Vitrolife AB (publ)

Hello and welcome to the Interim Report Quarter 1, 2023. My name is Caroline and I'll be your coordinator for today's event. Please note this call is being recorded and for the duration of the call, your lines will be on listen-only mode. However, you'll have the opportunity to ask questions at the end of the call. This can be done by pressing star 1 on your telephone keypad to register your questions. If you require assistance at any point, please press star 0 and you'll be connected to an operator. I will now hand over the call to your host. Mr. John Sigurdsson, to begin today's conference. Thank you.

Yeah, thanks for that. Good morning, and welcome to the conference call for the interim report for the first quarter of 2023 for Vitrolife Group. My name is John Sigurdsson, and I'm normally the chairman of the board of directors, but now, until August 1st, I will be the interim CEO until the new CEO, Brondon Brophy, will join the company. I'm here together with our CFO, Patrick Torb, and we will talk you through the investor presentation, which you will find on our website, detrolife.com. After the presentation, we will open up for questions, as usual. Move to page number two, please. This is a good quarter and a good start of the year, which is reflected on the text on the slide, actually. The first quarter, we increased our sales with 14% to $854 million. But the best reflection of the real hotline development is the organic, constant currency growth net of this continued business, meaning life for life. And this growth is 9%. We grow in all market regions, and particularly in APAC, with impressive 23%. All our business areas continued to grow, and the growth in the business area of consumer booths was especially strong during the quarter. Moving on to performance, we increased our gross margin with 1% to 59.2%, mainly driven by growth, product mix, and lower cost base for genetic services. Interdump increased to set 282 million resulting in a margin of 33% net of non-recurring cost of 20 million SEK. The earnings per share, including the non-recurring cost, increased with 23% to 0.74 SEK. The operating capital for the quarter is, as usual, quite strong, 160 million SEK for the quarter. This puts us in the comfortable to EBITDA ratio 1.3 compared to 2.9 last year. Now, having said that, now over to you, Patrick. Thank you for that, Joon. And let's move to slide number three, where we will look then a bit more into the sales performance per market region. And I will focus also then on the like-to-like business, which is then the 9% which where we then exclude the discontinued business from COVID-19 testing and also then the part of the DPDX that is not longer within our portfolio. Starting then with Americas, we grew with 6% and that is driven then primarily then from a solid growth in genetic services. That grew 10% actually during the quarter. particularly than in U.S., but also strong growth in South America, although from a lower base on that side. We continue then to grow also the consumables portfolio in U.S., but have a slight decline in technologies installations that, you know, will shift over the quarters. EMEA was a bit shy, just 1% growth, but also quite a bit differences within the region on that side, continuously solid growth on consumables. products across the line in the whole region. Genetic services grew strongly then in Middle East, but offset a bit then by a decline in South Europe. Technologies gained a couple of major accounts during the quarter, but that was actually offset then by large installations during the first quarter last year. So all in all, for EMEA then plus one. APAC, 23%. And in APAC, we grew within all business areas. All markets were growing except for China. And in China, we have seen then a significant increase at the end of the quarter after they have abandoned the zero COVID policies. This will positively impact in the coming quarters. We have seen less of that impact during the first quarter. So more to come on that side once the Chinese market continues to grow going forward. But during the quarter, we also had strong deliveries then on installations of the embryo scope to customers in APAC and the rest of the Pacific. And you see also that the share of the total sales continued to be balanced within the group. So moving to slide number four, where we look more into business-era consumables. which is then growth in all areas. We grow organically then with 12% in local currencies, and we grow in all product areas, media, disposable devices, and also genomics. On that side, we have, as we have talked about in the third and fourth quarter, we have focused on our scalability and investments, and we have increased our production capacity, primarily then for disposable devices. And that is going in the right way. And we have been able to increase our production during the first quarter. And we have also taken actions for scalability during the first quarter then to be able to deliver, particularly then for our media portfolio with the additional demand as expected when the Chinese market is going up. So all in all, strong growth in consumables within all product areas and all Moving on then to technologies. And as you know, there are continuously over the quarter when it comes to the installations, which you see to the left here as well. But continuously strong growth all in all, so plus 7% for the quarter. Continuously then focused on the time-lapse technology and the embryo scope supported them with our AI capabilities as you know about IDASCORE. Now it's becoming more and more standard of care in several markets in APAC and EMEA. Generally also then increase our sales of software during the quarters here as well and the business mix will change a bit going forward with more recurring revenues. We did major installations in APAC with a growth of 55%. In EMEA, we did a couple of key new installations then to existing and new customers in part of EMEA, while we did large installations during last year that we did not do this year on that side. In America, from a relatively small volume, we declined with 35%. But that is also related to that we did installations last year, that we did not do this year. Moving on to page number six and genetic services. We see continuously then growth in genetic services business who then like for like, which is then excluding the COVID and the DPDX that we have Discontinued grew with 7% in local currencies with growth in all market regions. And this is also good due to that we have seasonality impacts that makes the first quarter of Genetic Sermony normally the weakest one. We grew in Americas, which is the largest market for genetic services, driven by US, but also then, as I mentioned initially, good growth percentage-wise in South America. Volume growth is strong. ASP is slightly lower, but we are working then, as we have talked about previously, with updating our customer offer to our customers and focus on continuous profitable growth and scalability on that side. EMEA, yeah, we grew strongly within Middle East. On that side, that is then the driver behind that one, but then a small decline than in other parts of the market on that side. and continuous growth in APAC. So moving on then to a bit more on some of the financial highlights. So move to page number seven. We have then increased the sales to 854 million Swedish crowns, which is then a 14% increase in SEK. Like for like, the equivalent number was 60% then SEK, but more importantly than the 9% excluding then the discontinued business. That is the most important thing to focus on. We increased and improved our profitability. Gross margin then increased with about a percent unit to just south of 57% or then 59% if you then also look on the running base where we then take out the amortization for acquisition related intangible assets. The improvement of profitability is driven by higher volume, product mix, and also that we have a lower recurring cost base for our genetic services business from the actions that we have initiated during the last year. EBITDA, like for like, where we then adjust for those non-recurring costs of 20 million Swedish crown, ends up then of 282 million Swedish crowns, giving us then an EBITDA margin of 33%. Moving to the next slide, slide number eight, where we focus a bit on the operational expenses. Also there, like for like, excluding non-recurring costs on that side of 17 million Swedish crown, we increased the OPEX with 8%. This was driven then by higher sales and marketing activities, the non-recurring costs, but also negative currency impact as we have the majority of the operations and stocks located outside of Sweden. R&D, the lower R&D is then related to the activities that we did at the end of the second quarter last year, where we now have an agreement with Carlos Simon Foundation that we did on that side, which means that we focus more on the D within our operations and the R within the agreement with Carlos Simon. on that side. So that have then resulted in that the net of R&D is lower, but the output is expected to be higher when we focus on the exploratory research. Moving to the next slide, where you then see the summary of the financials. We, again, just to repeat those, we continue to increase the sales, 854 improvements in gross margin and in the adjusted gross margin. 56, 59, increased also then the adjusted EBITDA to 33% on that side. And then as Jon mentioned initially here, we continue to improve the operating cash flow to 160 million, which puts us in a bit more favorable positions than in the net debt to EBITDA. So with those words, I'll leave it over to you again, Jon, to conclude. Thank you, Patrick. We have gone through the quarter, but now I would like to reflect on our standing in the broader market and our, in my view, the ability to leverage on it. We started by expressing our view that this was a good quarter and a good start of the year. Last year, we have been basically consolidating and putting in place structure that will leverage on our comprehensive end impressive product portfolio, and seventh, our position as a leader in technology and service to our demanding customers. Going forward, we believe we will have a great opportunity to continue to grow by focusing on excellence in our offer to our customers and to use our capabilities for economical scale and consultation. We are now a group with a broad product line which includes medical device, including software, consumables, and now genetic services. This is becoming increasingly important in the future where we see even bigger and more sophisticated IVF chains in many fewer and more advanced suppliers. We believe that the new combined sales and marketing organization is a big step in this direction and will enable us to generate value creating offers to our customers. We will also continue to look for opportunities to add new products and services to our portfolio through internal development and well-placed acquisitions. Scalability is not only in the sales and marketing and service to our customers though. We have a proven front record of increasing profitability of acquisitions by utilizing economical scale and by getting out of sub-performing units that do not fit in our long-term strategy. I believe we have enviable front sides in a market with solid underlying growth, and we have both the ability and ambitions to get us there. In other words, the force is with us and so is the future. Now, thank you, and now we can open up for questions.

Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. Thank you. We will take the first question from the line. The line is open now. Please go ahead.

Great. Thank you very much. I was tracking from Carnegie. Hi, John. Hi, Patrick. A few questions on my end.

And starting off with consumables, 7% in America, 10% in India, and 15% in APAC.

It sounds like quite solid underlying markets. Is this something we should read into as the underlying growth, or is there something else into these numbers?

Obviously, APAC in China is something different. And we can take perhaps a second question on that. But overall, is this where the underlying market is today?

I think it's a good proxy on that side. I mean, of course, it can, of course, vary from quarter to quarter on that side. But there is a strong underlying demand in the market on that side. We have seen then also a couple of markets. Well, China is an exclusive story on that side. That has relatively good growth on that side. So this is a good proxy on that side. Great. And a follow-up question on China. So I know that you don't report China as a separate segment, but your approximation on how much

China has grown in the quarter and you sound quite optimistic towards the end of the quarter regarding the momentum of that business. If you can give us some color on the Cook medical situation in China and if you take in market share.

I mean, if we start on the Chinese market, I mean, what we hear from our customers is that the activity in China has definitely picked up. and have done so quite intensively at the end of the quarter on that side. So definitely an increased activity within the quarter on that side. But if you look upon it then from the impact on the first quarter sales, that has been relatively shy on the first quarter sales. And then, of course, the pent-up demand, and we have seen also, I mean, if you compare the Chinese market with the recovery from COVID from other markets, there will, of course, be an increase in the Chinese market. We don't know how big that will be, but it's certainly something that will change going forward. On Cooper Cook, I mean, we do not specifically comment on that side on market and market share. What we do know is that Cook has decided then to not produce media. in China, and that has, of course, led to opportunities for us. Great.

Going here by segment by segment, technology obviously is very lumpy. I think one bigger picture question is, when will IDA score be available for the U.S.

market? I wish I could have a very straight answer for that one, but I cannot do that at this moment. We are, of course, working with that process, but I don't have any straight answer for that on timing yet because we are not fully in control of that one by ourselves. But we are working on it.

Two more questions on my end. Genetic services, obviously you have some comparisons with GPDX and COVID-19. But overall, are you seeing the same type of price pressure on the PGT tests as you did throughout 2022, or has that situation changed or accelerated?

I mean, if you look on the volume growth per se on the number of tests, that has continued to increase. There is continuously then a price pressure then on the more commoditized products like PDTA, as you mentioned on that side. Maybe it's a bit too early to say that it has flattened out, but we are, of course, working with different initiatives on getting our pricing offers sharper and making sure that we can offer the right kind of products to the customers. What they do need is a genetic counseling or not on that side as well. So we are working more when it comes to the pricing level on that side as well. But maybe it's a bit too early to say they didn't have stabilized on that side. From my point of view, the good thing about gen ed services in general, apart from some pros and cons, is that it is on the rise, and the commodification of it is a result of wider usage and more volume growth, and we are quite optimistic that that will continue. granted that there are some regions in Europe that do not use it, but then we have a perfect solution for those different technologies.

Okay, great. And are you seeing any markets in May starting to ease regulation on genetic testing that could be positive for 23?

no major significant changes to my knowledge at this stage on that side. So no major changes on that side. Last question from my end. Cross-margin, at least in my book, was a bit on the light side. Is there anything we should read into this? And we talk about expanded

production of consumables and the facilities down in Gothenburg, is that something that plays into the gross margin? And is that fully operational here by end of Q1?

It is, as you say, I mean, we have improved the production capabilities of medical devices for our company in Gothenburg. That has improved, definitely. So we are getting more output out of that than in the previous ramp-up effects on the negative side has improved to more positive on that side. So that is one thing that impacts gross margin positively on that side. What you also see then for the quarter is that you see then the product mix, which is also then positively impacting the gross margin. But also then when it comes to the cost level of genetic services, we have improved that one, and the cost base is lower. But as we As you know, I mean, the first quarter is normally the weakest one from seasonality perspective for genetic services, so we don't see that full impact on the margin yet.

Okay, thank you very much, both Patrick and John, and I'll get back into the queue.

You're welcome.

Thank you. We will take the next question from line Jakob Lemke from SEB. The line is open up this time.

Hi, and good morning. A couple of questions from my end. First of all, on genetic services, could you maybe say something about what products are driving the growth here?

Yes. Currently, it's the primarily growth of the product is then on the PDF, PDTA, PDTM on that side. That's primarily where it is growing on that side. So volume growth on that side. But again, as you know, we have a relatively broad portfolio, but those still represent the majority of the portfolio.

Okay, understood. And then, I mean, it seems like the genetic services group overall has been held back on the headline number from discontinued businesses and a bit of COVID also in the comparable quarter. But just looking at the sort of like for like, it's still slower than consumables. I'm wondering a bit just on your outlook for genetic services growth here from this current revenue base in Q1.

I mean, as you know, we don't give any specific guideline on the specific business areas on that side. But I mean, what we can say, of course, is that we continuously expect the business to continue to grow on that side. And if anything, I mean, the genetic services in the longer run could have a potential to grow a bit higher. going forward, so that we see going forward for genetic services business on that side.

Okay, and then on the margins, can you say anything about how you're tracking on the genetic services EBTA margin versus your internal plan you communicated about before?

I mean, for the end of the quarter, we said last year, then we said for the Q4 that we were tracking them to 25%, which was the objective on the EBITDA for genetic services. And we said that we were a bit stronger than that, and that we are moving into a direction of aiming at 30% for EBITDA modeling for genetic services. And we don't disclose EBITDA then per business area, as you are aware of on that side, but it's going in the right direction. On that side, the operational excellence programs are working according to plan here as well. So we have no reason to change those statements that we did during the fourth quarter.

Okay, great. And then on the more medical device side, I'm wondering if you can say anything about how much is price growth here in the quarter?

We have increased the prices throughout the quarter, and we have then, as we did also during 2022, increased prices on that side. The full year effect will probably be somewhere around 3, 3.5% for the full year on that side. And part of that has, of course, come into the effect of the first quarter as well.

Okay, and then it's the final question on time lapse. We'd be interested to hear some feedback or the progress you're seeing in markets where the time lapse isn't as penetrated yet.

I mean, we continue then to, I mean, as you know, I mean, we have strong progress then in several markets on that side where it's standard of care and that is then big parts then of Asia Pacific, also then big parts of Europe. On that side, I think we have now also with genetic services in the group, we have learned also how to sell time-lapse into markets where You use genetic services as your embryo selection preference on that side. So it's basically also then focused more on workflow on that side. So that we are continuously working on. You haven't seen, call it, any major breakthroughs in the U.S. when it comes to time lapse at this stage, but we are working on that side going forward, absolutely.

Okay, great. Thank you for taking my questions.

Thank you. We will take the last question from Johan Annesen from TradeEye. The line is open now. Please go ahead.

Thank you for taking our questions.

You follow up on the growth margin to begin with. It seems like it could improve with the support from China and the efficacies you're making, what should be expected from the COG going forward during 2022? Sorry, could I ask you to repeat the question? I didn't hear you perfectly on that. Let's change. Better?

Yes.

Excellent. What about the growth margin? It's relatively strong and it seems like there are reasons to expect that it could be improving further if you get more support from China and you've done some efficacy measures. What should we expect here during 2023? We don't make any specific guidelines when it comes to growth margins or EBITDA on that side as well. We are continuously to focus on profitable growth on that side we have a lot of activities on the same side and we are focusing then when it comes to the cost side on that side as well but we don't give any specific guidance on the gross model yeah and yeah i think we have a medium to long-term scalability in the business That's because we have a quite big acquisition to digest, and we believe we have an underlying availability going forward, but that's more medium and long-term. Yes. And on the OPEX side, there was some pressure partly related to the fx effect but you're also scaling up the support especially on the sales side what what to should we expect to increase the resources on on the sales and marketing side uh i think what you should This is one area, of course, coming forward that we expect to work on synergies on that side. We are now working as one global sales and marketing team, and we are really then making progress when it comes to certain areas, certain markets. We mentioned also then during the quarter that we take an advantage of using our global presence then with genetic services to go direct into certain markets in South America with consumables, technologies, products, So those are activities that we will do going forward as well. But when it comes to the cost level, of course, we will continue to work on the efficiency in that area, but also in other areas going forward. Yes, and as you earlier mentioned, it's a bit early to say if it's sort of stabilizing price pressure in the PGTA segment. What measures can you do to cope with the situation if the price pressure would continue? For us, it's two things or maybe more. First of all, it's to continue to get a good customer offer so that we can make sure that we can deliver what the customers want and get that pricing structure working in a good way for both ends so that we can create value. But then it's, of course, also to work on the cost side, which we do then on the operational excellent side. So that is important for us going forward. Excellent. And finally, the cash flow was strong in Q1, and obviously there is some moving parts should be expected. The significance of quarterly expectations also going forward, or was it an unusually big change? I mean, if you compare the cash flow with the first quarter, it's more similar than to the third and fourth quarter last year as well. So as long as we then continue to deliver in accordance with what we do here, that's a relatively good proxy on that side. Okay. Thank you.

Thank you. We will take the next question from Susanna from Handels Bank. The line is open now. Please go ahead.

Hello, this is Susanna Quekbana from Handelsbanken calling. I also have a few questions. I wanted to follow up on the time lapse. So there has been a recent publication in The Lancet and RTC showing that time lapse and AI in embryo evaluation has no benefit in terms of pregnancy and live birth. Now, I know this is a competitor trial, but you also have a trial ongoing on clinicaltrial.gov. And I was wondering how you're expecting to sort of communicate those results, which are expected to be available at the end of the year. Will there be a publication?

No, I mean, first of all, if we go back to the first article that you mentioned here as well, I mean, it's obviously hard for us to comment anything on something that is done on a competitor's platform using old software in a specific market on that side as well. So that we do not comment on. But you're right, we are doing a lot of things on our end as well. And let us get back to how we communicate that one going forward. But we have, of course, a lot of activities on that side that you're aware of. Thank you. We see a greater uptake in time-lapse technology basically everywhere. There are, of course, it's underutilized in the U.S., as you are aware of, but any other place, and specifically Asia, it has a great uptake there and a huge acceptance.

Okay. Well, then I look forward to the announcement of those results Then the other question is in terms of the competitive market dynamics in Asia, which are developing in your favor with Vitrolife taking more market share. Help me understand how easy is it for clinics to change their IVF protocol in the lab, changing, say, from Cooper to Vitrolife?

It is, of course, depending a bit on where they stand on that side as well and what kind of portfolio that they would like to have on that side, if it's a consumables product, if it's the full range of technologies and also genetic services on that side. But we, of course, work very closely together with the clinics on that side when it comes to implementation and testing and support as well. So that we have... an ongoing program for us as well. We also may be making sure that we are working quite intensively with what we call then the Victory Life Academy and also Ideonomics Academy that are also supporting then our global sales and marketing team here with those kind of things as well.

Great. And then my final question is on genetic services again. You mentioned in 2022 that you'd lost your largest European client. And as this was a global chain, I wanted to know what the impact will be of this in other regions where this client is also prolific. Have you seen reductions in their genetic services in the US and India, for example?

I mean, of course, it will be so that some customers are choosing to insource part of their clients. call it commoditized business primarily than the PDTA on that side as well. So that will, of course, happen from time to time that some customers choose to go that route. But there are, of course, a lot of other things that we have in our portfolio that we offer to the customers on that side so that we are continuously then to have a relationship with the customers on other products range within Genetic Services. Also, the beauty now is that we have then a full range of portfolios. So, to some customers that choose to go to in-house, then we can, of course, sell, you know, mixed products that now is within, you know, business area consumables. So, we have two sides of the coin on that side. And also, this commoditization is an indication of wider acceptance of those, change, they're to use genomics in their process. And that's a huge advantage for us because we have, as Patrick mentioned, we have a broad portfolio of all kinds of services that we can offer our customers.

Okay, thank you.

Thank you. It appears no further question at this time.

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