Vitrolife AB

STO:VITR

Earnings Call Analysis

Strong Performance in Q3 2024

In the third quarter of 2024, Vitrolife Group reported a notable sales increase, reaching SEK 867 million. This marked a 2% growth in Swedish Krona (SEK) and an impressive 7% growth in local currency, driven mainly by a 13% increase in consumables. This quarter represents the company's strongest performance regarding local currency growth since the first quarter of 2023, indicating a shift towards more robust operational momentum.

Segmented Growth Across Categories

The growth trajectory was varied across the company’s product segments. Consumables increased by 13%, while Technologies experienced an 11% growth and Genetics Services in North America saw a 9% uptick. However, the company faced challenges in its genetics kit sales, which plummeted by 26% in the quarter, primarily impacting the U.S. market. Despite this setback, Genetic Services have shown signs of recovery, with an overall increase of 5.5%.

Regional Performance Insights

Looking at regional performance, EMEA— the largest revenue contributor—grew by 9% bolstered by strong media and disposable devices sales. The Southwest region exhibited particularly impressive growth, with triple-digit increases due to direct sales approaches. In contrast, North America saw a 2% overall growth hindered by the declining genomics kits but supported by the strong performance in genetic services.

Financial Metrics Showcase Resilience

For the first nine months of the year, Vitrolife recorded SEK 2.65 billion in sales, yielding a gross margin increase to 58.6% from 56.1% year-over-year. The EBITDA for the period amounted to SEK 888 million, showcasing a margin improvement from 32.3% to 33.5%. Operating cash flow also improved considerably, totaling SEK 640 million, indicating effective cash management and operational efficiency amidst challenging market conditions.

Operating Costs and Investment Focus

Operating expenses increased by 14%, attributed primarily to heightened sales and marketing expenses as Vitrolife expands its footprint in key markets. The company is investing significantly in digitalization and direct sales channels, especially in North America, to enhance its market presence. This strategic investment aims to capitalize on emerging growth opportunities and build a robust pipeline moving forward.

Guidance and Long-Term Strategy

Looking ahead, the company aspires to achieve annual organic revenue growth in local currencies exceeding 10% alongside maintaining an EBITDA margin above 33%. These targets are part of their five-year strategic plan initiated in December 2023, and while Vitrolife acknowledges the challenges ahead, they express optimism about attaining these objectives in the foreseeable future. Specifically, they anticipate a challenging yet positive trajectory for Genetic Services and a focus on lifting genomics kits back to growth.

Market Adaptation and Innovation

Vitrolife is also engaging in innovation through AI in its product lines. The CEO highlighted the strategic acquisition of eWitness to boost capabilities. The company is focusing on integrating AI with its Genetic Services, utilizing extensive data accumulated from their systems to enhance service offerings in the IVF market. This focus on technology aims to ensure Vitrolife remains at the forefront of its industry amidst evolving market dynamics.

Conclusion: A Promising Outlook

Overall, while Vitrolife faces challenges in certain segments, the company displays strong resilience through diversified growth across its core areas. With strategic investments, a strong operational framework, and an eye on innovation, Vitrolife is positioning itself for robust growth in the coming quarters. Investors can note the improved financial metrics and expansion strategies as positive indicators of the company's potential for long-term value creation.

Earnings Call Transcript 2024-Q3

[Operator]

Hello, and welcome to the Vitrolife Group interim report Q3 2024. My name is Laura, and I will be your coordinator for today's event. Please note, this call is being recorded. [Operator Instructions]

I will now hand you over to your host, Patrik Tolf, to begin today's conference. Thank you.

[Patrik Tolf, executive]

Thank you, and good morning to you all, and welcome to the telephone conference for the third quarter 2024 for the Vitrolife Group. Today is the 24th of October 2024, and the time is now 10:00.

My name is Patrik Tolf, and I'm the CFO for the Vitrolife Group. You will find the presentation on our website, vitrolifegroup.com/investors. And I will now leave the word over to our CEO, Bronwyn Brophy.

[Bronwyn Brophy, executive]

Thank you very much, Patrik, and good morning, everyone.

So if I can move you to Page 2, which is the Q3 2024 highlights. Highlight #1 is a growth of 7% in local currency. I would say, we're not getting ahead of ourselves here, but this is our highest quarter in terms of growth in local currency since quarter 1 2023. Consumables growth of 13%. We're particularly happy to see our core business growing double digit, and this is also one of the strongest quarters for our consumables business actually in a couple of years. And then finally, Genetic Services, North America growth of 9%. So good to see North America Genetic Services turning the corner.

If I can now move you to Page 3, please, where we'll talk about the key financials. So sales of SEK 867 million in the quarter, a growth of 2% in SEK and 7% in local currency. The sales growth in SEK, I must point out, was impacted by the appreciation of the SEK versus some of the major currencies in APAC and South America, and Patrik will talk a little bit more about that later. Gross margin increased to 58.6%, driven by product mix and operational efficiencies, primarily coming from our Genetics business area. EBITDA margin 33.4%, so stable and remaining above the 33% mark. Operating cash flow SEK 206 million and earnings per share SEK 0.85.

If I could maybe bring you down then to the first 9 months of 2024 because, of course, we just have 1 quarter to go. So our organic growth is 4% year-to-date in local currencies. I think we do see some steady progression here. We had 0% growth in quarter 1, 4% growth in quarter 2, and now 7% growth in local currency in quarter 3. And then moving on to EBITDA year-to-date, SEK 888 million, which is a margin percentage of 33.5%, up from 32.3% the same period last year.

So if I can now move you on to Page 4, please. And I'll talk you through our sales and growth per geographical segment. So let me start by saying that we are growing across all product lines with double-digit growth in media, disposable devices, and technologies. We have one exception, which is genomic kits. Genomic kits declined by 26% in the quarter, and the region that was most impacted is America or the U.S., if I'm to be more specific.

So looking then we had Americas at 2%, 9% in EMEA, which is our biggest region, 9% in APAC, giving us the 7% in total. So looking at Americas then, we had sales of SEK 273 million, with strong growth in media and technologies and as previously mentioned, 9% growth in genetic services in North America. However, genomic kits continued to decline, impacting growth in this region as a whole.

EMEA now our largest region, still our largest region with 38% share of total sales. So here, we had growth of 9% with media and disposable devices doing very well, actually. I should call out our Southwest region, where we have gone direct in Iberia. And here, we delivered triple-digit growth in the quarter. This is a combination of volume and margin.

And then finally, to APAC. So APAC returned to growth this quarter, which is good to see. Japan, Southeast Asia, and India were driving the growth. China also performing well, but I think it's good to see other markets picking up their growth rates, particularly Japan, which had a great quarter.

Okay. Moving on then to Page 5, and we will start to look at the business areas. So starting with our consumables business area. And as I mentioned, 13% organic growth overall, 9% in Americas, 22% in EMEA, and 8% in APAC. So with SEK 345 million in revenue, this is not our largest quarter in absolute revenue terms, but it is our highest growth percentage in local currencies for a couple of years. And you will remember that genomic kits previously formed part of our consumables business area. That is now part of Genetics business area.

Media continues to perform very well, where we are outgrowing the market and taking share in all regions. But I think what's also nice to see here in consumables is that disposable devices is growing even faster actually than media this quarter. The commercial teams have been focusing their efforts here. So it is nice to see some traction across the broader consumables portfolio. So good performance by our core consumables business.

If I could now move you on then to Page 6 to our Technologies business area. So here, we delivered organic growth of 11%, 11% in Americas, 6% in EMEA and 17% in APAC. So another good quarter here in Technologies on the back of a very large quarter 2, you will remember, with APAC and particularly Japan performing very strongly in both Time-lapse and Octax lasers. I think what's also good to see in the Technologies business is that revenue per system, which is a key indicator of utilization within the clinic, is also increasing.

Look, I want to draw your attention to the bar chart because you will see that going into quarter 4, we have some very tough comparables to navigate, which is going to make it challenging to beat that record-breaking Q4 in 2023. But overall, Technologies business looking in very good shape, actually. The rolling 12-month growth is looking good from both a systems, consumables, and service revenue perspective.

And then finally, before I hand you over to Patrik, I'll move you to Page 7, where we will look at our Genetics business area. So Genetics business area, flat for the quarter in Genetics with Genetics services back to growth at 5.5%, but genomic kits declining by 26%. We had 9% growth in genetic services in North America and 12% growth in APAC. So we can see that genetic testing is definitely increasing outside of Americas. And the growth in APAC and in fact in the U.S. was driven by PGT with both PGTA and the more differentiated PGTM doing well.

However, genomics, genomic kits continued to decline, although I should point out that the rate of the decline is decreasing month-on-month, quarter-on-quarter as the stocking effect eases. We can see that during the transition to EmbryoMap, which is our new kit technology, some customers did use that transition to move to next-generation sequencers or higher throughput sequencers, more modern sequencers, several ways to describe that one, of course.

Genomic kits only account for approximately 10% of the total revenue of genetics, but they do allow us to offer a genetic testing solution to customers who test in-house. So what are we doing to return our genomic kits business to growth? So we've now validated our kits on the next-generation sequencers. And we believe that combined with the EmbryoMap software, we have an opportunity to return the genomic kits business to growth in the coming quarters.

So with that, I will hand you over to Patrik, who will take you through the geographical segments.

[Patrik Tolf, executive]

Thank you, Bronwyn. And we are now on Page #8, and I will then start on the geographical segments who are then Americas, EMEA, and APAC. Starting to the right here with the total sales of SEK 867 million. And as Bronwyn mentioned previously, I mean, we have had quite a big impact when it comes to FX for this quarter, and that primarily came from a business area perspective and for our business area Genetics and then more particularly when it comes to region perspective, Americas or more precise South America and then also an overall impact in APAC.

So with the sales of SEK 867 million, we have increased our then gross income from last year to SEK 473 million to SEK 508 million, and that gives us then a gross margin of 58.6%, which is approximately 3% unit improvement compared to last year. And if you look upon how those are distributed then amongst the regions, we see that we are basically relatively steady when it comes to gross margin then for APAC. We are more or less on par where we were last year. The largest improvements have come in EMEA and also in Americas, where we have then grown about 4% units each for the quarter.

So the improvements that we've had on the gross margin, I mean, that are allowing us to continue to invest in growth. And if you look then to our selling expenses for the quarter, that has increased from last year, it was SEK 162 million, and that has increased then to SEK 190 million throughout this quarter. And how is that then? Yes, the big -- the largest changes you see are within EMEA that went from SEK 56 million to SEK 73 million. And the largest impact on that one is that we now go direct through our acquisition of EMB and also that we have then the cost for eFertility included in these numbers. So those are the main drivers when it comes to EMEA.

And then we continue to invest in commercial capabilities. And most notably, we have started to do that one in one of our key markets in North America. So going down then to market contribution, we see that, that is approximately flat or slightly lower for Americas and EMEA compared to last year, while we are continuing then to improve in APAC. And for the group, we are slightly above or you could say, flat compared to last year.

Moving us on then to Slide #9, where I will again repeat a bit on the Q3 financial highlights. Again, here, as we have talked about, the SEK 867 million compared to SEK 848 million gives us a 2% increase in SEK. But most importantly, the organic growth in local currencies are 7% for the quarter. And the currency impact primarily, as I mentioned before, came out of APAC and Americas and particularly then for our business area Genetics.

Again, we continue then to improve the gross income and improve the gross margin to 58.6% and we have had a positive product mix through the quarter with consumables growing, as Bronwyn mentioned previously, with 13%, Technologies growing with 11%, and also now Genetic Services growing with 5.5% for the quarter.

Again, just to repeat, we continue to deliver on our operational excellence improvements, particularly when it comes to our Genetic Services business, where we continue to decrease the cost per sample. All in all, this gives us then an EBITDA of SEK 289 million, which consequently then gives us an EBITDA margin of 33.4% compared to 33.9% last year. So we are slightly lower then on EBITDA margin compared to last year.

Moving on to Slide 10, which is then the operational -- operating expenses. That compared to last year increased with 14%. I have mentioned sales and marketing. Again, we are continuing to go -- continuing to invest in sales and marketing capabilities in key markets. And again, we have then 2 large impacts, which is where we go direct in -- for the acquisition of EMB and also on eFertility.

When you look on R&D, I mean, that's slightly lower or flat, you can say, compared to last year, and that is then related to project phasing and also that as we have continued then to make the progress in the various programs, we can do more capitalization on the R&D spending that we do.

Admin, a slight increase, but relatively flat compared to last year. And the other operating expenses, that's really where you then see the negative FX impact on the income statement, and that's basically where you then make the revaluation of the net working capital, and that is the big part of the other operating expenses of SEK 18 million, that was SEK 6 million last year.

Going to Slide #11, which is my last slide is then the key financials, and I would like to focus a bit more on the year-to-date. And again, to repeat, we are growing then 4% in local currencies, 2% in SEK. So that brings us then to sales for the first 9 months of SEK 2.65 billion. We continue to increase our gross margins that goes from 56.1% to 58.6%. Continue then to strengthen our EBITDA from SEK 842 million to SEK 888 million.

And consequently, then an EBITDA margin improvement from 32.3% to 33.5%. Net income also continues to increase, and we are strengthening then the earnings per share from SEK 2.42 last year to SEK 2.76 per share for the first 9 months of 2024. Operating cash flow continues to improve here, so SEK 640 million for the first 9 months this year. And then all in all, this combined then gives us then a net debt to EBITDA on a rolling 12-month basis, an improvement again from 1.1 down to 0.8 for the first 9 months this year, and that's the same, obviously, for the quarter.

So with those words, I'll leave it back to you, Bronwyn.

[Bronwyn Brophy, executive]

Thank you, Patrik. So our corporate strategy, the Vitrolife Group corporate strategy. So you have all seen this strategy one pager many times. In fact, I hope I'm not boring you with it. But on this particular occasion, I would like to draw your attention to the financial targets. And I get asked this question often, which is what do we mean by long term? The answer is 5 years. So we presented these financial targets. So annual organic revenue growth in local currencies above 10%, EBITDA margin above 33%, and net debt-to-EBITDA below 3. We announced these targets in December 2023. So we are coming up to our 1-year mark. So I would say we are 1 year into the 5-year plan.

So how are we doing? Well, obviously, we're going to do our very best to get to these targets as soon as possible. And we do have parts of the business already at double-digit growth. However, we have other parts of the business growing closer to the cycle growth, and we estimate that to be at 5% currently. So it will take time and investments to get the entire company growing above 10%, but we do believe that we are on the right path.

So moving on then to my final slide and this is also a slide that you will have seen before. In fact, it's the exact same slide that I presented at the end of quarter 2. And the reason why I want to show it again is to really demonstrate to you how we are progressing and how we are executing on what we say we are going to execute on.

So the first point here is increasing share and penetration in the U.S. and China. And clearly, we are taking share quite nicely now on media, also on disposable devices in both of these key geographies. We are investing in our commercial capabilities. We have recruited just this quarter, a new vice president of marketing in the United States. We've recruited more sales reps on the ground. And we are building out our strategic account management capabilities. We have also invested, I should say, excuse me, an increased [ fees ] on the fees in China as well, which is also helping to drive the growth there.

The second area of focus at the end of quarter 2 and still holds true is to increase market share in consumables. We've had some pretty good momentum in media for several quarters now. But what we wanted to do was to increase our market share across the consumables portfolio with disposable devices being a key area of focus in quarter 3, and that is definitely starting to pay dividends. I think EMEA leading the chart, but we see some nice traction across pipettes and needles in all of our regions.

Accelerating penetration and utilization, very, very important for Time-lapse. We don't just want to sell systems. We want the systems to be used. We want them to generate revenue. So increasing utilization per installed EmbryoScope, all of our metrics there are also on track, which is good to see.

The fourth point then is to accelerate the growth of the broader genetics portfolio. Why? We don't want to be overly reliant on any one test or on any one region. So we have been focusing on increasing sales across the broader genetics portfolio in areas like carrier screening and noninvasive tests. And carrier screening had a strong quarter in quarter 3. I think also very importantly, driving growth outside of the U.S. Of course, the U.S. is the largest market for genetic services and genetic testing in general, but the acceptance is increasing around the globe.

And then finally, on the operational excellence piece, I think we are getting some good synergies and our operational excellence program, particularly in Genetics, is doing well, but we're also seeing some dividends coming out of consumables. What we really need to do in quarter 4 and going into 2025 is to leverage synergies across the business areas. So I would say some good work done, but more to do. But overall, in terms of our focus areas for Q3, they will continue to be the key focus areas for Q4 and on into 2025. So some good steady progress across the board on our focus areas.

So that is it for me. With that, I will hand back over to the moderator, and we will open up for Q&A. Thank you for your attention.

[Operator]

[Operator Instructions] We will now take our first question from Sten Gustafsson of ABG.

[Sten Gustafsson, analyst]

My first question is on Time-lapse in the U.S. If you could -- I think you write in the report that you had strong growth in North America, but that was primarily Latin America or South America, if I remember correctly. If you could share with us how the growth rate for Time-lapse in the U.S. has developed in the quarter and also maybe year-to-date, that would be very helpful.

[Bronwyn Brophy, executive]

Yes. So thank you for the question, Sten. Yes. So with Time-lapse, we typically look at rolling 12 months because it can be a little bit lumpy depending on phasing. So it was a slightly softer quarter in North America, very strong quarter in South America for Time-lapse, slightly softer quarter in North America, and that's primarily down to phasing. They had a big quarter 2 and the pipeline for quarter 4 is also quite strong. So hopefully, that explains your question.

And then -- so we obviously have in Americas, North and South America. South America had a very strong quarter on Time-lapse and actually also on Octax lasers. So Octax lasers had quite a good quarter in several markets this quarter, which, yes, hasn't been a big area of focus, but is starting to get some nice traction. So North America is mainly down to phasing. South America, a very strong quarter. But overall, the rolling 12 months on Time-lapse in Americas, both North and South is looking quite strong, Sten.

Anything you would add, Patrik?

[Patrik Tolf, executive]

No, I think you covered.

[Sten Gustafsson, analyst]

And what are the main pushbacks you get? And I mean, I'm trying to figure out the reason why the penetration rate is so much lower in the U.S. compared to Europe and Asia. And if that is about to change going forward?

[Bronwyn Brophy, executive]

Yes, it's a great question. So the U.S. has a much higher penetration of genetic testing. And what has been happening historically is markets typically focus more on genetic testing or on morphokinetics or AI, which is essentially what we have with Time-lapse. What we are increasingly starting to see not just in North America, but around the globe is Time-lapse technology and genetic testing living side by side.

So essentially, Time-lapse and AI iDAScore being used to try out the embryos that go for testing. I'm really sorry, I don't want to get too technical here because I love this topic. It's one of my passions. But that's essentially what you have, Sten. North America is much more penetrated on genetic testing, and that has been the standard of care there. But increasingly, we're seeing the role of AI. The other point that I would make is that we have our iDAScore. iDAScore is not yet approved in North America. We are working on that to get regulatory approval for iDAScore in North America, and that will help to accelerate the penetration. But overall, in general, adoption of Time-lapse is increasing even in markets that have more heavily relied on genetic testing.

[Sten Gustafsson, analyst]

And then maybe a question for Patrik on how we should think about operating expenses going into Q4? Will they -- anything you want to highlight that we should be mindful about?

[Patrik Tolf, executive]

No, I think -- so I think on that side, I mean, some of those selling expenses here that we now have seen then for the quarter will continue to be so right because that's basically a bit more since we now go direct and we have also then incorporated the eFertility, some of that will continue to be there. And again, we will continue to invest when it comes to our global sales and marketing capabilities as well here.

So of course, the swinging part will be what will happen on the FX here as well. And as I mentioned previously, I mean, we have seen a quite big impact, and that happens then in the other operating income. And that is, of course, relating to what happens then on the currency market. But all in all, we will continue to invest here and continue then to focus when it comes to R&D. So no big, call it, news when it comes to the fourth quarter. So we will continue the same strategy as we have outlined in the past as well here.

[Operator]

And we will now take our next question from Jakob Lembke of SEB.

[Jakob Lembke, analyst]

My first question is on Genetic Services, which seems to improve here throughout the year and particularly on the PGTA side. Would you say there is anything particular behind that? Or what can you say?

[Bronwyn Brophy, executive]

So good performance in Genetic Services. And while we are focusing outside of the U.S. and on the test like carrier screening, as I mentioned, the core PGT business did really, really well, and it's the bulk of the revenue of genetics. So that's really where the growth came from. I think it's important to keep our feet on the ground and stay humble, but the growth rates in North America would indicate that we are taking share because the growth of 9% is above the market growth rates in that geography.

So there appears to be some share gain in North America. And there are a couple of other countries just looking at the sort of market level. We have some pretty strong growth in a number of markets around the world. So -- and most of that is driven by the PGT portfolio, as I said, PGTA and PGTM, so. Yes. Hopefully, that answers your question, Jakob.

[Jakob Lembke, analyst]

Yes. And a follow-up on that. I guess you still have some maybe headwind from the ERA tests in some regions. But just based on the sort of momentum you're seeing now, do you expect Genetic Services to get back to sort of high single-digit growth here in the coming quarters?

[Bronwyn Brophy, executive]

Yes. So great question. I think some good traction, high single-digit growth globally, I think, will still be a challenge. It's probably going to take us several quarters to get there, but some of the fundamentals needed to get us to that point are definitely looking better. ERA, the decline in ERA has definitely slowed in most geographies, but it's not growing. It has returned to growth. So still a slight drag on the portfolio.

But PGT, as I said, doing well and carrier screening doing very well, although the materiality of that is still relatively small. So I think slow and steady is probably the name of the game here, Jakob. I think it will take several quarters, but the fundamentals are definitely looking better. And I think to have our largest market, which is North America, growing up in high single digits is a sign of a healthier business.

[Jakob Lembke, analyst]

And then on consumables, quite strong in this quarter. Is there any phasing effect in the quarter? I know you talked about disposable devices, for example, being a bit slower last quarter.

[Bronwyn Brophy, executive]

Yes. And no, it doesn't seem to be phasing effect. It's pretty much across the board, Jakob. So I mean, media is doing really well everywhere, if I look at it market on market. And then disposable devices, again, across the board, like the -- without giving exact figures and pointing the competitors where to go, but the disposable devices growth, as I mentioned, is actually well above the media growth, and it's in most markets. It's in all regions, very strong in EMEA, also very strong in APAC. So I don't think it's phasing.

I think it's been a slow steady climb to get there. And the commercial teams have very much been focusing on our [ pipette ], which we believe are high premium quality and also on our Sense needle, which is the differentiated needle. So it has been an area of focus of the commercial teams. I mean, essentially, what we're trying to do is leverage the full Vitrolife Group portfolio and not, again, be overly reliant on the media. I mean how long are we going to continue to take share for? We need to make sure that it's taking share across the portfolio and not solely reliant on media, which -- where we have been capitalizing on share gains. So it doesn't appear to be phasing. It's across the board, Jakob.

[Jakob Lembke, analyst]

That sounds promising. And then just on APAC consumables here, the second quarter in a row with a bit more modest growth, I would say. Is there anything we should be mindful in there?

[Bronwyn Brophy, executive]

Yes. I think, yes, it's probably not -- I mean, it's not up at the levels of the other 2. But it is still growing above market. We have a couple of markets where I think we could probably double down a bit. But in general, I would say media growing slightly above market. We do have to remember that in China, we took significant share last year. Actually, for several quarters, we've been taking share in China. So that's probably leveling out a bit. I mean our market share in China is very significant now. There's not a lot more places to go to take share. So media is still above market in APAC region as a whole. Disposable devices well above market growth. So yes, maybe a little bit of the China factor coming into play there, Jakob.

[Jakob Lembke, analyst]

And then just finally, a bit of a housekeeping question, but were there any sales contribution from eFertility here in Q3?

[Patrik Tolf, executive]

Yes, it has started to come a bit here in the third quarter as well. We do not record that separately here as well. So I mean that's part of the Technologies business, as we said before here. But a small contribution throughout the quarter here as well. And of course, we do think that we have a really interesting pipeline, not just only for that one to be sold specifically, but also the combination of selling eFertility and the positive impact that, that will have combining then with our technologies and consumables business as well. But a small contribution for the quarter here.

[Bronwyn Brophy, executive]

Yes.

[Jakob Lembke, analyst]

Okay. Very clear on…

[Bronwyn Brophy, executive]

Maybe just to point out on eFertility, Jakob, that we have launched in the EMEA region. We haven't yet launched in the U.S. that's coming in 2025, although they are very eager to get going with the launch. So to Patrik's point, marginal contribution, but increasing contribution month-on-month. And I think the sales funnel looks -- is starting to build pretty nicely.

[Operator]

And we will now take our next question from Ulrik Trattner of Carnegie.

[Ulrik Trattner, analyst]

A couple of questions on my end. And getting back to consumables in EMEA and you talked about the disposable devices growing. I know you talked about different types of effects. But do you feel that this could -- to any extent, be MDR related for competitor or to any way related to disruption in the Cook Medical operations driving sort of excess growth and market share gains for disposables needles in particular, given that you obviously also scaled up your operations in Gothenburg by sort of twice the production capacity lately, and now we're seeing it coming through. So how much should we read into that?

[Bronwyn Brophy, executive]

Yes. So that's an excellent question. You've done your homework, as always, Ulrik. So we've been increasing capacity on the disposable devices for a while now, okay. So -- well, actually in media and disposable devices. So increasing capacity in Denver, increasing capacity in Gothenburg and increasing capacity in San Diego. And that is really helping to fuel the growth. It's very hard to conclusively say what percentage is coming from what.

But pipettes are doing well. Our sense needle is differentiated. You will have seen some of our social media and promotional campaigns around stents. It is a less painful needle used for egg retrieval, and that is starting to get some traction. Is there a distraction factor with some of our competitors, potentially, but it would be very difficult to measure that. But I think what's interesting to see here on disposable devices is it's across the board. It's -- every single market actually that I'm looking at here is growing and growing very nicely.

And we probably haven't really been focusing on this commercially as we could have or should have been where we very much started to double down here because we see it as a growth opportunity and growth opportunity and also ability to take share thereby delivering above-market growth. So it's -- yes, I think a combination really, Ulrik, of increased capacity, increased confidence, commercial focus and potentially some distraction factor, although that's not the reports that we hear back from the field. So, yes. And we do believe in it going forward, which is clearly why we're continuing to invest.

[Ulrik Trattner, analyst]

And on switching topics to technologies and the U.S. market. And you obtained the large commercial contract that you talked about in Q2, and you mentioned it being delivered in 3 tranches with effect in Q3 and Q4. It looks like we see a minor effect here in Q3 in terms of absolute sales numbers, it looks like kind of a low to normalized quarter. Can you give us some indication on what effects that commercial contract had in Q3 and if we are expecting for that to ramp up in Q4?

[Bronwyn Brophy, executive]

Yes. So great question. So yes, that particular order is going to come in, in 3 tranches. We didn't get tranche #2 in this quarter. So it's coming and the order is there and it's confirmed and no concerns on that. But I do think we have a phasing effect on Time-lapse, particularly in North America. So yes, Q2 very strong. Pipeline in Q4 looking good, but it is a little bit lumpier. And the reason being is that, obviously, the U.S. has very large clinic chains.

60% of all clinics in the United States now are part of chains. So it does make the business a little bit lumpier quarter-to-quarter. So there is a little bit of that factor going on, Jakob. But overall, we are absolutely focusing on Time-lapse in North America. We have put more commercial muscle in there. I don't believe there was enough in the past. So we're definitely doubling down and also our strategic account management function, which we have created specifically to work with the chains is focusing on Time-lapse.

The one, I suppose, maybe hindrance or impediment that the U.S. has when it comes to Time-lapse that EMEA doesn't have, and that is iDAScore. So we are working on regulatory approval for iDAScore in North America, but that's going to take time. So we primarily promote Time-lapse EmbryoScope in North America on workflow and clinic efficiency. So just an area where we need to work the regulatory side to improve the value proposition of Time-lapse.

And then to the earlier point that Sten made, this is a market where genetic testing is much more prevalent. So Time-lapse is really only starting to sort of find its place in terms of living alongside. But workflow being the key benefit, and I'm sure you saw the press release, Time-lapse 10x faster. So it's bringing a lot of efficiency. This article was published in Nature Magazine in August. So it does bring a lot of workflow efficiency to the clinics, and that's really what we're focusing on for North America.

[Ulrik Trattner, analyst]

Yes. And just a follow-up question related to that. And obviously, Genetic has been the prime source of embryo selection throughout like as long as I can remember and Time-lapse is more of a workflow efficiency tool. But I also know that -- and you talked about this at your Capital Markets Day, your efforts in combining genetics and Time-lapse deriving data that would confirm additional benefit of the 2 combined. So where are we at in terms of that progression?

[Bronwyn Brophy, executive]

Yes. So that is the key play. That is core to our owned platform pillar of our strategy, where we will essentially marry Time-lapse EmbryoScope AI technology with noninvasive genetic testing. So I mean, really, what we're doing there is using AI to try out the embryos that get genetically tested.

The program is progressing well. It's on track. It is a 3-year program with multiple phases, but it's progressing very well. We've been -- Patrik spoke about our R&D investment, and we've been putting a lot of R&D dollars, people, efforts into exactly what you described. So most of that development takes place in Aarhus in Denmark and in partnership with the team in Valencia. So it's on track. Yes.

[Ulrik Trattner, analyst]

And if we were to switch to genetics and since we're talking about clinical studies, if you can give us some update on the noninvasive ERA trial that is ongoing. I know from clinical trials that it's supposed to be completed in 2026. Is there anything you want to mention more around that study and potential readout?

[Bronwyn Brophy, executive]

Yes. So the -- so ERA study ongoing, the recruitment has been slow. That's not unusual in clinical trials, especially in clinical trials where a significant number of the clinics and customers are privately owned. So we have broadened the inclusion criteria. And since we broadened the inclusion criteria, the recruitment rates have increased. So that's good to see. It was stagnating a little bit, but it's now starting to ramp up on recruitment.

So probably still on track for 2026, of course, the market would like additional clinical data earlier, but I think it's important to get high-quality clinical data as opposed to fast clinical data. So yes, recruitment is picking up. I would say, still on track, but starting off, it was a bit slower than expected, Ulrik.

[Ulrik Trattner, analyst]

Okay. And if we were to follow on with the noninvasive PGT study ongoing in the U.S. as well with expected completion midyear next year. I guess that's the Embrace product. What to expect from that?

[Bronwyn Brophy, executive]

Yes, exactly. So yes, noninvasive core area of focus for us. That is also on track. So that's led by our clinical team in Valencia and by Dr. Carmen Rubio. A little bit easier to recruit for that particular one. So should be on track to announce the results probably in and around time ASRM time next year. Yes.

[Ulrik Trattner, analyst]

And just going into numbers here for genetics as well. And you're stating core genetics services growing 5.5% in the quarter. I just need to fact check here. What do you mean by core genetic services? Is that genetic services overall? Because if it's genetic services overall, I'm not getting the kits decline by 27%. If I add 5.5% from your genetic services sales in Q3 last year, I'm getting genetic test kit sales just below SEK 20 million, and that would sort of spur an additional question whether you are gradually phasing out genetic test kits and it's no longer a priority area of yours?

[Bronwyn Brophy, executive]

Okay. I can start. Sorry, everyone is going to be tired. I'll start and then I'll hand over to Patrik. So when we say genetic services, we mean everything except genomic kits, Ulrik. So that's genetics -- that's the whole lot. So just to sort of remind everybody, genomic kits was part of the consumables business area. And keep me honest here, Patrik, in quarter 1 of this year, we moved genomic kits into genetic services, creating genetics business area. So that's what's kind of making the comps a little bit noisy. Patrik, I don't know if you'd add.

[Patrik Tolf, executive]

No, I think you summarized it well there, Bronwyn. I mean the -- and then again, here, Ulrik, obviously, then the genetic services business and that's what we're referring to having then a growth quarter-over-quarter with 5.5%, whilst then the kitted business have a significant decline here compared to the same quarter last year.

[Ulrik Trattner, analyst]

Yes, yes. And that was kind of what I was alluding to because if you can do the backtracking of genetic kit sales by your reported number and genetic services numbers in Q3 of last year. And it looks more like genetic test kits declined 75% year-on-year.

[Patrik Tolf, executive]

No. Then you need to check your numbers there, Ulrik. Of course, I mean, it was -- the year-to-date impact on genomic kits is larger than the one that you see for the quarter. That you're right, yes. But I do not really recognize that kind of number that you talked about on genetic -- genomic kits.

[Ulrik Trattner, analyst]

And then also…

[Bronwyn Brophy, executive]

So, actually maybe just to help, so we don't have exact breakout for what you're looking for, Ulrik, but the decline of the kits have been easing quarter after quarter. So these are not exact numbers, but ballpark, in the first half of the year, it would have been close to 50% because of that very significant stocking impact.

So taking us back to 2023, we have stocking up in quarter 1 and quarter 2 of 2023 inflating the numbers, okay, because people were stocking up prior to transitioning to the new technology. Remember, the old kits were essentially being discontinued, so. And these were kits that people have been using for a very long time, very loyal to the Illumina technology. That's why we have to upgrade our kits to a new technology and why we developed embryo math.

So then we come into 2024, we have really high comparables in quarter 1, really high comparables in quarter 2, some residual in quarter 3. So the effect is lessening as the year progresses. That's for sure. But there are some -- definitely, we can see now because the stocking impact is lessening. There are some customers that have essentially traded up to next-generation sequencers.

So I think the second part of your question is, do kits play a role? Do we see kits playing a role going forward? And it's an important strategic question. The reality is by having a genomic kit with our EmbryoMap software, which is now validated on next-generation sequencers, we have a product offering for those clinics and laboratories that test in-house. Without kits, we don't have a play in those clinics. It's a much smaller part of the market. Our focus is clearly on our own laboratories, our genetic services business. That's our premium offering and kits is only 10% of the total sales, but it does give us an opportunity to play in that segment of the market. So a lot of technical information, but hopefully, that answers your -- helps to answer your question.

[Ulrik Trattner, analyst]

Yes, sure. And also just some clarification, and I'm not sure if I misheard you during the initial presentation. But you mentioned you saw a decrease slowing month-on-month. And did you also mention that it's potentially growing in Q4 already year-on-year?

[Bronwyn Brophy, executive]

I didn't. I intentionally did not say that. What I would say is that certain markets are expecting that business to return to growth in quarter 4, but not all markets are expecting it to return to growth in quarter 4. So as we look at our -- we forecast monthly and quarterly and some of our regions are expecting the growth to return. Others think it's going to be quarter 1 next year before the growth returns. But it is turning the corner, that's for sure.

[Ulrik Trattner, analyst]

I know I've been taking up a lot of time, but just one last question, short one. Gross margin improvements, is it purely product mix? Or is there anything structural within Vitrolife that is driving the strong gross margin?

[Patrik Tolf, executive]

I would say the main driver are, again, as we said, I mean, it's the product mix absolutely that contributes the big -- the largest part of the improvement, I would say. And the other thing are obviously here, as we also mentioned, that are the operational efficiency gains that we do, particularly within our Genetic Services business, where we continue then to work on reducing the cost per sample, improving the turnaround times and improve our overall way of working when it comes to the labs that we have throughout the world. So those are the main contributors for improvement in the gross margin.

[Operator]

And we will now take our next question from Rickard Anderkrans of Handelsbanken.

[Rickard Anderkrans, analyst]

So first one on Technologies. Obviously, quite significant volatility in the quarters. But following up on the comment you made there, Bronwyn, on the slide, should we expect Technologies to grow in Q4 given the challenging comparable? Or maybe you could add sort of a little bit more commentary around the growth profile in Q4 for Technologies if you're able to grow from that base? I'll start there.

[Bronwyn Brophy, executive]

Yes. Thank you for your question. I think the bar chart explains best what we're up against. So we have a good forecast, a robust forecast for quarter 4 beating SEK 206 million, I think, it's going to be tough. This was Patrik, again, you'll keep me honest on this one, but I think that was -- was that the highest quarter of all time for technology.

[Patrik Tolf, executive]

Correct.

[Bronwyn Brophy, executive]

In Q4 2023. So that's going to be a tough one, Rickard. And I prefer not to overpromise and under-deliver. So the current forecast is not coming up to SEK 206 million. So I think it's -- that's going to be a challenging quarter to beat. It's looking like a strong quarter, but not to Q4 2023 level. The revenue per system has picked up. The service revenue has picked up. So all of the sort of utilization metrics are good, but to beat SEK 206 million is going to be very tough.

[Rickard Anderkrans, analyst]

I appreciate that. But given this comparative headwind, both on technologies as well as to an extent on the genomic kits, do you think it's fair to see group organic growth somewhere in line with what we saw in Q3 and Q4? Or do you think you will outpace and grow above in the sort of higher single-digit range in Q4, just to get a sense of the moving parts.

[Patrik Tolf, executive]

Well, you know that we do not give any specific guidelines when it comes to exact numbers then on growth per quarter. But I mean, we have -- as Bronwyn have said here as well, we do have a positive momentum, which is on the underlying side here. We talked about on that one for the Genetic Services, just recently also then on technologies, as Bronwyn explained here. And we continue to see a good momentum when it comes to our consumables business. So there are no, call it, structural or anything change on the underlying businesses that we do here.

So we continue to focus on the markets where we are active in and to deliver according to our strategy here that we have for the end of the quarter here as well or the end of the year.

[Rickard Anderkrans, analyst]

And just a final one, maybe a little bit more housekeeping or nitty-gritty, but admin costs saw a quite significant sequential decline in the quarter. Anything to call out there? And how should we think about admin expense into Q4? Should it be similar rather to the levels we saw in the first half of the year? Just trying to get a sense a little bit of that movement, so I understand.

[Patrik Tolf, executive]

Yes. When it comes to admin, of course, we will continue here, as we have said, to invest and a lot of those digitalization efforts that we have as part of our strategy is also captured majority then into our admin costs as well. So we will continue to focus on our digitalization throughout the rest of this year, but also into the coming year as well. So I think the level that we are now seeing is approximately on where we could expect us to be going forward, maybe slightly up here due to investments here, as I said.

And that is then also offset here, as Bronwyn alluded to before as well when it comes to driving then the operational excellence here. And we want to -- and we know that it takes a bit of a time to do that, and we need probably to invest in order to save money in the long run as well.

[Operator]

And we will now take our next question from Johan Unnerus of Redeye.

[Johan Unnerus, analyst]

Just -- well, 2 questions. The first on Genetic kit, it seems to be a tougher headwind than perhaps you expected earlier in the year. What to expect on that side sort of over the coming quarter? What should we think of sort of stabilizing baseline in the future?

[Bronwyn Brophy, executive]

Yes. So thank you for your question, Johan. Yes, definitely a tough headwind. So significant stocking factor. I think as well the complexities of transitioning from one technology to another, the technology that we were transitioning from customers have been, as I mentioned previously, using it for many years. And some took the opportunity to upgrade their laboratories.

So we probably did, I would say, underestimate the complexity of some of that in early 2023. That said, we believe the worst is past us. So we've sort of had our most difficult, not the best English, but our most challenging comparables in terms of quarter 1 and quarter 2 this year. We did still have some stocking impact in quarter 3 because we had quite an amount of their seats built up.

So it has been getting easier, Johan, as the quarters move on. I do think the worst is past us. And as I mentioned to Rickard's question, we are -- some of our markets at least are expecting to be able to return our genomic kits to growth in quarter 4, not all, but some. I do think it's important to keep the context of kits in here. So the decline has been significant for sure, but it does only account for 10%, approximately 10% of the revenue of Genetics business area. That said, it was big enough to impact the growth overall. So I would say worst has passed us some green shoots in some of our regions. So it will get better in Q4 and then further improvement in quarter 1 2025.

And as I said, what are we doing about it ultimately? We have validated our new kits and our new software on all of the higher tech sequencers. So that does give us every opportunity to play back in that space.

[Johan Unnerus, analyst]

And more sort of a macro questions. AI is, of course, very interesting, and it's an opportunity for you. It could perhaps also be partly a challenge like for other businesses as well, sort of market-leading businesses. I presume that the access and ownership to data is critical here. And how do you see that? Are you in a very good position to capitalize on that? Or could it be a challenge in some regions and in some clinics?

[Bronwyn Brophy, executive]

Yes. So excellent question. And you are spot on. I mean, EmbryoScope has been around for a very long time. So we have millions of images and data to work on in terms of AI algorithms, probability calculations. So we are in a position of strength. But Johan, I'm paid to be paranoid and never to be complacent. So yes, we are in a position of strength. We have access to more data in this space than most, but we have to use the data, right?

And it's absolutely paramount that we stay ahead on the AI piece. We have a fantastic team of biostatisticians and people, AI specialists in Aarhus, similarly in Valencia. So it is most definitely an area of focus for us. It's an area of strength. But it's an area where we have to be sure we are not complacent.

So we're working pretty hard in that area. And I think it was -- Ulrik had asked the question around the marrying of the genetic testing portfolio and AI, that's clearly part of our platform play. So a key element of our R&D strategy going forward. So yes, but I think a lot more to come on AI in this space.

[Johan Unnerus, analyst]

And how should we judge the progress ahead on this side? Should we expect visible contribution in 1 year or 2 year or?

[Bronwyn Brophy, executive]

Yes. So our next-generation platform, that's a multiyear program. So we start to do some releases in 2 years' time, some more in 36 months, 3 years. So it is sort of, I would say, more iterative R&D as opposed to big bang. I think that's a safer way to do R&D with a much lower risk profile. So it's really going to be iterative, I would say, Johan. And we should be able to bring it to all regions. I think everybody is very excited about the role that AI can play.

What I would point out is the regulatory piece is very, very important because there are players out in the market promoting I in the field of IVF without having navigated the -- or maybe not the necessary, but without having navigated through the regulatory authorities. That's not the road that we want to take. We want to work with the FDA. We want to work with the regulatory bodies in the EU and partner with them to bring regulatory approved AI to the market. So I think that's really, really important. We're going to go by the book here.

[Johan Unnerus, analyst]

And so we should expect some visible contribution towards your end of your sort of long-term period, which is sort of 4 years remaining. So year 3, year 4 from now on. Yes.

[Bronwyn Brophy, executive]

Exactly. Yes, I would say within the horizon of our 5-year corporate strategy, we should start to see some of those benefits coming through. And the eWitness company that we have acquired, that also feeds into that. So yes, you're correct, Johan.

[Johan Unnerus, analyst]

And what about scope for additional complementary acquisition in this space?

[Bronwyn Brophy, executive]

Yes, we are on it. So yes, that's precisely what we're working on. So very synergistic targets that are closely aligned with our strategy, with our core strategy of integrating the products and services of the IVF journey. Yes, I think eWitness was one of those acquisitions. There are a couple more that we are currently looking at. So yes, you're also correct there.

[Operator]

That was our last question. I will now hand it back to Bronwyn for closing remarks. Thank you.

[Bronwyn Brophy, executive]

Thank you very much. So just thanks to all for dialing in. Thank you for your very interesting questions. You've clearly all done a lot of homework, which is a sign of interest in the Vitrolife Group, and we are very grateful and appreciative of that. So have a wonderful day, and thank you all very much.

[Patrik Tolf, executive]

Thank you.

[Operator]

Thank you. This concludes today's call. Thank you for your participation. You may now disconnect.