Vitrolife AB

STO:VITR

Earnings Call Transcript 2022-Q3

[Operator]

Hello, and welcome to Vitrolife Interim Report Q3 2022. My name is Priscila, and I will be your coordinator for today's event. Please note, this call is being recorded. [Operator Instructions] However, you will have the opportunity to ask questions at the end during the Q&A session. [Operator Instructions]

I will now hand you over to your host, Mr. Thomas Axelsson to begin today's conference. Thank you.

[Thomas Axelsson, executive]

Thank you very much, and welcome to interim report quarter 3 for Vitrolife '22. Okay. The speakers on today will be Patrik Tolf, the CFO of Vitrolife and myself, Thomas Axelsson.

By that, let's jump into Page #2 and go through the presentation. The headline today is actions done and synergies ahead. And that is what Patrik and I will try to explain what we have done and what's going on within the business. But let's start with the short summary of numbers, what we achieved during the quarter.

We achieved a growth of 97% in Swedish currency. If you look on growth pro forma in local currencies, it was plus 5%, and the total sales was SEK 798 million. Our gross margin was down from 56.4% pro forma to 53.6%. However, we did a margin increase from 33.9% to 34.5%, and the EBITDA then was SEK 276 million. Our EBIT per share was [ SEK 2.04 ], and we had a good operating cash flow of SEK 200 million.

By that, please go into Page #3, and we will go through the business then. The main question that we are getting is regarding the market under these circumstances. So what I will do on this page is to go through sales and growth per market region and give some extra details around it. First, we can see overall that growth is slowing down or it's more normalized. And what I mean with that normalized in number of IVF cycles. There are still some COVID impact. We are in some markets seeing that there are some uncertainties regarding the future situation of the private economy, but still this is a prioritized area doing IVF.

We also see within this quarter that we are having -- that we're impacted by regulations and reimbursement. Okay. So let's see what's happening then in different markets. Our organic growth in local currencies was 76%. And if we start then from the East going West, the organic growth in Japan Pacific was 32%.

I would like to divide that market up in Japan and in Australia because there's a big difference between those 2 right now. In Australia, there are a situation where the IVF cycles are probably going down with 2%, 3%. However, it is still a good momentum in the business. In Japan, the new reimbursement system that was put in place 1st of April is showing an increased number of cycles for sure in quarter 3. And those -- and that's the situation why we are having good growth in that area of 32%.

Then moving into the next area, Asia. In Asia, and the major market there, the biggest market is, of course, China. And we are having a growth in the total area of Asia with 10%. We are doing surprisingly well in China with this growth of 10% totally. The number of IVF cycles in China, it's difficult to say exactly how many it was during the period, but a good assumptions after talking to customers is that it is down around 20%, and that is due to COVID and all the restrictions that is coming with that.

So [ achieving ] 10% in growth in that area with the largest territory under some COVID restrictions is quite well. Then going into the region, EMEA. That's a mixed picture. What we have there is that the IVF cycles in the public side are normal. There's not any increase or decrease. What we see is there's a difference between the private IVF clinics in some regions. We believe after discussing with customers that it is a small decline in U.K., there's a small decline also in Spain, that, for instance, 2 big markets.

However, it is an increase of the market in Middle East and in some other areas. Overall, we believe that the market in EMEA may be down 1% or 2% totally in number of its cycles. We are down minus 8%, and I will explain when we go into the product area what has happened.

Then finally, the area, the Region of Americas, it is an organic growth of 7%. And what we can see is that we believe that there's still an underlying growth in the U.S. of mid- to high single-digit numbers. And the expectations going forward is that it's going to be around that number also going forward. Yesterday, the big ASRM, the American meeting for the reproduction side, meeting with all the customers, I would like to say that it's a careful tone regarding the expectations on the growth of the market going forward, but it's still going to be a growth within the market.

So overall then, let's go into the Page #4 and look upon the different business area, consumable business area. Consumable business area is an area where we are -- can compare a little bit regarding the normal IVF cycles because that's products that are using when they are performing a cycle, for instance, the media. And so looking into those, the growth, Japan Pacific, 18%. That is more than the growth of the IVF cycles, but it is a good, good growth for us due to the reimbursement system.

So we are having a favor of the reimbursement system in Japan and that's why it's bringing up the numbers. In Asia, growth of 27%. We can see that the Southeast Asia and India is picking up and are normalized except that is not any -- there's not any IVF tourists from China. The growth that we have in consumables, that is a lot higher than the normal, let's say, the growth within the IVF business in China are due to that customers are moving towards a secure supply of mainly media products from Vitrolife. So that's a good momentum in China.

In Americas, 4%. That's the normal business right now what we believe. We don't see any major changes there. And if it is 4%, 6% or 7%, just depends upon if they are buying needles or not into their clinic. Minus 9% in EMEA then is the big question. I would like to say that there is not any real decline within the market, maybe a little bit, but this is also due to the service situation. It has been an increase within the IVF market, and it's been a situation where the supply has been a question. So distributors and also some customers has taken the safe side and build up the inventory.

And what we feel is that -- and we can see it also that the number of products being bought for real consumptions like the media is not any change, what is, is regarding in our Labware product and within the needles that then are -- that they feel that we have enough inventory level, especially on the distributor side. So overall, the business in consumables are following the trend globally in IVF cycles with an extra growth for us in Asia and Japan Pacific area.

If you then are going into the technology on Page #5, there you can see how fluctuating the business is. We have a growth of 99% in Japan Pacific. And that's also due to the acceptance of the reimbursement system and that, for instance, time-lapse are involved or if they can do time-lapse morphology in Japan. So there is a demand from smaller clinics in also installing time-lapse, a good growth there.

In Asia, the decline of 21% is all around the situation that when we are doing installations and traveling to China or working from our organization in China, it is an uncertainty, and we've not been able to do the installations due to the COVID situation. In EMEA, yes, we have gone down from SEK 63 million to SEK 46 million, and that's a decline of SEK 17 million. And it is all around a situation that we have not sold to any larger IVF clinic chain during the period.

In Americas, declined with minus 31%. It is only a few million, so we don't see any major changes there. So in local currencies, minus 9%, and it is up and down between the quarters on technology. And as you can see, an unusual sales situation in Japan Pacific and an unusual sales situation in EMEA on the negative side.

Let's go into Page #6 and Genetic Services business area. We have a mixed picture. It's a really interesting business right now, the Genetic Services business. We can see that the Japan Pacific, only a growth with 1% in local currencies, and the reason there is that PGT-A is not included in the reimbursement system. So there we have the opposite side compared to consumables and technologies.

In Asia, we have closed some businesses that was not profitable, and we don't believe that in some of those countries that we have business would create any profit growth. So minus 3% is due to our activities in Q3 to change the business. Growth, 12% in EMEA. It is not any growth in 2 major markets like U.K. and Spain. So there we can see a same kind of pattern for genetics compared to the consumables.

However, we see a acceptance of Genetic Services in newer markets, a lot of new small markets, and all of them is picking up, and that's a positive sign, a sign of that genetic testing is an area that's getting more accepted in more and more countries. Growth in Americas of 11%. That's a good number, but we are not really, really pleased with it, because the numbers in sales in local currencies is, of course, 11%, but the number of genetic testing that we are doing is a lot higher than 11%. So part of the -- our activities to have a profitable business and action done is to get a balance between end user pricing, the service that we are doing and the number of tests. So it is a good growth. However, we are not really satisfied with the gross margin on some of that growth. But it's a very, very good growth area for Genetic Services overall.

And by that, change to Page #7, and Patrik, please.

[Patrik Tolf, executive]

Thank you, Thomas. And I will talk you through the third quarter and financial highlights. And if we start then with sales, you see that the sales has then increased to SEK 798 million, which is then equivalent to 97% increase. More importantly, to understand the performance is to start looking on the pro forma. And there you see that we have grown from SEK 713 million up to SEK 798 million, which is then equivalent to 12% if you look at on the pro forma.

Also, we need to consider that during last year, there was a significant sales of COVID for Genetic Services, which during the third quarter is very close to [ 0 ]. So the sales growth that we have for this year offsets the decline in sales for COVID-19. During the quarter, we've also had a positive impact from currencies, which is then equivalent to SEK 81 million. And the performance number that we focus on internally when we steer the business is the growth in local currencies and then we need to exclude the COVID-19 testing and we also compare that on the pro forma. So that number is 5%.

Moving on to gross income. That has then increased to SEK 428 million. When you look on the margin, that is a bit lower, 53.6% compared to pro forma, 56.4%. And that is primarily related to the product mix, but also a bit impacted then by increased freight cost and also the fact that we are scaling up some production capacity for some of our media and disposable devices products in business area consumables.

Moving on to EBITDA. You see that the EBITDA has increased to SEK 276 million, which gives us then an EBITDA margin of 34.5%. The currency impact going through then to EBITDA is SEK 28 million. And if you look on the EBITDA per share and compare that one with where we were in the third quarter last year, you see that the EBITDA per share has increased 47%. And for the restructuring of Genetic Services that we have been doing during the third quarter, we have also then taken restructuring cost of SEK 29 million.

And SEK 6 million -- sorry, SEK 7 million out of those SEK 29 million has impacted EBITDA, and the residual SEK 22 million has then an impact on the financial net and those SEK 22 million are related to the divestment of the entities that we have in China. Also worth mentioning on the performance is that we have then also a other operating income, which is positive, SEK 24 million for the quarter. It's then related to VAT claims and also insurance payments.

Moving on to the next slide, Slide #8 and focusing a bit on the operating expenses. What you see here is that the operating expenses is SEK 274 million, which is higher than it was last year. And yes, we had a bit more, as we call it, normalized business activities. We are traveling a bit more, going -- visit more customers and those kind of activities. So selling and admin cost goes up, also a bit offset then by R&D.

But interesting here also when you look upon the currency impact, which is negative SEK 19 million. And the majority out of those SEK 7 million taken then for the restructuring of Genetic Services, has an impact then on the OpEx. So that means that all in all, we have a reduced running cost on the operating expenses on that side.

Moving on to next slide, Slide #9, where you see then the key financials and the pro forma numbers. We have talked through these numbers throughout the presentation. To summarize again, adjusted EBIT, gross EBIT, gross margin -- adjusted gross margin, 56%, adjusted EBITDA of 35%, EBITDA per share, SEK 2.04, net debt-to-EBITDA, [ 1.9 ]. And you see also that we have an operating cash flow of SEK 200 million. And if you look on the -- what we have done on the financing side, we have paid back the outstanding amount that we had previously on the recurring -- revolving current facility, which is now basically unutilized on EUR 100 million on that side and the additional amortizations on that side.

So moving on then to Slide #10. What we call then this report actions done and synergies ahead, and I will talk through a bit on what we mean then on synergies ahead. We are focusing on fertility. And those are related then to the actions that we have done, and we are very impressed by our team in Genetic Services, how we really have been implementing these changes in a very good manner and also in a short time on that side as well.

And now we have a positive momentum, positive energy in making sure that we have a structure going forward to continue then to deliver as a group and focusing on delivering on our synergies. If we then start on synergies then from the customer interactions. I mean, we are using our different backgrounds. We have strength in our global presence. We have the markets where Igenomix, Genetic Services have a strong presence and strong customer knowledge, where Vitrolife is not and vice versa. That, of course, gives us opportunities, that gives us customer interactions, which then gives us possibilities to connect with customers from different angles on that side as well.

That is something that we will continue to, of course, leverage on and use, so that we can have a right product offer to our customers on that side. Customers, of course, as we know, there are different customers organized in clinic chains and they have different approaches, some of them are global, some of them are regional. And we have good relationships that comes then from either consumables technologies relationships or Genetic Services relationships. And customer interactions is then focusing on driving our commercial excellence towards our customers.

When we come to development, I mean, we talk here about that we can continue then to develop our future products. We talk about applied product development, where we can really then focus on getting the right products and the right portfolio. And again, now we focus on fertility. We can use the competence and the skills that we have within business area consumables, technologies, Genetic Services to continue then to develop very good products.

Focusing a bit on the -- as one example, the stress-free optimized embryo development as one example on what we can do going forward. We now have done one global sales and marketing organization, continue then to drive our commercial excellence. We have already started on this one in Japan Pacific, where we were a bit first out, but from the 1st of October, we have then one global organization for the whole world, focusing, of course, on customer service, digitalization, getting the customer offer towards the right customers in the right way on that side.

Restructuring of Genetic Services, and that means that we now then from October the 1st have all labs under one umbrella. What that will mean is that we will have a bit more of an industrial approach focusing on how do we -- how we can run and how we can develop the lab operations in a most -- in an efficient cost-effective way going forward. And also, in addition to that, we focus on applied product development and also have a clear product ownership structure in that organization.

All in all, focusing on operational excellence in order to get our products with the highest quality at a low cost going forward. So we have a positive energy in the company. Of course, we have been through some tough things when it comes to Genetic Services, but we are very pleased to come to the situation where we are today.

So with those words, we will leave over to the operator to the Q&A session. Thank you.

[Operator]

[Operator Instructions] We'll take our first question. Please post your name and company before posing your question.

[Ulrik Trattner, analyst]

Great. This is Ulrik Trattner from Carnegie. And congratulations on good developments in the quarter. I have a few, if I may, and I would like to start off with the development in China. Obviously, it looks like you've been getting through to customers in China despite of the zero-COVID lockdowns. But could you help us understand what level is China on today in terms of underlying IVF cycles, as well as it looks like you're grabbing market share. So if you could shed some more light on where you're grabbing market share and from whom, that would be very helpful? That would be my first question.

[Thomas Axelsson, executive]

Thank you, Ulrik. China, it's difficult right now, as I said, to explain what's going on there due to that it change more or less from week to week. During the quarter, it looked quite good in July. There was some clinics that was opening up trying to do normalized cycles. Then from August on up until the end of September and has continued at least up until the Communist Congress last week has been restrictions. And those restrictions have impacted us in a situation where the ability for us to go into clinics, and there are actually some clinics and even completely hospitals that has gone down to nonperformance at all.

Public -- the private side are -- continues the decline in Private China, before COVID compared to today, it's probably around only doing 1/3 of the cycles. So totally China cycles maybe 75% compared to what they did last year, which is then a decline compared to what they did, 2019. The challenge that we have had is to travel through the provinces, get into the clinics, and that has impacted our sales of technology.

What has been unusually good for us is the consumable business in this period. And it is all more or less around the situation of having a secured supply of media products to the clinics. When the clinics themselves is selling a production that goes up and down and some uncertainties, they want to be sure that they can be delivered by products that has a short lifespan. And as you know that our media products has a lifespan of 16 weeks up to a year around that, and they don't want to have any scrap.

So with a good production planning, with a good service level, we have -- it looks like we got customers that are placing more and more orders on our side. I would like to be humble regarding the market shares. Of course, we have sold more than the market, but we don't know when the business will be normalized, how the customers' purchase behavior will continue. So I'm trying to be a little bit careful regarding the long-term consequences.

[Ulrik Trattner, analyst]

Fair enough. Fair enough. And on to Europe, and once again, I would like to focus on the consumables. And what we have seen sort of recent time is sort of the new MDR regulations in Europe. And how are you in terms of regulating your products and how does sort of the competitive field look like? Are any of sort of smaller players in EMEA having problem under this regulation and is this any way favoring you and or are you feeling the same type of headwind from regulations?

[Thomas Axelsson, executive]

All bigger players, and you know there aren't so many big players. We are all performing well regarding the -- these processes and are getting the MDD over to MDR. So I don't see any differences between the larger companies that has structured process, structured manufacturing. And the challenge is, is for the smaller companies. And, of course, I don't want to mention any names, but for instance, in this period that at least one of the competitors that has gone into what's called an insolvent process due to quality regulations and the challenge of having a Class 2 or Class 1 products changed and go into the MDR or MDD system in the right time. So smaller players, yes, they have a challenge. Insolvent processes, some has withdrawn their offer from the market, that's how it looks like.

[Ulrik Trattner, analyst]

And just from a production capacity point of view, we have noted that several sort of players in the market have limitation in production and supply chains. Are you even able to supply these clinics or do you have capacity constraints as well?

[Thomas Axelsson, executive]

For media, we have a very flexible production, and we have increased the production there. And the challenge there has been on the supply on bottles on those sides. We have -- during the last 2 years then changed that to secure supply chain and ownership by ourselves because that's important. What we have had a challenge on is, of course, the situation on the needle side with the material. We've been able to produce in a -- to a level that was before the COVID, but we have not been able to expand and take the opportunities on the market. And that's why Patrik said that we have invested and we are increasing the production capacity in line with the current new suppliers.

[Ulrik Trattner, analyst]

And just to be clear, is that production, new production volume are those live currently or...

[Thomas Axelsson, executive]

Excuse me. Are those live?

[Ulrik Trattner, analyst]

Yes. If those are live, those are generating volume now.

[Thomas Axelsson, executive]

Yes. They are starting to generate volume. There are still some areas where we are working with the output. But those -- the output are seen in Q4, and we expect the full production capacity in around Q1.

[Ulrik Trattner, analyst]

Okay. Great. Next question would be on the genetics and Genetic Services. And you talked about that you were a bit disappointed in Americas with top-line not really reflecting the volume of tests. And if you could expand on what your plan is for America in specific? And in general, you talked a little bit about this, but what's left in the commercial excellence of Genetic Services, as well as if you could help us decipher what the margin contribution from Igenomix was in the quarter, that would be very helpful?

[Thomas Axelsson, executive]

Okay. Let's start with the situation. It's unfair to say that I'm disappointed. I maybe used that word myself. What I mean is that profitable growth has been a key theme for Vitrolife during the years. And that's also a key theme for the new Vitrolife Group. So the situation right now, where the sales team and what we are doing together is to get market share to increase the sales, but with a better profitability.

And that's what's right now going on within the Genetic Services side in the U.S. So I'm very, very pleased with the movement, but we are currently also discussing about growth, profitability and what services are the right ones to have in U.S. for long-term success. That was the first thing about U.S. For the next question...

[Patrik Tolf, executive]

I mean just to fill in on your second question here on commercial excellence for Genetic Services. And that is, of course, related to have a smooth and friction-free customer offer when it comes to the customer process on that side. And that is related then to customer service, that is also related to the digitalization in order to have a smooth process towards the customer on that side. So that would be an additional area that we are working, of course, hard with today, but we will streamline that one even further going forward.

[Ulrik Trattner, analyst]

Great. And just the question regarding if you can help us with what margin Igenomix contributed in the quarter, if we're on the path of 25% that you mentioned before in end of the year?

[Patrik Tolf, executive]

Exactly. The actions that now have been taken throughout the quarter, of course, gives us more confidence that we will continue to deliver to that target that we have set, and we should have a run rate of 25% on EBITDA margin for Genetic Services. We are there on that side. So that gives us confidence on that we deliver that one in the short run and also that we pave the way towards the next target, which is then 30% on that side as well, which looks within reach as well.

[Ulrik Trattner, analyst]

Perfect. Last question on my end. You had a big other operating income related to the sell-off of GPDx in China. But I also note that it is a very high tax rate in the quarter in relations to what we have seen before. I'm guessing it's also related to this GPDx sell-off in China. What are sort of a more normalized tax rate going forward? Because it looks like the difference is more or less completely the other operating income.

[Patrik Tolf, executive]

Exactly. I mean if you look at from the last quarter, the percentage, the tax rate on that side would be a bit bumpy then, as you say, and that is depending on certain activities that happened throughout the quarter on that side. So I would say that the more normalized over time would be [ fully then ] or year-to-date tax rate on that side.

So somewhere between [ 22%, 23%-ish ] level on that side as well. But that is, of course, depending going forward where we continue to grow, where our profitability lies and so forth into it as well. But something like that.

[Ulrik Trattner, analyst]

Great. Well, thank you very much both Thomas and Patrik.

[Operator]

[Operator Instructions] It appears there is no further questions at this time, Mr. Thomas. All right. We have -- sorry, we have one. Okay. Please state your name and company before posing your question.

[Ulrik Trattner, analyst]

Great. Ulrik Trattner from Carnegie here again. Since there are no one in the queue, I'll just continue then. I know some good developments in reducing your debt during the quarter with the net debt-to-EBITDA down to now around [ 1.9 ]. Are you sort of comfortable right now with the integration of Igenomix and the current leverage that you're looking to pursue new M&A possibilities?

[Thomas Axelsson, executive]

The quick easy answer, yes.

[Patrik Tolf, executive]

Yes.

[Ulrik Trattner, analyst]

And what area would you sort of preferably look into? I think everyone has noted that Cooper are forced or potentially forced to sell off certain consumable products. Are there any specific areas outside of that, that are of current interest on your end?

[Thomas Axelsson, executive]

I mean the antitrust is something that we don't know what's going to happen there. So that's not within our scope. I would like to say that our -- we have not changed the focus on the acquisition targets that we want to have growth areas that we can explore with development and with technology. So we are looking into, of course, the opportunities within the consumable business, because consumable business is a stable one.

And going forward, we have expanded in the geographical area. We would like to continue the geographical expansion, but also in more consumables. And if there is an opportunity within the technology side, more and more in this field is going to be the use of software, if it is software for morphology or if it's -- or if it is software for quality control or if it is software system for solutions regarding Genetic Services, but it is within that side is our key focus right now.

[Ulrik Trattner, analyst]

Okay. Great. And last question, and then I'll leave you guys alone. On the consumable side, you have genetic tests there as well under the distribution agreement of Illumina. How is that developing?

[Thomas Axelsson, executive]

Not any change there.

[Ulrik Trattner, analyst]

Are we seeing above-market growth for that product area?

[Thomas Axelsson, executive]

Genetic Services currently, if we are looking into the hardware side, we -- as you know, we're not selling the hardware, but I assume that your question is whom is the -- whom is growing most, is it Thermo Fisher within hardware or is it Illumina, that's something that's good for those companies to answer. We have a good growth momentum with the Genetic Services coming into more and more markets.

And then the question in those markets are, should we use a service like the Vitrolife can do within Genetic Services or should we start and build our own genetic testing. Within smaller markets, there are mostly cases going to do service -- ask for services, IVF clinics, larger clinics, they will set up more and more of their own service.

[Ulrik Trattner, analyst]

Okay. Great. I just remember one last question. On consumables, how big portion of that is cryo currently, and how is that developing? I know that you just launched a new system for cryo. And are you seeing accelerated uptake in that area?

[Thomas Axelsson, executive]

We are not talking about those kind of details. But I can fill in some that the cryo side is continue to grow more than the culturing side. And it also shows within our growth numbers within the consumables.

[Operator]

It appears there is no further questions. And I would like to turn the conference back to you for any closing or additional remarks. Thank you, Mr. Thomas.

[Thomas Axelsson, executive]

Okay. Thank you very much. Thank you, Ulrik, for good, good questions, and thank you all for listening in. And bye from Patrik and myself.

[Patrik Tolf, executive]

Thank you. Good bye.

[Operator]

Thank you for joining today's call. You may now disconnect. Hosts, please stay on the line and we'll wait for further instruction. Thank you.