Vitrolife AB

STO:VITR

Earnings Call Analysis

Sales Rise, Margins and EBITDA Grow at Vitrolife

Vitrolife’s Q4 report showcased a robust financial picture with net sales growing by 6%. Gross income improved substantially, rising to SEK 514 million, and operating expenses increased by 12%, linked to strategic investments. Despite one-time costs and a non-cash impairment charge, a healthy EBITDA margin of 32.5% was maintained, with an earnings per share of SEK 3.31. The company's balance sheet strengthened, evidenced by a reduced net debt to EBITDA ratio at 1. Vitrolife focuses on sustained growth, aiming for over 10% annual organic revenue growth, an EBITDA margin above 33%, and maintaining a net debt-to-EBITDA ratio under 3.

Vitrolife Group's Q4 Performance Shows Solid Growth and Strong Margins

The Vitrolife Group's fourth quarter disclosed a 6% increase in net sales with a gross margin improvement to 56.9%, largely attributed to higher sales of core consumables and technologies which bolstered gross income by 11%. EBITDA also climbed by 6.5% with a margin of 32.5%, reflecting a robust operational excellence program particularly within Genetic Services. However, operational expenses grew by 12%, primarily due to investments in commercial scale-up activities and research and development aimed at accelerating product time to market.

Investment in Future Growth Amidst an Impairment Charge

Despite facing a substantial non-cash impairment charge that affected the balance sheet, the company has proposed increasing the dividend from SEK 0.85 per share to SEK 1 per share. Excluding this impairment charge, net income was SEK 121 million for the quarter and SEK 449 million for the full year. The strong financials are highlighted by a 10% increase in net revenue and continued growth in EBITDA margins when considering non-recurring costs.

Strategic Focus on Genetic Testing, Patient Empowerment, and Global Leadership

Vitrolife is observing significant growth in genetic testing, particularly in Asia and certain European countries, which aligns with their mission to be the global leading partner in reproductive health. The company has set long-term growth and financial targets including annual organic revenue growth above 10%, an EBITDA margin exceeding 33%, and maintaining a net debt-to-EBITDA ratio below 3. To achieve these goals, Vitrolife is focusing on product and service integration, innovation leadership, acceleration in key markets like the U.S. and China, optimizing their go-to-market model, and driving operational excellence to fund growth.

The Momentum in Technology Adoption and Global Market Development

The company is experiencing strong performance in its technology segment, with time-lapse embryo evaluation and iDAScore gaining traction thanks to targeted investments in sales specialists, especially in China and the U.S. A focus on workflow efficiency has also begun to pay dividends as customers realize the full extent of its benefits. The healthy pipeline for time-lapse orders suggests sustained growth moving forward.

Consumables Leadership and Opportunities in Emerging Markets

Vitrolife's consumables remain the company's stronghold, boasting the highest gross margin across its product segments. The company's ongoing efforts in operational excellence are directed at maintaining solid EBIT and gross margins despite shifting product mixes. Concurrently, there are strategic expansion plans with increased operating expenditures in commercial activities, particularly in the U.S. and China, where there is potential for market share gains and ramping up sales efforts. The company plans to fund this growth by scaling down administrative expenses while ramping up R&D investments.

Talent Acquisition as a Growth Lever

Recruiting skilled commercial talent, especially in MedTech and Life Science, is a priority and challenge acknowledged by Vitrolife. The company leverages its strong brand reputation and product quality to attract and retain the best talent, which is vital for sustaining growth. A hands-on approach to recruitment and rapid onboarding in the U.S. market is seen as critical for scaling up operations effectively.

Looking Ahead: Growth Expectations and Operational Optimization

Vitrolife is optimistic about surpassing market growth rates and expects to grow significantly in China, with double-digit revenue expansion already evident. Although facing headwinds in the U.S. with Genetic Services, the company has a clear vision and expects to grow faster than the overall market while reaching for positive organic growth by mid-year. Despite the challenges, Vitrolife's fiscal prudence and strategic planning seem to set the course for sustainable growth and market share acquisition.

Earnings Call Transcript 2023-Q4

[Operator]

Hello, and welcome to the Fourth Quarter and Full Year Report 2023. My name is Caroline, and I will be your coordinator for today's event. [Operator Instructions]I will now hand over the call to your host, Mr. Patrik Tolf to begin today's conference. Thank you.

[Patrik Tolf, executive]

Thank you. Good morning, and welcome to the earnings call for the fourth quarter and full year 2023. Time is now 10:00, and the date is the 2nd of February 2024. My name is Patrik Tolf, and I am the CFO for the Vitrolife Group. And I will now hand over the call to our CEO, Bronwyn Brophy.

[Bronwyn Brophy, executive]

Thank you, Patrik. Good morning, everyone, and thank you for joining. If I can now move you to the second page of the deck, we will start with the highlights for quarter 4. So as you can see, we have delivered improved margins, both gross and EBITDA with gross margin increasing 2.7 percentage points versus the same quarter last year and EBITDA margins of 32.5%. This in the case of the EBITDA margins is mainly attributable to product and market mix.We had a fantastic quarter in our Technologies business. In fact, it was the highest quarter ever with double-digit growth across the regions and very robust growth in 2 of our key strategic markets, namely the U.S. and China.And then, as most of you will be aware, we launched our new corporate strategy at our Capital Markets Day that we hosted in Stockholm in December, where we set out our new corporate strategy, the 5 key strategic pillars that we believe will help us to drive long-term sustainable profitable growth for our company, and we also updated our long-term financial objectives.So I will now move you to the next slide, please, where we will look at the key metrics and also take a look at the performance in the full year. So sales for the quarter of SEK 904 million. That's an increase in SEK of 6%, but in organic growth in local currencies, that is a growth of 5%. I've already spoken about margin and EBITDA, you will also see that our operating cash flow increased to SEK 171 million for the quarter.If we look then at the full year, we see sales of SEK 3.512 million. That is a 10% increase in SEK versus the previous year and 5% organic growth in local currency. Our EBITDA performance similar in terms of percentage versus 2022, so SEK 1.136 million on EBITDA, delivering the margin of SEK 32.3 million, and our operating cash flow for the year went up from SEK 636 million to SEK 757 million. Earnings per share also increasing.Just to give you then the full year performance in local currencies in terms of our 3 business areas. Consumable performance for the year in local currencies was 9%, Technologies 11%; and Genetic Services, excluding discounted business, minus 1%. So that is the performance by business area for the full year.I will now move you to the next slide, and we will look at sales and growth per geographical segment in local currencies. So let's start with the Americas, and it's important to bear in mind here that Americas includes both North and South America. Organic growth in the Americas was minus 5% in the quarter. We had a very strong performance in Technologies, but the overall growth of the region was impacted by a decline in Genetic Services, most notably in the ERA test. I would like to highlight that the performance of ERA in North America does appear to be stabilizing. But versus the previous quarter last year, of course, it did have an impact.EMEA performance for the quarter, plus 6%. We had double-digit growth in Technologies despite the fact that Europe does have higher penetration rates for our time-lapse EmbryoScope. And ERA was also impacted in the EMEA region, but the volume of ERA testing and the revenue contribution is less material. And we also moved more rapidly here with our remediation plan. I think as well across the Genetic Services, we do see nice growth in some of our other tests, and we saw solid growth across the consumables portfolio in the EMEA region.APAC 16% growth, a fantastic performance across the portfolio, especially in China, which is a key market for us. China delivered triple-digit growth of an increasingly large base in technology. So really, really nice to see this. But it's not just a story about China, India and other key large markets in the region are also doing very, very well. So very strong performance in APAC.And then -- then if we look at the contribution by region, we do see a healthy split with of course, 32% of the share of total sales coming from Americas, 38% million from EMEA and 30% from APAC. And I think with that substantial growth and sustainable and consistent growth that we're seeing in APAC, we would expect that contribution to increase going forward.I'll then move you to the next slide, and we will move into looking at our sales by business area. So our core Consumables business performed well with media doing particularly well, double-digit growth in APAC and above-market growth in most of our key markets. Media business is, of course, very central to the success of Vitrolife Group, and we have increasing market shares in most of our main markets.However, our genomics kitted business was impacted by substantial stocking up in the first half of the year, while customers transition to our new EmbryoMap technology. And probably really the best way to explain this phenomenon is actually to look at the bar chart. You'll see that in the first quarter and in the second quarter of 2023, they were particularly strong in Consumables. It was strong across the board media and disposable devices, but the performance of our kitted business was standout, and we do see the impact of that stocking prior to customers transitioning.Just to give you some figures, genomics increased -- genomics kitted business increased 21% in quarter 2 and 15% in quarter 1. What I would say is that in the final month of the year in December, we did start to see customers ordering. So it appears that, that transition and phasing should be leveling out. North America was the region that suffered most from this kitted impact. But aside from that, good performance, as I said, across core consumables and most notably in media.I will now move you to the next slide, where we will cover Genetic Services business area. So total growth for the quarter in local currencies was minus 2%. Americas, again, North and South declined due to the ERA impact. So ERA declined 20% in the quarter versus the same quarter last year. And that PGT-A sourcing that we mentioned in the first and second quarters of 2023 still going through our numbers. So it will be the end of quarter 1, beginning of quarter 2 before we get a clean basin comparison there. Aside from that, we did see growth across the rest of the portfolio in Genetic Services. So it's good to see the diversification into the -- of the revenue into some of our non-invasive and newly launched tests.EMEA, interestingly, 6% growth in EMEA. EMEA was also impacted by ERA, as I previously mentioned, but it is a less material proportion. We have executed on our remediation plan, and we did see good growth in some of the other tests in Genetic -- in the Genetic Services portfolio in EMEA.And then APAC, 16% growth for the quarter, very strong growth in some of the key markets, I'd like to call out India, which is doing very, very well, and the base there is becoming material. So good performance in APAC, I would say, robust performance in EMEA, Americas. We are addressing, of course, the decline in ERA, but we do see that leveling out month-on-month.And then finally, if I can move you to the Technologies business area. Look, this was a fantastic quarter. It was our largest revenue ever. You can see there, SEK 206 million. Double growth in all regions, so 31% growth in local currencies. 13% in EMEA, this is a great performance in a market that's more penetrated for time-lapse, especially Western Europe. APAC growth of 37%. China is doing very, very well. Triple-digit growth in 2 of our key markets, so U.S. and China, as I said. And I think what's also a very healthy sign in this business is, we're seeing some nice traction in terms of the Consumable revenue and Technologies and also the service revenue.Americas great to see traction on time-lapse in the U.S. I think our customers there are really starting to see the benefits of the workflow efficiency that embryo brings -- EmbryoScope brings to the very heart of the clinic. So it is off a lower base, but nonetheless, it's good to see us getting traction in North America.So I think the other point I'd like to highlight before handing over to Patrik is we did set out our Capital Markets Day, the importance of these 2 markets to us. And of course, time-lapse on Technologies is a key cornerstone in terms of the owning the platform strategic pillar. So good to see that we are starting to get some nice traction in those 2 critical markets.So with that, I will hand over to Patrik.

[Patrik Tolf, executive]

Thank you, Bronwyn. And then, we will move back then to our reporting segments, so if I ask you, please turn to -- change to the next slide, where you then see our reporting segments down to market contribution and also then contribution margin.If you then look on the sales, as Bronwyn have just explained, you see the growth in sales for the various regions. You also then see how we have distributed and the gross income. The 56.9% is then distributed then with the highest gross margin within APAC and then ranging down to Americas. This obviously then follows our product mix is also -- is impacted then by the sales volume per region.Then we take out the direct selling expenses that we have per region, and that brings us down to our market contribution. And you can then see that we are continuing to increase the market contribution in APAC and also in EMEA, but we are slightly lower than following the decline in revenues for the Americas market region.Moving on to the next slide, where we then look on the Q4 financial highlights. We see that the net sales of the -- for the Vitrolife Group for the fourth quarter has increased with 6%. And that is in SEK and the currency impact for this quarter has been relatively small compared to other quarters. So that is approximately then 1% [ unit ].We then move down to the gross income, and the gross income then increased to SEK 514 million, giving us an EBIT -- sorry, a gross margin of 56.9%. And that is driven then by higher sales of core consumables and also technologies that is driving the margin improvement. We are also, as we have talked about in previous calls and previous quarters, driven then the operational excellence programs, particularly then within Genetic Services, and that also has a positive impact. All in all, this brings us down then to an EBITDA of SEK 294 million with a margin of 32.5%. So all in all, we see that the net sales are increasing 6%. We also see that the gross income is increasing substantially higher with 11% and EBITDA is growing with 6.5%.So moving on then to the OpEx, which you will see on the next slide. You can see that operating expenses for the fourth quarter has increased by 12%. And the largest increase, as you see, is within our selling expenses, and that is then related then to continuous investments in the commercial scale-up in high market -- high potential market activities.We have administrative expenses approximately on the same level, although that we had a couple of one-timers for the fourth quarter. We also, then continue to increase our investments in R&D to continue to accelerate the time to market of the new products that we have in the pipeline. Generally, you can also say that we have slight higher traveling costs and that impacts, particularly when it comes to the selling expenses.Moving on then to the next slide, where you will see an income that is then adjusted for the non-cash impairment charge that we did and announced here on the press release on the 23rd of January. And here, you will then find the quarter and the full year and how that is adjusted then for the non-cash impairment charge. And as you know, we booked this one, as other operating expenses of SEK 4.3 billion. And now you can see then how this is then distributed then on the net income down to SEK 121 million for the quarter, and the equivalent number is then SEK 449 million for the full year. So hopefully, that gives you a bit of clarity on how we have accounted them for the non-cash impairment charge. And consequently, of course, this has an impact on the balance sheet with decline in goodwill and also a decline in equity.To summarize, I move to the next slide, which then are the key financials. And again, just to repeat on the quarter, SEK 904 million of sales, gross margin, SEK 56.9% and EBITDA of SEK 294 million, giving us then an EBITDA margin of 32.5%. On the full year basis, you can see that we continue then to, of course, continue to grow the net revenue, which is then a 10% increase in SEK if you then exclude the discontinued business, including that one, the sales increase is 9%. We continue then to, again, increase the gross margin, EBITDA margin of [ SEK 1,136 million ].Keep in mind also, as we have been stating out in the report that we have during '23 have had non-recurring costs of approximately SEK 25 million. which is primarily driven then by CEO succession and warranty provisions that we did during the first and second quarter, which actually means that we are running at a higher EBITDA margin throughout the year.Moving on to earnings per share, we continue to increase that one. So that's now [ SEK 3.31 ] earnings per share. We continue then to generate good operating cash flow, which brings down then the net debt to EBITDA, where we are now down to 1. And also, then saw in our communication and in the report, the Board proposed that we increased the dividend from SEK 0.85 per share up to SEK 1 per share.So with those words, I'll leave it back to you, Bronwyn.

[Bronwyn Brophy, executive]

Thank you, Patrik. And if we can move to the next slide, this is hopefully a slide that is starting to become familiar. And I really want to talk through this slide again because this is the road map for the Vitrolife Group. We -- this is what we believe we need to execute on in order to drive sustainable, profitable growth for our company. And I think it's very important that I highlight that we will be tracking progress in terms of our ability to execute and hit the key milestones in relation to this plan.So just to summarize it again for everybody. The market trends that we see, and we expect to see going forward, growth in demand for this market. Cycle growth is expected to be somewhere between 5% and 7%. But as access and affordability increases, we would expect these rates to increase. There is a labor and a skills shortage at all levels of this industry, hence the need for increased digitalization and automation in the labs. And again, this is something that we believe we can bring to our customers.Consolidation is happening. It appeared to slow down at points in time, but the general trend is towards consolidation. If we take the U.S. as an example, 50% of all U.S. clinics are now part of the chain. Regionalization, what do we mean by that? We tend to see a larger amount of genetic testing in terms of the number of cycles performed in the U.S. versus other regions, although that is starting to change. And I think it's seen from the numbers that we've presented today, genetics testing is starting to increase in areas like Asia and also certain countries in Europe. And then patient empowerment, this is nothing specific to our industry that's happening across health care.Our vision is obviously to enable people to fulfill the dream of having a healthy baby. And our mission is to be the global leading partner in reproductive health. We also want to strive for better treatment outcomes for patients.The long-term growth and financial targets that we highlighted. Annual organic revenue growth in local currencies above 10%; EBITDA margin north of 33%; and net debt-to-EBITDA less than 3; and then our 5 key strategic pillars. So what you should be seeing reflected in the numbers is based on the execution and progress towards these 5 pillars, and it is #1 own the platform, connecting products and services. This is why we are pleased to see the traction that Technologies is getting in our key markets.Innovate to expand leadership. We have a great pipeline. We need to accelerate the rate at which we bring products and tests to market. The pipeline is only as good as the ability to commercialize. So we think we have quite an opportunity there.Accelerate in key markets. Look, the -- all of our markets are important to us, but we believe our greatest opportunities lie in the U.S. and China. And I think it's important that we focus and double down in those key geographies, where we have opportunities to develop the market and take share.Optimizing our go-to-market model. This is important in terms of how we go to market, how we tell our story and how we leverage the full breadth of the Vitrolife portfolio.And then very importantly, driving operational excellence across the company, so that we can fund this journey. And to that end, we have brought in some specialist talent to help us with these programs across all business areas, regions and functions.So then my final slide before we open up for questions-and-answers, going forward, what are we going to be executing on in the near term, optimizing our go-to-market model. We need more feet on the street, and we need to pair back in terms of back office. Scaling up in the U.S., that has already started, but we need to accelerate there. And the opportunities in the U.S. we're all very familiar with.We're doing very well in Consumables media, in particular. We believe we have opportunities to increase our share in core consumables. We have very good momentum, but I think we have opportunities to do even better. We have high-quality -- high-quality media and because of the investments that we've made in capacity, we are able to satisfy that demand when we do take share.Acceleration and penetration of time-lapse globally. This is unique in terms of our portfolio. I think it's great to see this happening, but we need to make sure that it continues to happen. And then, we have some great opportunities in terms of Genetic Services outside of PGT-A. So our more differentiated tests, our non-invasive tests, we are starting to see this revenue pick up, and we have an opportunity to accelerate.So I'd like to thank you for listening to us, and we will now be able to open up to questions.

[Patrik Tolf, executive]

Yes. So we'll leave it over to the moderator.

[Operator]

[Operator Instructions] We will take the first question from line Ulrik Trattner from Carnegie.

[Ulrik Trattner, analyst]

Great. A few questions on my end. Starting off with consumables, and you mentioned genetic test kits and the phasing from old products into new. But how worried should we be in terms of the underlying market in the U.S.? And can you give us some indication how much consumable ex-generic kits were growing for Q4?

[Bronwyn Brophy, executive]

Yes. So good morning, Ulrik, and thank you for the question. We don't believe we should be worried. It is clearly a phasing impact. We can see the stocking effect in quarter 1 and quarter 2. I don't want to come across as complacent. We want all of our business areas to be growing in all quarters. But the stocking effect is clear, as we drill down into the numbers. And I do think it was good and a healthy sign to see that in the month of December, some of those customers, who hadn't ordered in a number of months were starting to place orders with us again.We're also confident, and we've had very good feedback from our key customers in terms of our new EmbryoMap. So I don't think it should be cause for concern. We're confident in terms of our ability to transition our key customers over to EmbryoMap.Aside from that, core consumables is doing well, very strong media performance in APAC, good growth in EMEA, Middle East and Turkey, double-digit growth, double-digit growth in U.K., Ireland. I'm not going to give you every number, Ulrik. But looking at the breakdown here, there shouldn't be any cause for concern in terms of the core consumables business of Vitrolife.

[Ulrik Trattner, analyst]

Okay. Great. And on technology, obviously, great performance and obviously, great to see technologies and time-lapse growing in the U.S. Are you feeling any difference in terms of sentiment and adoption? And you talked about workflow efficiency, but is it something that has triggered this ramp-up in sales that you think is sustainable? And I also note that your selling expenses for the U.S. markets increasing by 25% year-over-year. Is there something related to that? Or how should we sort of view this entire shift in sales for the U.S. market?

[Bronwyn Brophy, executive]

Yes. So I can start, maybe Patrik, and then if you want to add some color. So thank you for the question, Ulrik, great question. I believe there are a number of factors contributing to the acceleration in technologies. I think one of them is focus, okay? So really doubling down in terms of the technology that is unique to the Vitrolife Group. That's one. We did increase our investment in both China and the U.S. in terms of capital sales specialists. I think in China, that's starting to pay dividends, in the U.S. should pay increasing dividends going forward in terms of revenue. I think the other key thing is we have very much focused on time-lapse in terms of embryo evaluation and iDAScore, and that is clearly a very compelling part of the value proposition.Where we've probably focused less in the past is on workflow efficiency. Now we have tailored our message to highlight the benefits of workflow efficiency. And we have customers, for example, Cornell and our largest time-lapse customer in San Francisco, UCSF, they are clearly seeing the workflow benefits. So I think the workflow benefits, the true magnitude of that is starting to be realized by our customers. And I think that's also probably propelling and boosting the sales. So I would say 3-dimensional, focus, the increased investments that we've made. And then Patrik, I'm not sure if you want to add anything additional to that.

[Patrik Tolf, executive]

No, nothing you've covered it.

[Bronwyn Brophy, executive]

But maybe, Ulrik, if I could just add one other point, excuse me, I should add. The pipeline for time-lapse orders is very good for this quarter and for the coming quarters. So I don't -- we don't believe this is a flash in the pan. The order book looks very good.

[Ulrik Trattner, analyst]

Great. And I know that you -- well, 2 parts here. You sound very forward leaning for '24 taking market shares. And the obvious question would be in which areas and geographies you're seeing taking market share, as well as you sound a little bit more upbeat on China. If there's -- do you see the trend of China opening up and as well, India, new market, it's a growing IVF market? How substantial is the sales contribution?

[Bronwyn Brophy, executive]

Okay. Well, I'll start, Patrik, okay. Sorry, look, I'm taking all your questions here. I'm hogging the floor. So where can we take share? We -- I think we can take share in consumables. We have a very high-quality portfolio, great reputation, good share, but there's always ability to take more, okay? This is relatively speaking, still a fragmented market. So I think we have great opportunity to take share in media and disposable devices. Technologies, that's more of a market development today. And I think in Genetic Services, we have a lot of opportunities in terms of our non-invasive tests to really start driving the penetration of those tests.And China, China is a really interesting one because I think we've been challenged in the past in terms of how sustainable is your growth in China. All our leading indicators are looking very good on China. We're not reliant on even though we've had an outstanding performance in technologies. It's across the portfolio. So we're not overly reliant on any one business area. And the demand is not just holding up, it's accelerating. So again, media is looking very strong in quarter 1. Order book is looking good on time-lapse. So we're feeling pretty good about China. I think that's fair to say Patrik.And then India, yes, I mean, great points that you make Ulrik. India, sometimes China steals the light from India. But I have to say here, in terms of its total contribution, it's becoming increasingly material as part of our APAC region, good growth, double-digit growth in the quarter across the board. Very nice performance in Genetic Services, very good performance in disposable devices. So I think we have opportunities in India to drive further penetration in that market and clearly going to be a very large market and important market going forward.I don't know Patrik, if this...

[Patrik Tolf, executive]

Yes. Sums it up very well.

[Bronwyn Brophy, executive]

Okay. I'm stealing all of Patrik.

[Ulrik Trattner, analyst]

Perhaps he can -- he can answer the follow-up question then on India. India, obviously, a very fast-growing market, but it's also been a low-cost market. But when I look at your market contribution for Q4 for APAC, it looks quite good, and it's actually up sequentially. So how -- just -- can you help us with the dynamic of your sales in India, is it is margin dilutive or if you can keep up with the margins and just expand in India?

[Patrik Tolf, executive]

It's not margin dilutive. Of course, I mean, as Bronwyn said, I mean, the relatively -- the relative share of India still is relatively low, but increasing quite nicely here as we say, right? And as I say, yes, it's compared to other markets, it's a relatively low-cost market. So -- and also you really need to be present in India in order to do successful business in India as well. We are getting there. We are making progress in various areas, and it is definitely contributing to our margins for the region.

[Bronwyn Brophy, executive]

I think maybe the final point that I would add, Ulrik, and it's a similar case in China. Very good local team on the ground. So I think India is similar to China in that regard. Indian people, who know the market, know the customers, clinic setup. I think that's really, really important as opposed to placing a more western lens on the Indian market. I think that's one of the key success factors for both India and China for the Vitrolife Group.

[Ulrik Trattner, analyst]

Great. Last question on my end relating to ERA, and I think it's perhaps more fair to compare it on a sequential basis. You mentioned stabilization, but even for the U.S. market, are you seeing flat or growing sales for ERA sequentially or even if you have month-by-month comparisons, what are you currently seeing?

[Bronwyn Brophy, executive]

I can start with that one. So flat, it's flat. The decline has halted. It's not yet in growth trajectory, but we are pleased to see the stabilization. It did take a sharp decline. So it's stabilizing at the moment. And I do think that is in large part, down to our remediation efforts. We are, as you know, doing additional clinical work in order to be able to support that study. That's going to take time. But for the moment, it's stabilization. We're not yet in positive trajectory on ERA in North America.

[Operator]

We will take the next question from line Suzanna Queckborner from [ SHB ].

[Suzanna Queckbörner, analyst]

I wanted to start, first of all, just to double down on the consumables and the genomic kits. Could you give us an update on the deal that you made with Illumina in 2018. I think it's up for review on -- in 2023 and how that factors into this new dynamic in consumables?

[Patrik Tolf, executive]

Suzanna, yes, I mean, as you know, we signed and done agreement with Illumina here a couple of years ago, and that was extended here during the last year. So that, in essence, means that we are continue then to sell those kits as well. So that do not really have any impact on this one. Basically, now it's also then moving into the next generation here moving then into the EmbryoMap, as we have been spoken about. So that agreement is still in place there. And we are now chasing the kit for the half year during 2023.

[Suzanna Queckbörner, analyst]

Okay. And then, I also wanted to ask something about your operational excellence program, specifically in terms of consumables. Is it a fair -- is it fair to assume that you're reaching a maximum capacity in terms of media manufacturing? I noted that one of your ambitions from the CMD was to double your capacity. So how is Vitrolife planning on doing this and in -- specifically with regards to culture media, and -- how will you take market share?And then as a follow-up, with the market share that you say, you have a chance of taking more impact down to one of your larger competitors having issues with quality?

[Patrik Tolf, executive]

If I start with the first point that you are making here now as well, I mean, yes, we are continuously investing into our manufacturing capacity for our media also that we have increased our capacity then also for medical devices. And we are also making new investments that have done so during the fourth quarter here as well to increase the capacity for the media production. So we are ready to continue to increase volume with continuous high quality, which is a key essence and key epithet that we are very known for, and that's something that we continue to focus on here as well. So -- from a production capacity perspective, we have more capabilities to increase our manufacturing of media.

[Bronwyn Brophy, executive]

Yes. Maybe if I could jump in there. Thank you for the question, Suzanna. And so, we have been working on -- even prior to me joining the company, our media footprint, our capacity, our site master plans in order to be able to deliver on our ability to take share or execute on our ability to take share. So capacity, not a concern.Where do we believe we can take share across all markets. I think China is a really good example in terms of what we were able to do with competitor exits there. Yes, certain competitors facing challenges right now, what happens to all companies at different points in time. But of course, it is an opportunity for us to convert some of those customers to our media in North America and across the globe. So our media, it's synonymous with quality. We have very vigorous quality and test protocols as do most companies. But as we look at that part of the portfolio, speak to customers, our reputation on media is excellent. It builds a lot of confidence. So I think that's something that we can leverage and it's an opportunity to take share.

[Suzanna Queckbörner, analyst]

Okay. Great. And then just one final follow-up. Should we expect low single-digit consumables growth in H1 2024?

[Bronwyn Brophy, executive]

The very honest answer to that question is, Suzanna, I would be disappointed if we were delivering low single-digits on consumables in the coming quarters. So I can't make any promises, but we typically don't issue guidance, but that would certainly not be the aim. This is a core part of our company. We're doubling down. We believe we have opportunities to take share. And if we're growing double digit in key markets, then we need to keep that trend going.

[Operator]

We will take the next question from line Sten Gustafsson from ABG Sundal Collier.

[Sten Gustafsson, analyst]

Perhaps, we could start with the PGT-A test and the insourcing you talked about last year. If you could provide us with an update if that has increased or decreased in the U.S. Yes, let's start with that one.

[Bronwyn Brophy, executive]

Yes. So thank you for the question. PGT-A insourcing has not increased in the U.S. So we were clearly impacted by this in quarter 2 of 2023 and it impacted the numbers throughout the year. But we have not suffered from additional insourcing on -- of PGT-A. I would actually say aside or adjusting for -- that's not a way of making excuses, but adjusting for the insourcing of that large chain, the business is actually growing quite healthy. So we haven't seen that insourcing trends increase and have not been impacted by it.

[Sten Gustafsson, analyst]

Excellent. My second question comes to -- relate to transportation costs, given the turmoil on the Red Sea and the freight rates going up, how should we think about this for '24? Will there be much higher cost for you? And how will this play out in terms of the delayed shipments or supply constraints or something like that?

[Patrik Tolf, executive]

Thank you. It's a good question, and that's obviously something that we are working on here. So as we can -- we can -- we have seen some impact of that one during the fourth quarter as well. I mentioned travel cost. That's one side that, that's obviously more traveling of our personnel rather than our goods. But of course, it has an impact, and that's obviously something a challenge that we are addressing now for 2024. But if anything, we see that there is a cost increase and a cost pressure for the logistics side, absolutely so. And we will obviously try to offset that one work in a different way, but it has definitely an impact for us during 2024.

[Sten Gustafsson, analyst]

Would it be possible to try to quantify it in some way or...

[Patrik Tolf, executive]

It's a relatively small portion of our COGS. So -- but of course, it adds up for the Group when it comes to all the logistics given also that we are operating and selling into globally about 125 markets. So -- but it's not a substantial impact on the cost line.

[Sten Gustafsson, analyst]

Okay. My last question relates to the sort of the outlook for '24 and maybe you don't want to provide us with the numbers here, but is it fair to assume that given the fact that you sound rather upbeat and talk about gaining market share, et cetera. At the same time, you have, at least in the near term, some headwinds on Genetic Services in the U.S. But is it fair to assume that you're probably going to grow faster than the overall market this year, i.e., above [ 5% to 7% ]?

[Bronwyn Brophy, executive]

So I can take that one, Patrik. So we definitely want to grow above market and expect to grow above market in consumables. Same applies to technologies. We do have headwinds in Genetic Services. We are addressing those headwinds. But absolutely, our aim always is to grow above market rates. So -- we don't like to make promises that we can't deliver on, but we are certainly aiming, as a company and taking all actions necessary to increase our growth rates. And of course, for us, the goal has to be that we are growing faster than the cycle growth in the markets. We need to be growing faster than cycle growth.

[Operator]

We will take the next question from line Johan Unnerus from Redeye.

[Johan Unnerus, analyst]

Great. Thanks. I'll start off with some follow-up and especially related to Genetic Services, you had minus 10% organic growth, which was better than Q3 at minus [ 15% ] more in line with Q2. What to expect here looking into '24, you're talking about improving and saving headwind. Can you reach positive organic growth by midyear?

[Bronwyn Brophy, executive]

Thank you for the question. Yes, so a couple of factors at play here. So we are seeing a stabilization in North America. So that is good given the situation that we had earlier in the year. But ERA is still declining outside of the U.S. So we do see ERA declining in EMEA. The impact is less -- lessened because the revenue simply isn't as material as it was in North America. But we do need to navigate that ERA decline OUS.The PGT-A phenomenon that ends kind of midway or early quarter 2. So that certainly helps in terms of baseline comparisons. We are starting to see increase in revenue in some of the other tests outside of ERA and PGT-A. That's good to see. But the revenue contribution of those tests is small comparatively speaking. So we really do have to sort of move the needle in PGT-A in order to be able to shift the overall performance of Genetic Services. But we are certainly aiming to move ourselves into slightly more positive territory in terms of performance of the overall business area.I think the fact that APAC is doing well and EMEA is also performing pretty solidly, it's really all about Americas. That is the one that -- it has the biggest revenue contribution and is also the region that suffered most in terms of ERA. So a few dynamics here for us to navigate and manage, but also some positive green shoots in terms of ability to get things going in a more positive direction.

[Johan Unnerus, analyst]

So it sounds like it should be achievable to maybe hit positive growth by somewhere around midyear to add some granularity or caveat, it seems like Q1 last year was pretty healthy on Genetic Services and the PGT-A headwind built remain in Q1, so maybe we should add modest expectations for this quarter.

[Bronwyn Brophy, executive]

Yes. I would say for this quarter, best to have modest expectations. Yes. But improving as -- improving as the year progresses.

[Johan Unnerus, analyst]

Yes. And on the growth -- sorry.

[Patrik Tolf, executive]

Yes. Johan. Also, as I know, Johan. I mean, if you look on then -- on the ERA, the big decline in ERA, it started in the second quarter 2023. That's all.

[Johan Unnerus, analyst]

Yes. And on the gross margin, which was obviously very positive and also despite the mix, where we had a very good support from technology. It can be viewed in different ways, I suppose. One way of looking at it is that on a normal consumable contribution quarter that suggest that the gross margin could take a further step up? Or should we think that view it like there's less of a difference between technology and consumable?

[Patrik Tolf, executive]

The consumables business is running on the highest gross margin. So absolutely so. But I mean, the product mix, of course, when you look on the consolidated numbers will, of course, always have an impact on the -- on the consolidated gross margin. We are, of course, continuing to -- as we have talked about several times, when it comes to operational excellence, we are working on that side to manage the cost side as well. So we are taking actions to continue then to maintain the EBIT margins and obviously also then the gross margins that we are currently having.

[Johan Unnerus, analyst]

Yes. And finally, a reminder on the OpEx and especially the sales efforts. On the Capital Markets Day, you were pretty clear that you had great ambitions especially in the U.S. and also in China and Q1 -- Q4 confirms this. What should we think about the step-up in terms of OpEx commercial investment put it that way for the full year? Is it should we expect something in line with Q4 delta or can it go move up further?

[Bronwyn Brophy, executive]

So thank you for the question. We need to ramp up in the U.S. and U.S. scale-ups. I have done a few of them, they don't compete. So that not if you have the growth ambitions that we have. And if you look at our commercial front -- footprint vis-a-vis our competitors, Vitrolife Group is not going to win if we don't scale up. So we have to take some calculated risks there, but we are confident in our ability to execute.That said, we do see ability to take out cost in some of our backoffice functions, which I would argue are a little bit on the heavy side. So I do think that we should be able to fund the majority of that scale up by taking out cost in other areas. We're going to have to monitor it extremely closely. It's one of our key metrics in our dashboard. So the selling expenses will go up, admin expenses will be coming down. That's how we're going to [ fund ] this. And R&D expenses will also be going up. This is part of our own the platform. It's intentional. We are ramping up, scaling up, and we want to accelerate some of the developments that we have in the pipeline, which really helped to feed into this platform play, which we think is most definitely the way to go for the company.

[Johan Unnerus, analyst]

Thank you. Yes, it's -- of course, it's partly challenging to find additional sales capacity, but it's also very important to monitor and make sure that you -- they contribute and deliver. What's your experience from that side? Do you have a track record in recruiting and follow-up?

[Bronwyn Brophy, executive]

I do. And in my -- several of my previous lives, my most recent in fact, based out of Uppsala, we did do a U.S. scale up there. And talent, access to talent in the U.S., it's a very tight labor market. I was watching CNBC this morning. And the labor market is very tight in the U.S. and getting good commercial talent in MedTech and Life Science is definitely challenging. That said, I think we have a very good reputation. I had a discussion with the U.S. customer recently, and they -- I won't name the other competitor, but they said, if this competitor is Coca-Cola, you're Pepsi, so where do we need to start. Maybe we need to start leveraging that.So we have a great brand, with really, really good products, synonymous with quality. EmbryoScope is really starting to gain traction. So we need to leverage that strong corporate brand to attract talent. And the best commercial talent in this space, it is expensive, but it's also the talent that delivers on growth. So we are very much focusing on this right now. I'm taking a personal interest in the recruitment and ensuring that we get the very best people. And then your point is an excellent one. Those individuals then need to deliver. The good thing about the U.S. is that notice periods tend to be shorter. So you're able to get the talent once you identify the right talent, able to get it onboard quicker.

[Johan Unnerus, analyst]

Great. Thank you. Even if I don't like Coke or Pepsi.

[Bronwyn Brophy, executive]

Neither do I. I stick with my Paron Swedish water, which I love. Yes.

[Operator]

Thank you. We will take the last question from line Jakob Lembke from SEB.

[Jakob Lembke, analyst]

Firstly, on China, I mean, you seem to be quite upbeat about China today. My sense has been that maybe the recovery has been a bit slower than one initially would have hoped for. So what are you seeing in China is sort of accelerating and your thoughts on that?

[Bronwyn Brophy, executive]

Yes. So thanks for the question, Jakob. Yes, again, overall, China sentiment, I guess, is mixed. Some med device, med tech companies a little bit challenged. We are not experiencing that. We have double-digit growth in China, and it's not in the teens, okay? It's very strong. We have growth across the board, really nice on -- really nice on media. It's everywhere. So a very, very strong performance.I suppose market factors, Jakob are important to consider here. I mean, the China birth rate has fallen dramatically, policymakers, payers, the establishment has to really step in here to support the IVF industry. So we are seeing better payment and coverage on support for couples embarking on the IVF journey and taking the decision to undergo IVF treatment. So it's a very large market with a declining birth rate with payment and coverage increasing. So I think we can continue to remain to be optimistic around China.And then, I really have to acknowledge in the case of Vitrolife Group, we have a fantastic team on the ground. So the opportunity is there. But maybe to the previous caller's question, ability to execute, ability to execute is here with our team. So good market, robust underlying demand, very strong leading indicators and a team that's executing very, very well. So we remain optimistic on China.And as I said, order book is looking good, not just on time-lapse, but across the board. So we are not feeling any negative effects, and certainly seeing in our area full recovery. Yes. I don't know, Patrik, if there's something you would add.

[Patrik Tolf, executive]

No, I think -- I mean, as we have talked about throughout the quarters here as well that we have seen that the recovery would -- out of COVID, right, would -- will always start out of the consumables products, which it has done, and then later on comes the technologies business and that we have seen now happening during the fourth quarter as well. And we have been delivering as much as we can and have had ability to and the pipeline for 2024 looks very good as well.

[Bronwyn Brophy, executive]

And we've increased our commercial footprint in China. So we have put more feet on the street in China as well. Yes.

[Jakob Lembke, analyst]

And then just a follow-up on the quality issues at your main competitor, I'm wondering, if you've sort of seen any inflow of business from that as of yet?

[Bronwyn Brophy, executive]

Yes. So look, as I previously mentioned, it happens in companies. It happens in all companies, of course. And I suppose as an industry, we don't wish that on competitors. What we want to do is what's in the best interest of customers and patients. We have seen some increases maybe -- I think we're only just really starting to see the start of that. It's just something that we will be monitoring closely. It is an opportunity, of course. It is an opportunity, most notably in North America. But I wouldn't say we're seeing significant influx right now. No.I think, maybe -- yes, maybe if I could add one point. I'm thinking out loud here, but there is a logic. It takes time to validate media, so changing media. And this is a good thing for the Vitrolife Group, right? Media is a sticky product, okay. Customers start using a media. They like it. They trust us. It's validated. So switching media takes a little bit more time than one might initially think.

[Jakob Lembke, analyst]

Okay. And then on Genetics Services, I mean, seeing as -- it sounds like the insourcing is seen, like I'm wondering a bit on the PGT-A test. I mean, do you see that you're going to be able to get back to sort of more growth in the U.S. in 2024 maybe more towards the sort of market growth for that?

[Bronwyn Brophy, executive]

Yes. Jakob, I can take it. Pat -- sorry.

[Patrik Tolf, executive]

That's good. There you go.

[Bronwyn Brophy, executive]

So I'm stealing all the questions from Patrik. Yes. So adjusting for the insourcing factor, which, as I mentioned, starts to [ peter out ] mid-quarter 2. PGT-A is doing well. We have got some new customer gains there in the U.S. So certainly, an opportunity to start driving it into higher growth levels. I don't know if something else you want to add, Patrik.

[Patrik Tolf, executive]

I mean, maybe we can just add. I mean, as you know, during [ ESHRE ] this summer, we also then launched a smart PGT-A plus, and we started to sell that one during the well, fourth quarter really on that side. So now we have additional product capabilities as well, which definitely then strengthens our ability to continue then to be successful in U.S. and other markets as well.

[Jakob Lembke, analyst]

Then -- and then my final question was going to be on the PGT-A plus. I mean, is there any sort of financial impact from that as of Q4? And what do you expect for 2024?

[Patrik Tolf, executive]

You wouldn't -- I wouldn't say that it has had any significant impact during the fourth quarter still volume-wise relatively low. But as time goes on here, we are expecting to see additional growth on smart PGT-A plus. That comes at a higher price. So that's obviously good for the bottom line. So that currently at a relatively small volume, but we are seeing positive momentum in that one in particular in U.S.

[Operator]

There's no further questions at this time. Now I'll hand it back over to your host for closing remarks. Thank you.

[Bronwyn Brophy, executive]

So thank you very much. Thank you for everybody for dialing in. Thank you for the great questions. Very much appreciated. And have a very nice weekend from all at Vitrolife Group.

[Patrik Tolf, executive]

Thank you. Bye-bye.

[Operator]

Thank you for joining today's call. You may now disconnect.