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Ladies and gentlemen, thank you for standing by. I'm Stuart, your Chorus Call operator. Welcome, and thank you for joining the Stratec Conference Call today regarding today's announcement for the Q1 2019 financial results. [Operator Instructions]I would now like to turn the conference over to Marcus Wolfinger, CEO of Stratec. Please go ahead.
Yes. Thanks, Stuart, and good morning in the United States, and good afternoon in Europe, ladies and gentlemen. Welcome to our Q1 2019 financial result presentation.Before I commence the presentation, I would actually like to mention some housekeeping stuff. I think I don't need to read you through our safe harbor statement, and you should actually be able to download that presentation either if you're following our webcast and additionally, we should have that presentation on our website either in a few minutes or probably it's already there.So as always, I would like to split this presentation into these 5 major blocks. First of all, I would like to walk you through the Q1 at a glance; secondly, the financial review in details; then talking about Stratec's outlook and the strategy for the past -- for the next 12 months. After that, we will do Q&A session and at the end of this presentation, we have an appendix with supplementary information.So 2019 first quarter, actually everything which turned against us in 2018 trended into positive now. And we got through the first quarter with a growth of -- in revenues of 17.6% in constant currency, representing about 20% in euros. Actually, I just want to mention that at this point the 17.6% are comparing to a 12% organic decline in Q1 of 2018, which gets us exactly where we tended to be at this point. By means of that, I clearly said we want to pick up what we lost in 2018 and want to show at least an on top growth of 5% and that worked out fairly well in Q1.Then adjusted EBIT margin, actually it's slightly behind our expectation at this point but still a growth of 60 basis points. And I would like -- really like to mention at this point that I'm extremely proud of what we achieved top line wise and bottom line wise, particularly taking into consideration that the company was literally down 3 weeks in December and more than 3 weeks in January as we had the go-live of our new SAP system. Particularly, consumables and maintenance kits were affected in the -- in January, which means actually we literally had only 2 months to get to that point, which probably shows the achievement of our manufacturing and logistics teams. And actually, I would clearly state how grateful we are what has been achieved and actually the SAP go-live went in, I would say, a good manner. Actually, we still have some inefficiencies here and there, but I think from an overall perspective, particularly taking into consideration what other companies report in such a situation, we cannot value the achievement of Q1 high enough.On top that market launch, which had been postponed in 2018 a couple of times and now took place, company declared the declaration of conformity, which means the system is available in Europe. And the U.S. launch will take place in the next quarter. We are expecting serial production ramp-up for several imminent production launches, including the LIAISON XS. Actually DiaSorin confirmed that they will have the instrument commercially available in Q2, which then implies declaration of conformity as well. And we have no reasons to believe why that thing should be pushed out or moved.Number of employees, again up on a year-over-year basis by about 10%, the majority in development, which is mainly attributable to the full development pipeline at this time, actually means that we are allocating more resources to the same number of projects. It actually means that the number of projects went up and the resource allocation to a given growth rate is almost the same, which means it should give us an indication about the company's potential in 3 to 4 years from now.As already mentioned, in the meantime, SAP is group-wide enrolled. Headquarters took place -- headquarter go-live and our biggest manufacturing site in Beringen, Switzerland started this January and -- whereas the Austrian manufacturing site and Hungarian development and manufacturing site actually went live already in Q1 of 2018. Actually, we are expecting a lot. At this point, again, we are in a -- still in the phase where we are trying to get to the degree of automation we had with our legacy systems. Certainly 2019, 2020 will be the years where we are expecting significant efficiency gains coming from group-wide ERP systems.Dividend proposal is EUR 0.82, which would be the 15th consecutive increase after EUR 0.80 last year. Again, this has to be approved by the AGM taking place next month -- next week, sorry. Now getting to the financial reviews. I already mentioned that sales up by 20%, adjusted EBITDA up by 32%, margin up -- the adjusted EBITDA margin up by 140 basis points, which is leading to an adjusted EBIT of about EUR 5 million, which is -- which represents a growth of about 26.2% and an adjusted EBIT margin from 10.1% to 10.7%, which means a growth of 60 basis points. Again, we are expecting a certain progression in the quarter this year. And if you compare those figures to previous year's figures, I think it -- this is actually exactly on track what has been expected.So from a sales perspective, looking into the revenue, positive effects are coming from our higher run rates in manufacturing, particularly from new systems and established systems. So particularly those things which -- where we were lacking growth came back, established systems and the new systems, which have recently been launched or those ones which have been launched in 2017 and showed some weaknesses. And a lag of the expected manufacturing growth rates in 2018 are now very positive and on the new product launch site. So in the Diatron segment, we see some tailwinds as well. And I mentioned that already in the at-a-glance slide that literally in January, we couldn't ship any consumables and maintenance parts, which is not just -- doesn't have -- only have a sales implication. It has a certain earnings component as well certainly as the gross margin on those products is comparably higher to the remainder of the product portfolio.Now getting to a review on the EBIT margin and adjusted EBIT and EBIT margin. So certainly tailwinds from economies of scale. And again, I already mentioned that I am not entirely satisfied certainly in LIAISON with IFRS 15. Unfortunately, we will see higher volatilities here positively as far as earnings. KPIs are indicating the development. We will see higher volatilities here, particularly in Q1, driven by the increased expenses as a derivative from the very strong project pipeline, particularly development activities. Then certainly very negative effects from stock appreciation rights, which is actually mainly a valuation thing and not an actual earnings implication. Then certainly product mix didn't work in our favor, in particular, and I mentioned that already as a derivative of the SAP implementation. We had difficulties to ship certain products so that the product mix doesn't represent the overall strength of the gross margin in certain products. But we are positive that in the course of this year, we will improve the situation as we actually did that in 2017 and '18 as well, which we are particularly EBIT margin heavy towards the end of the year.Cash flow. Q1 '19 operating cash flow down to EUR 9.5 million after EUR 12 million in Q1 of 2018, mainly based on the high investment spending due to our capacity expansion here at the headquarter in Birkenfeld and again, mainly the money is put into our new development center. It has nothing to do with actual overhead functions or anything the like. It's all about development. Then the higher net debt position is mainly attributable to the first-time adoption of the new rules of IFRS 15 on a like-by-like basis. We haven't seen a material change here.Now getting to the outlook and strategy, reconfirming our guidance here again. So group sales is expected to increase by at least 12% at a constant exchange rate, which is mainly based upon healthy business. If we are looking into the forecast provided by our customers, if we are looking into the already lined up product launches, if we are looking into the activities related to development milestones, everything looks positive and in line with plannings. We have been extremely cautious on the planning. And so far, we don't even have the slightest suspicion or indication that something could go wrong at this point. Adjusted EBIT margin foreseen to get to 14% to 15% after 13.9% in 2018. So definitely, positive scaling effects will drive this. Then we will definitely see some impact from the -- our earnings improvement program, which was announced last summer, which was actually brought in to cover a time span of more than 24 months. So we will definitely see the majority of those measures kicking in 2019. Again, please allow me to say that although it -- earnings improvement always had this slight taste of that personnel measures might be involved. To the contrary, we are actually growing on that end and mainly but based upon existing and contracted development projects. As mentioned, to the contrary, we'll grow on the personnel side by most likely the same percentage like we grew over the parts, which means in the area of 10%. And then certainly, we have the adverse effects from the continuing of high development activities, particularly as an outcome of the changes related to IFRS 15. Investments in tangible and intangible assets will grow to 12% to 14%, and I would like to mention this at that point because we'll most likely get back to significantly lower values already in 2020 and again, slightly declining as a percentage of sales in 2021. This year's activities and this year's growth is mainly related to those already mentioned, construction activities for capacity expansion here in Birkenfeld. Then certainly growing investments and this means mainly infrastructural measured, not the investments in human resources and higher personnel costs due to higher development projects. And certainly as already mentioned, the -- as a ratio of sales and investments, we are expecting a considerable decline from 2020 on and certainly 2021, we will most likely get back to normal. Some of the activities regarding capacity expansion will actually already -- take us into 2020, although the majority of the activities are taking place in 2019.Focus in 2019. Definitely, the reacceleration of the top line growth and the reduction of the earning volatilities. And again, if we talk about reduction of earning volatilities, and I'm talking operationally, I think we are especially "penalized" by IFRS 15, particularly because we have that high ratio of development cost and development activities versus top line, which then is leading to higher volatilities in the earnings KPIs.Then we are currently performing, still growing number already -- even taking into consideration that we have already a big number of projects in a phase, which are earlier than the signature of the supply agreement but already in a phase where Stratec has committed development resources and the customer has committed development and supply activities. And we want to certainly bring those projects into the safe harbor as far as development and supply agreements are concerned. So typically, we call this phase like feasibility or contract negotiation phase. Still a growing number of development activities for already contracted projects, but on top, we want to make sure that we continue to fill up the development pipeline with projects which will then get to the market in 2022, 2023, 2024, and we are talking about those projects at this point.Then certainly taking advantage of our new ERP system, particularly we see efficiency gains in the way how the group-wide ERP system now tempering the activities of different business units together and where we have other abilities to look into activities to increase our gross margin coming from that system. Then certainly, another focus is the activities around new product launches. So as mentioned, we got through that product launch already with the customer, with a North American customer, which has been postponed a couple of times last year. And for this year, we foresee at least 3 product launches: one is the LIAISON XS; second one is an instrument for immune hematology and serology in blood banks; and certainly our CLIA analyzer will get into the hands of the relevant customers, which are already lining up as well. I think it is important to understand that this typically means that we are not extremely high in run rates for new instruments on the other side. Certainly, we are shipping quantities of higher priced validation units and serial manufactured instruments, which means it already shows a certain positive inflect -- effect in our P&L, although the instruments are fairly young in the product portfolio.Then bottom line, certainly, our earnings improvement initiatives will have a positive influence to bottom line. And certainly, we want to look at the moves of the different departments of Stratec here in Birkenfeld are working without any development or manufacturing or testing or any other interruption of the operational activities of Stratec.Then looking into the strategic priorities, again, we will continue to focus to enable our customers to grow north of the long-term market average, which means a clear focus on high growth area in the in vitro diagnostics and in the translational research area and then certainly, we want to boost our expertise and technological portfolio as a derivative of our own intellectual property rights, which is certainly the core of Stratec business model that we develop our own IP rights and getting our customers' access to our IP rights, which is actually the underlying element of the business model as we continue to have ownership in these IP rights and on top get the customer -- a customer-specific product looking and feeling like the customers' product without the necessity for the customer to control everything from A to Z and handing over the majority of responsibilities as far as instruments, software, accessibility and so on is concerned to Stratec. Then certainly, organically and through M&A transactions, we want to broaden our product offering and priority #1 is certainly that we don't want to step on our customers' toes, which means we don't want to even leave the impression that we are looking into activities, which would be defined as core activities of our partner, like owning the customer access, the end customer access, or owning a brand or anything the like. On the other side, there are enough activities, which are typically -- or which typically have to be addressed by our customer but causing additional costs, additional inefficiencies, additional headaches to our customer. These are certainly areas where we, if we are specializing in such things, could do a job which is actually not only diversifying our product offering but is offering new sources of income and earnings.Then very much driven by complexity of the product and if we are looking into the product portfolio, this is certainly way more complex, particularly as far as our most recent development activities are concerned than the product portfolio 10 years ago. Higher complexity of product portfolio typically allows for a higher percentage of maintenance parts and consumables. Our Consumables business is growing nicely, which means that we are intending to further increase the proportion of service parts, including maintenance parts and consumables, which is foreseen to drive bottom line development of Stratec.Then certainly, diversification is another thing. One of the things which is actually keeping me up at night is that we are an OEM supplier. More than 90% of the worldwide volume in diagnostics and translational is -- research is in the hands of 10 companies. So there is a high concentration of revenues in our industry. We want to make sure that we are diversifying our business. Today, we generate about 40%, 4-0, of our revenues with our top 2 clients, 20% each. This is certainly not risky, but on the other side, it certainly means that there is a high degree towards those customers. Certainly, it's not only generated with 2 products. It's generated with 6 or 8 products. On the other side, we want to make sure that we work on our diversification activities, which means bringing new customers onboard, diversifying the business into other areas. As mentioned, with the acquisition of Diatron, we have, in the meantime, an exposure of between 5% and 10% into veterinary. Certainly translational research offers opportunities. Again, it's certainly one of our focus areas to further diversify the business.This gets me to the end of the presentation, and I would like to hand back to Stuart. He will explain how we can work ourselves through the Q&A session.
[Operator Instructions] The first question is from the line of Falko Friedrichs from Deutsche Bank.
And I would have 3, please. Firstly, on the adjusted EBIT margin now in Q1 and going forward, besides more consumables and spare parts, is there anything else in terms of the product mix that should help in the next quarters to reach your guided target range? And how good is your current visibility into the development over the next quarters? And secondly, on Diatron, is it fair to assume that the business has stabilized and is returning to a more normal growth pattern again? And then thirdly, was there a good contribution from the Panther Fusion in Q1? And what was -- or what is the outlook for the remainder of the year for the system?
Yes. Thanks, Falko, and please allow me to address the questions one after the other. So first question was about margin development over the next quarters besides product mix. So certainly, at this point, we haven't been entirely satisfied with the product mix and particularly the product mix and some other minor components, like working capital and inventory and some other things will drive the margin. If you look into the development of, let me say, the last 10 quarters, you will find the same schematics of a weaker gross margin in the first quarters of the year and growing gross margin towards the end of the year. Actually, we -- if we look into the forecast of the product mix and if we are looking into the development of the installed base, which allows us to derive maintenance parts and consumables consume, we are expecting a good progress here. On top, certainly, we are expecting, let me say, less interruptions from our SAP activities.Today, and I mentioned that already, we still have certain departments where they cannot focus too much into their actual jobs where they have to look into the inefficiencies which are generated, and I would like to make that point, which is important for us. This is no finger pointing at all. I'm really grateful what has been achieved. On the other hand, I think it is worth mentioning that a company of our size and shape can only introduce a new ERP system if we are following very stringent rules. And the Board of Management has clearly given rules to stick as close as possible to the standard application and had set high hurdles for any deviation from the standard, which means that we are comparing an SAP system today with a legacy instrument, which had been fine-tuned for more than 20 years, which means the degree of automation and the degree of comfort offered by the legacy system cannot be achieved at this point. We are working on that, but we have to see that we are still far away from having an absolutely smoothly comfortable, highly automated degree of an SAP system. Things still have to be done manually, and we are actually working with a lot of pressure to get to the same degree of automation. And as I've already mentioned before, most likely, we will not get to the same degree of automation we had with the legacy system this year. This will most likely take us into next year. Then, Diatron, we have actually been satisfied with the development in Q1. However, we are still far away from that every intended product launch is in line. We are still -- we still have a fairly packed development pipeline. We still have certain delays with certain products, which needs to get to the market. So I think there are still certain gains in Diatron, which have to be achieved in the next 24 months. However, we have been very satisfied with the development in Q1. If we are looking into sales projections of the remainder of this year, we see ourselves in a -- really well positioned. However, we -- there are plans to launch new instruments. There were plans to launch new instruments in the past, which have been slightly delayed, so which means we are still working on the market launches for certain products within Diatron, which means we are most likely half the way down the road, but still there is way to go. On the Panther side, we cannot talk about individual products. We have been unsatisfied with the development of certain products in 2018, particularly as we didn't see that kind of common curve after market launch. Today, it looks way better Q1 for some of those products, was a very successful quarter. If we are looking into the forecast provided by the customer, it looks like that our expectations we had for 2018 are now going to be met in 2019, which means a 12- to 15-month delay. As mentioned, the forecast for our molecular product lines are looking promising, and again, this is one of those effects allowing us to confirm our 2019 guidance.
The next question is from the line of Michael Ruzic-Gauthier from Berenberg.
Just a couple from me. The first is on free cash flow. We saw quite depressed free cash flow level this quarter. I was wondering if you could talk me through the developments you see there for 2019 and where you expect free cash flow to go. And secondly, if you can just remind me on guidance, when you say top line guidance of at least 12%, does that include stripping out of the nucleic acid business from the prior year compared to those you have in Q1 '18? And lastly from me, do you mind giving us the actual Diatron growth rate for Q1?
Yes, expected. Thanks, Michael. Free cash flow is expected to grow significantly for the remainder of the year. Q1 was actually affected by those effects I already mentioned before that we were very heavy in sales in February and March and very weak in January, which means accounts receivables were -- took us into the second quarter. Then we had huge investments, as already mentioned, but we are expecting -- from our perspective actually, free cash flow is significantly under expectation, which is in most cases something which has to do with inventory for our new product launches, our new building activities in line with a quarter which was heavy in revenues towards the end of the quarter, leading into higher accounts receivables than expected. So from our today's perspective, I would actually see this as mainly a timing thing.The guidance includes the strip out of our molecular business, 12%, clear answer, yes. And kindly help me again with the third question. Diatron growth rate, north of 10%, so fairly satisfied.
[Operator Instructions] The next question is from the line of Michael Heider from Warburg Research.
I have also 3 questions, if I may. First of all, can you give us a feeling on your Q1 growth, if this was mainly driven by the shipments to your U.S. customer? Or is this more broadly based? And then second question. Can you quantify the IFRS 16 impact on your EBIT margin? You said the improvement was 140 bps year-on-year. How much of this was due to IFRS? And then the last question, also housekeeping here, but the negative effect from stock appreciation rights that you mentioned as a burden for your EBIT margin in the first quarter, can you also quantify this?
Absolutely, Michael. Thanks for your question. Actually, as mentioned in the EBIT line section, actually everything which turned against us in 2018 recovered, which means it's not just that the shipments to our U.S. customer drove top line, even those instruments which have been launched in 2012, '13, '14, which means instruments which are still fairly young in the product portfolio, by means in depth for 1/3 of their life cycle but were slightly weaker in 2018, recovered and showed some nice growth. EBIT margin effect from IFRS 16 about 10 basis points and STARs (sic) [ SARs ] compared to previous year first quarter, the negative effect on the EBIT margin is in the area of 110 basis points. So Q-by-Q, Q1 '19 to Q1 '18, negative effect to the EBIT margin 110 basis points. So Stuart...
Are you finished, Mr. Wolfinger?
I am, yes. Stuart, do we have further questions?
There are no further questions at this point. If you'd like to conclude.
Yes, actually. Ladies and gentlemen, obviously there are no further questions. This gets us to the end of our Q1 2019 call. Should you have any further questions or you would like to discuss specific topics with us, we are here for you. So just call our IR department then we can set up a further call. Thanks very much for your interest in Stratec, and have a good day and a nice weekend. Bye-bye. Thank you.
Ladies and gentleman, the conference is now concluded. And you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.