Stratec SE

XETRA:SBS

Earnings Call Transcript 2018-Q1

[Operator]

Ladies and gentlemen, thank you for standing by. My name is Ama, your Chorus Call operator. Welcome, and thank you for joining the STRATEC conference call regarding today's announcement for the Q1 2018 financial results. [Operator Instructions] I would now like to turn the conference over to Marcus Wolfinger. Please go ahead, sir.

[Marcus Wolfinger, Chairman of Board of Management & CEO]

Yes, thanks, Amanda. Good afternoon, ladies and gentleman in Germany and Europe, and certainly, good morning in United States. Welcome to our Q1 presentation. Before I dive into details, I would like to mention our safe harbor statement and some housekeeping stuff. Actually, you can download this presentation either from the [indiscernible] or later on from our website. We intend to split this presentation into 5 major blocks. Block 1 is going to be the overview and things ongoing. Second part would be a financial review, then followed by the outlook and the focus for 2018 and beyond. And at the end, we would like to give you the opportunity to bring up questions, and hopefully, we can answer those questions.So diving into details. We had a very soft start to the year 2018. Actually, we expected a soft start. It -- at the end, it was even softer than expected leading to a sales decline on constant exchange rates of about 12%, coming from about EUR 50 million down to EUR 42 million in sales, adjusted EBIT margin correspondingly down to 10.3% coming from 13.9%. This is almost exclusively due to missing scaling effect. We have confirmed our 2018 full year's guidance. So if looking into the details, particularly the forecasts provided by our customers, the plannings, the communications we had in the calls of Q1 or even towards the end of last year are actually confirming our expectations regarding 2018, and I will dive into details what that actually means. We won further contracts, which means we have moved and maneuvered certain negotiation-staged projects into contracts, which is actually a very positive signal in terms of how we can execute things and in terms of how we can turn proposals into contracts early stage.I think it's worth mentioning that we have an extremely packed pipeline. So most of you certainly know that we are launching several products this year that we launched a number of projects last year, and all those projects and products are lining up to contribute to the sales growth of the company, which makes us very positive for the remainder of the year and particularly for 2019. We have a number of product launches, I mentioned that already, which are progressing according to plan, which means we are hitting the milestone days agreed upon with other partners, like in last year, towards the end, we, together with our partner, launched the Panther Fusion regarding the LIAISON XS regarding products for Becton Dickinson. Everything is on track, so we are very positive that we -- as we met the relevant milestones, that we are meeting the relevant launch dates as well.The number of employees is actually reflecting the very packed project and development pipeline, again, grew by about 11%. We are very positive that we can continue on that track in order to meet future milestones as well. Here again, the growth is almost exclusively attributable to the development to R&D. So only logistics and manufacturing is growing as well, everything else is already prepared to cover the growth we planned for.Financial review. So I already mentioned sales. As mentioned before, in constant exchange rates, we were down by about 12%. Here you see the 16%, which is on the relevant currency sales. Adjusted EBITDA, down 27%, leading to an adjusted EBIT margin to -- of 15.3% coming from 17.8% after Q1 2017. Adjusted EBIT margin -- sorry, adjusted EBIT, EUR 4.3 million coming from EUR 6.9 million after Q1 '17. So I think it's worth mentioning again that Q1 was both -- Q1 2017 was particularly high, because we had that milestone payment which was, let me say, an order of magnitude you typically don't have in such a point. Adjustments, talking about adjustments. On the EBIT side, about EUR 0.5 million is ERP related, the rest is PPA. Same thing on the net income side, the majority, same thing, about EUR 0.5 million ERP related and the remainder almost exclusively related to the PPR -- PPA amortization and the relevant deferred taxes accordingly.Talking about sales in details. So what actually happened is mainly 3 things: So the first thing was actually that we had a customer which was facing some regulatory issues in a certain market, which led to the fact that the customer couldn't sell instruments. This matter had nothing to do with us, which was purely chemistry-related. And in the meantime, this matter is sorted out and the customer is actually restocking. So we believe that particularly within that program that we will see the catch-up already in Q2. I think at this point, it's worth mentioning that we certainly see a belief that we can catch up in H1. However, we believe that we will not show total growth already after H1 on a 6-months basis. I think the majority of the growth is actually happening in the second half of the year. Here we are very confident regarding Q3, and to a certain degree, we think Q4 will contribute more to the growth than in 2017. So getting back to Q1 '18, I already mentioned the customer with the regulatory issue. Then we had a second customer where responsibilities regarding supply chains changed, which means the customer was trying to reduce inventory, which hit us to a certain degree. On the other hand, we clearly see that the demand from the market is very strong regarding that instrument. But if 2 such things happening with key customer then we will certainly find scratches. Again, we have already forecasted that this is going to happen in Q1. However, the effects were stronger than expected. The third issue was actually, mainly that we had some delays, particularly, in supply, which was mainly related to an ERP go-live in our Diatron business as well as within STRATEC Consumables, which is actually leading to delays. We are [indiscernible], however, we still have certain difficulties. We are very positive that this matter will be sorted out and that we will see some catch-up effects here as well. The fourth main contributor to the weaker sales was that we still have product launch delays, which are actually on our end, regulatory-related, which is happening within our Diatron business. And again, nothing to do with the development pipeline, it's mainly a regulatory task, still ongoing, but on the way to be sorted out.Talking about adjusted EBIT and adjusted EBIT margin. The adjusted EBIT margin in Q1 was on a level of 10.3%. Adjusted EBIT down by 37.5% year-on-year. Margin decline of about 360 basis points, which is material, but if we see absolute figures, it's obvious that we can easily catch that up if things are developing in the expected manner. As mentioned before, we have those negative scaling effects hitting us at this point. And certainly, we continue to invest. We cannot react accordingly if such events like weaker sales in a particular quarter are happening if we have a development pipeline, which is packed like 3, 4, 5 years. And we want to make sure that we are delivering according to the agreed-upon milestones with our customers, delivering according to those milestones. Certainly, have the necessity to make sure that development projects are stuffed in a relevant and according to the development plans. So we want to make sure that we are stuffing the project properly. Adjusted net income, same thing as on the EBIT and EBITDA side, decreased by 34% down to EUR 3.5 million. Again, sounds horrible, the absolute figures are fairly small. Adjusted tax rate on a level of only 17.8%, which is mainly attributable to deferred taxes, which are, at the end, attributable to the weaker contribution of our [ Smith ] manufacturing side to the overall earnings of the group.Talking about cash flow, this is the positive end, so the operating cash flow was only down by 13%, which actually shows that the sales pipeline and activities are intact. So we are not worried about those things ongoing. Cash flow on the investment end continue to be on the same level. Financing activities declined, which was very much attributable to last year's activities. I think normalize the EUR 1.1 million is a reasonable figure. Free cash flow's about EUR 2 million lower than in Q1 2017. Particularly taking the EBIT and EBITDA into consideration, I think we can really be satisfied with the cash flow development, which means at the end of the quarter, cash positive of about EUR 30.6 million. Net debt reduced by about 20%, all working in the same direction and very positive for us.So talking about the outlook. Certainly, we want to grow, and we have the confirmations by our partners regarding forecast, regarding inventory management, regarding our Consumables sales. And so on so, if we are adding up things, we believe that we will show an organic growth of at least mid-single-digit percentage range. The growth is expected to be realized mainly in the second half of the year. Again, and I mentioned that before already, we are very positive that we see an upswing in Q2. However, we believe we will not show actual growth after H1. So the majority of the growth drivers are kicking in only in Q3 and Q4. We are forecasting an adjusted EBIT margin in the area of 17%. Our mid-term expectations are actually that we will see an average organic growth rate in the high single-digit, low double-digit area. Those ones who know about our product pipeline, in particular, know that we have several instruments which are either launched and which will be launched within the very next few months where the actual expectations from our customers are extremely high in sales. So that makes us very positive that we can show that midterm growth rate of, particularly, as far as revenues are concerned, of high single-digit, low double-digit area. Today, we expect a broadly consistent EBIT margin development. As mentioned, we have some positive scaling effect. On the other hand, we have a packed and loaded development pipeline, which are to a certain degree diluting our earnings coming from product sales.The focus for 2018 and beyond. Certainly, we need to drive the top line growth and reduce the earnings volatility across our different businesses. We talked about that a lot. Particularly, our Consumables business towards the end of the year is very volatile. We managed to get to breakeven in our smart consumables business already last year. However, as this business' scale's very good on the lower edge of revenue thresholds, certainly, the scaling effects are kicking in negatively as well. That's why, certainly, particularly this business will continue to be volatile as far as earnings are concerned from the next year. However, we believe that if we are talking about accretiveness of certain business units, so certainly the margin driver in the future like from 2021 on, 2022 on will definitely be our smart consumables business. Then we want to realize further synergies. We have several development activities ongoing across the different STRATEC businesses, which are helping us very much to leverage existing development libraries, existing development tools and certainly existing parts and sub-assemblies on so -- and so on. Particularly for new products, synergies are playing a major role bringing our gross margin up. Then certainly, leveraging our platform offering, we have already launched the KleeYa, which is a chemiluminescence immunoassay platform. Several customers are currently validating kits on their -- on those platforms, which makes us believe that we will see some material sales towards the end of this year. Certainly for the next year, this is -- particularly, the KleeYa platform will play a major role. Certainly dedicated products will grow faster and will show higher potential top and bottom line. However, platforms continue to be an important pillar in our product offering, and particularly the platform -- following the KleeYa platform, which is a molecular diagnostics platform will help us very much to further diversify our business. Achieving milestones and market launch is an important thing, not just to satisfy the needs of the customers affected by the milestones and affected by the market launch, and certainly, it's a must to make sure that we can allocate development resources in the next development projects in order to deliver the next and the very next products in time as well as we do for those ones in the nearer future.Then certainly, the implantation of the ERP system outside Diatron and outside STRATEC Consumables, which mainly means met the headquarter here in Birkenfeld as well as in our biggest manufacturing site in Switzerland, becoming effective January 1, 2019 after only allocating resources and certainly allocating today's focus. However, we do not expect material delays as far as supply is concerned. I think we have gained enough experiences with the go-live in STRATEC Consumables and in Diatron at the beginning of this year. And certainly, we continue to expand our development capacities and capabilities, particularly with growing headcounts as well as, like here at the headquarter, a bigger extension building in order to make sure that we have sufficient space to take advantage of the growth opportunities.This gets me to the end of the presentation, and I would like to hand back to Ama. She's going to explain us how to raise questions. Thank you, so far.

[Operator]

[Operator Instructions] First question comes from the line of Falko Friedrichs with Deutsche Bank.

[Falko Friedrichs, Research Analyst]

I would have 2, please. The first one regarding the KleeYa platform. Could you give us an update on the partnerships you've signed for it so far and also, an idea of the market potential of the platform, meaning how many placements you potentially target here over the next years? And how we can think of the price point compared to other platforms? And then my second question, can you give us some additional color on how your 2 acquired subsidiaries have started into the year and performed in the first quarter?

[Marcus Wolfinger, Chairman of Board of Management & CEO]

Yes. Thanks, Falko, for your questions. Certainly, I mentioned KleeYa is one of those, let me say, 5 to 7 products driving the growth of the company in the next 3 to 4 years. It is as it is. We are not yet allowed to announce our customers and our clients in that case. The nice thing regarding platforms is that we can sell those platforms to a number of customers, which typically then market the platforms under their own brand name. In this case, the customers can even leverage other placements outside of their own scope with their own tests. So what does that mean. Today, we have 2 customers on the platform already and are about to get 2 further clients on that platform as well. The potential, particularly, for platform and particularly talking about several customers is actually hard to determine. Today we believe that we can sell like between 250 and 500 units, certainly, getting closer to the 500 units like in 3, 4, 5 years from now. The price point is in the area of STRATEC's instrumentation, so x Diatron, STRATEC's average sales price so in the area of north of EUR 30,000 per placement. In this case, we have a higher contribution to the consumables. So at the end of day, it's not just that we are selling the plastic parts with the instruments. In this case, we are selling buffers and other basic reagents, basic chemistry elements as well, which, particularly long term, help us very much to contribute from the installed base in a deeper and meaningful sense than we do in other platforms, which was the overall idea with those new platforms, KleeYa and the molecular platform called [indiscernible], which will be shown to a number of selected players at the AACC 2018 in summer this year. So we believe that [indiscernible] will like be in a stage where KleeYa is today in about 2 to 2.5 years, so slightly behind schedule. However, both platforms are material contributor to the growth of the company.Talking about the acquired businesses. I mentioned that already. So smart consumables, soft start in the year but soft in the expected manner, so we are in budget. Diatron, slightly behind budget, the reason therefore being and I mentioned that already are product launch delays, which already affected Q4 2017. We believe that particularly with the new products, we talked about that already, those products which have been shown at the AACC 2017 that those products will help us to catch up, and we are very confident to meet budget for Diatron in the planned manner. Again, both subsidiaries, soft start. Consumables, in the planned manner; Diatron, slightly behind budget.

[Operator]

[Operator Instructions] The next question comes from the line of Michael Heider with Warburg Research.

[Michael Heider, Head of Research]

I have a question on -- basically on your visibility because you have kept up your full year guidance and at the same time you said that you still -- you do expect a rebound in the second quarter, but you're still going to be slightly behind on a half-year comparison, which means basically you fully need to have a very strong second half. And can you give us a little bit more of a feeling how deep your visibility really is into these orders? Are these firm orders you have already with your clients? Or how do you see that?

[Marcus Wolfinger, Chairman of Board of Management & CEO]

Yes, no, thanks for that question. It actually helps me very much to explain deeper details. So what we do have is that with each customer, we have what we called an established rolling forecast system. Unfortunately, the rolling forecast systems are typically customer individual, which is very much derived from the forecast the headquarters of our customers are collecting from their subsidiaries from the countries they represent. So what that, at the end of the day, means is that we have like a rolling forecast, typically updated every month or at least every quarter. There are certain period has to be treated like a binding order. So typically, this is like between 1 month and 3 months, which means that if a customer is placing like April 1, a forecast for Q2, the majority of that forecast presented is binding, derived from the fact that like between 1 month and 3 months have to be treated binding. Typically, the customer are then sending us like call-off requests we have to ship the instruments and the consumables to. The actual forecast presented like I mentioned as an example on April 1, typically is a rolling forecast, covering a period of like between a year, in some cases, even 1.25 years. However, the long end of the forecast are nonbinding. So we have some like in the immediate solutions where like the first 3 months are binding and the second 3 months are 70% binding. Again, this is all customer individual, which means I cannot get you the answer that 100% of the called forecast presented for Q2 is binding, but the majority of Q2 and Q3 is already binding. And the -- for the remainder, we have a good indication of how that might end up. And certainly, we have the experiences with the majority of our customers. So we know which customers tend to forecast aggressively and which customers tend to forecast conservatively, which at the end of the day means that we have a good mathematical model in order to assess those forecasts provided and in order to derive our forecasts from the customer forecast. Certainly, like particularly consumables is tough to forecast because typically, inventory management for consumables is not based upon actual forecast. It's typically based upon inventory management, and typically inventory management is a derivative of the actual demand, which like means if a customer of ours is placing new instruments in a certain country, typically, the consumables and spares for that particular country are going up because initial stock keeping takes place and in other more established places, certainly, logistic process are kicking in, which means our customers are trying to reduce their inventory level and to only have an inventory level on the basis of what's actually needed. At the end of the day, certainly for 2018, we have to schedule in new product launches like already mentioned, like the fusion, which has been launched for Hologic already in Q4 last year, where particularly the fact that Hologic now is making the menu available on the fusion, a comprehensive menu, that we see that the demands here are going up. Certainly we are only talking about forecasts. We are talking about new product launches, which will have a ramp-up in 2018 already, which means we have to overlie the existing product forecasts with the expectations regarding when and how a market launch take place, in line with what we expect as the ramp-up curve for those new product launch, though it makes the thing complicated but to a certain degree, transparent for us as we have a good indication in any case. So today, I think it's too early to make any promises. However, we are really confident that we meet the guidance based upon what we see today as information provided by our customers and information we hear from the development departments from our customers and from our own development department regarding how fast we can execute and deliver on milestones. This was a fairly comprehensive answer, but I hope it actually kind of underlines our confidence regarding our forecast.

[Michael Heider, Head of Research]

Yes, it was very clear. Maybe one follow-up. I think on the last call, you mentioned that you are awaiting an approval for the U.S. market of a new instrument. And you weren't quite sure whether this would come before the summer break. And do you have any more insights on that one now?

[Marcus Wolfinger, Chairman of Board of Management & CEO]

Yes, well, actually, this is the case. We are expecting U.S. market approval for an instrument today, and we actually derive that from follow-up questions by the FDA. It looks like we are [indiscernible], and that's why we are expecting approval by summer.

[Operator]

[Operator Instructions] There are no further questions registered at this time. I would like to pass back to Marcus Wolfinger for closing comments.

[Marcus Wolfinger, Chairman of Board of Management & CEO]

Yes. Thanks, Ama. Ladies and gentlemen, this gets me to the end of the presentation. Thanks very much for your questions, and thanks very much for your interest in STRATEC. If you have any follow-up questions, please do not hesitate to call our IR department or myself. More than welcome to answer your questions. Thanks very much. Buh-bye.

[Operator]

Ladies and gentlemen, the conference is now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.