Stratec SE

XETRA:SBS

Earnings Call Transcript 2020-Q1

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

Yes. Thanks, Stuart. Good afternoon, ladies and gentlemen, in Europe. And good morning in the United States. Welcome to our Q1 financial results call. Some housekeeping stuff. I think I don't need to walk you through the safe harbor statements. And actually, you can download this presentation now in the presentation mode, or you can actually download it from our website later on, if it's not already there. Jan asked me to let you note that as we have restated figures in 2019, that we will put the relevant quarters on our website within the very next 2 days. So the restated quarters for 2019 will be on our website in a few days.I would like to walk you through the agenda of today. So we start with what happened in Q1, then I would like to get you a financial review, followed by the outlook and then getting into the Q&A session, if you have any questions.First quarter of 2020. We continued growing like the year before in the area of 20%, top line actually by 21.3% year-over-year, leading us to EUR 56.5 million after EUR 46.6 million, which means an organic growth of about 20%. Noticeable actually strong performance in all segments, including spare parts, replacement parts and consumables. In Q1, we had COVID-19 tailwinds, only very minor, somehow in the area of EUR 600,000 and EUR 700,000.EBIT margin went up by 290 basis points year-over-year to 13.6% EBIT margin after 10.7% EBIT margin after Q1 in 2019.Some other achievements were actually that we had new product launches and several development milestones, very important milestones. And I cannot reiterate that often enough how important it is for STARTEC to meet the milestones. It's not only about customer satisfaction, it's actually that we certainly have a development plan, and our developers are forcing to develop other things, new things, products in new projects, and that's why it's so important to get through milestones in time in order to allow us to continue with the development planning as foreseen. So particularly hard and software extension for a molecular diagnostics analyzer system here to name it and certainly our KleeYa instrument achieved CE marking.Yes, you know it is tough for us to talk about new projects, new sign projects. But actually, we brought a couple of negotiations as far as new contracts are concerned, pretty close to the finish line. Actually, I would expect, within the next 3 months, probably 2 bigger signatures and probably a third one to the end of -- until the end of the year.Now getting into the financials. So as mentioned already, sales went up by 21.3%, adjusted EBITDA by 41%, EBIT margin 250 basis points up, adjusted EBIT to EUR 7.6 million after roughly EUR 5 million in 2019, growth by north of 50% and adjusted EBIT margin from 10.7% to 13.6%.I think it is important to understand that, for certain reasons, we always have kind of seasonal development, particularly as far as the EBIT margin is concerned. So after a 10.7% EBIT margin in 2019 first quarter, we actually managed to get the company to a 14% to 15% EBIT margin after 12 months. So I think this is actually a fairly good start into the year. And we have been really satisfied with the progression here. So actually, I think that we will continue to show growth as far as EBIT margin and adjusted EBIT margin are concerned over the year.So again, from EUR 10.7 million (sic) [ 10.7% ] to EUR 13.6 million (sic) [ 13.6% ] adjusted EBIT margin, growth of 290 basis points. The post-tax figures actually even better with 60% or 67% -- 66% and 67%, respectively. And certainly, EPS going literally through the roof, which was actually very much related to weak Q1 in 2019 with EUR 0.11, and this year, actually after Q1 at 37% (sic) [ EUR 0.37 ].Actually, the figures actually exclude PPA. I just want to make note at this point. And for comparative reasons, we adjusted to the account for the disposal of our Data Solutions Business unit, which has been reported as a discontinued operation.Now getting to the sales figures. I think this is actually very impressive, and it shows what happened in the Q. So after the weak quarter 1 in 2018, and actually, which progressed through the year in 2018, a weak year 2018 from our historical perspective, nice growth Q1 '19 and further growth Q1 2020 on the same level. Again, organic growth in the area of 20%. Strong service parts and consumables business. Higher call up numbers for systems, including forecasts and actual demand, and nice and dynamic growth of -- in the veterinary business in the Diatron segment.Adjusted EBIT and EBIT margin, Q1 adjusted EBIT margin up 53.9% year-over-year to EUR 7.7 million. EBIT margin 2020, 290 basis points to 13.6%. So I think nothing very special here. The same thing we were lacking in '18 and started to regain in 2019 is actually nice economies of scale. I've already walked you through that process that we have made significant investments in '17 and '18, but unfortunately, we were slightly underutilized in '18 due to the known fact, and that's why now economies of scale are helping us to improve on the margin end.Certainly, the product mix in terms of, if you see, it's isolated on the instrument side, certainly helped us very much. But furthermore, if we are looking at other details, like lower contribution coming from development and recognized revenues in development, lower contribution from weaker products, lower contribution -- or higher contribution coming from spare parts, so overall, nice development here, which actually shows that the utilization of the equipment is improving further and further. And probably, you learned about that, that some of our clients report in Q1, literally reported the same thing for Q1. And actually, one should expect that particularly in the light of the COVID crisis, that utilization continues to be high and further -- and grows further.Cash flow, which is actually the -- I would say, the only downside in this quarter. So cash flow from operating activities down by 66.3%. Actually, we see this as, to a certain degree, temporary and intended. So what we did already when the crisis materialized and -- the COVID crisis, and it became more obvious what's happening in the world. And when we saw that actually things shipped from China took longer to be shipped to Europe, we actually advised all our suppliers to ship all products, which has been forecasted for quarters 1 and 2, which means the inventory slightly went up. And certainly, this led to premanufacturing, and that's why actually we traded safety in supply slightly against KPIs, like inventory, like turnover in the warehouse and so on. So this was actually happening intendedly.Then we certainly had a timing effect here, is that particularly in the slightest ramp-up of everything in the industry -- at the steepest ramp-up of everything, we had to report, which actually is showing that this is a fairly unfruitful situation. At this point, we really see this as temporary. And actually, if we are looking already in the development of Q2, we see significant improvements here as things are getting more stable on that end. So we are very positive for quarter 2 to definitely show better cash flow, particularly operating cash flows, but even on the investment side, it's going to get better.Higher net debt position and the growth here is actually temporarily. Working capital management will certainly pay a dividend already in Q2. Again, what we did in Q1 was mainly related to save supplies.Now getting into the outlook. So after the preliminary figures for Q1, we actually have given you guidance. Group sales is expected to increase organically now at the lower double-digit percentage range. Adjusted EBIT margin continues to be the guidance for -- in the area of about 15%. Certainly, with the development we see, it's certainly more safety margin here. We see some positive scaling effects and certainly improving sales and product mix. So product mix and sales mix will definitely help us to get to that target by the end of the year. Investments in tangible and intangible assets. So I think this is actually progressing extraordinarily, particularly with our real estate activities here, that's why we are stating that. So it used to be south of 10%. Today, we are saying between 10% and 12%. It should get back up better from '21, where we expect to get back into the historical figures south of 10%.Certainly, it is important to understand that, at this point, and we stated that we have certainly nice growth rates and nice demands with COVID, particularly our instruments, which are using chemiluminescence immunoassays and other immunoassays and molecular diagnostics are showing very higher demand than expected at the beginning of the year. On the other side, we already start to see, at this point, very minor -- and clearly, my expectation would be that this continues for the remainder of the year, very minor weaknesses in other areas. Actually, today, the net effect is definitely positive.I think, again, it is worth mentioning that we have real challenges in the supply chain. At this point, let me touch wood here. It worked out fairly well, but the efforts are actually going through the roof. We have literally tripled efforts in supply chain management in order to make sure that we are getting the materials in time. It's actually almost a double effect that it's not just that the reliability in the supply chain based on the regular demand and on the plant demands are weakening, which means that order confirmations -- our Tier 1 suppliers cannot hold their order confirmations because their second-tier suppliers are actually showing weaknesses. That's why we have to manage this and help our suppliers to manage this. Matter of fact, we see additional demand, which makes it even more complicated because we are not just talking about those things which have been planned, we are talking about those things which have been unplanned, which is really a daily challenge up until now. Allow me to say that it works out fairly well. No bigger disturbances. And if we see some delays here, we are in a position to catch up within weeks, which makes this a positive situation as far as supply chain is concerned.Focus in 2020. Again, improve the EBIT, contribution of our Smart Consumables segments. Here, we see progress. Then definitely drive working capital efficiency. This is actually already a matter of Q2 after this fairly weak quarter 1. But again, to a certain degree, the growth in working capital was on a planned manner.Then certainly, the achievement of development targets. I talked about that already. And then certainly, new development and supply agreements to execute on the deal pipeline. We brought in some other nice things, early stage things, but I think there are a couple of things, which have been brought in a year or 2 ago, where we have successfully performed feasibility studies and went through the phase where product and market requirements are defined and where specifications are made and that's why, as already mentioned before, we are getting closer to a signature contract of things, which have been brought in a year or 2 ago.And then certainly, we want to realize further efficiency gains. So you probably remember that, in 2018, we set up an earnings improvement program, which started paying dividend last year, and we expect this process has to be continued in 2020. Certainly, again, we went live with our new SAP system. And after a year of where it was actually, like, getting customized to a new system, we see that our people working with SAP are already showing efficiency gains, and that's what we actually expect to happen for the remainder of 2020 and certainly as a big leap in 2021.This gets me to the Q&A session. And actually, I will hand back to -- I would like to hand back to Stuart, who will explain us how to proceed with the Q&A.

[Operator]

[Operator Instructions] First question is from the line of Jan Koch from Deutsche Bank.

[Jan Koch, Research Analyst]

I have a couple, please. Firstly, given the situation in China in Q1, one of your largest customers reported lower instrument sales yesterday. In contrast, you mentioned a strong increase in demand for analyzer systems. Could you share some color on the specific reasons for your strong first quarter performance?And secondly, with regard to COVID-19, you have slightly changed your wording, and now you expect a slightly negative effect in terms of customer orders. Could you outline, which areas are affected and give us a sense of possible magnitude?And lastly, on your last earnings call, you mentioned that you saw an increase in orders for your molecular business north of 100%. Could you give us an update on your current order book and your expectations for the remainder of the year? And what is the roughly base for that? Any color would be helpful.

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

Yes. Thanks, Jan, for the question. So let me start with China. I think that's important to understand. So certainly, our customers are reporting weaknesses in certain areas. We have to see that they are mainly talking about their reagent kits, that is kit sales. If it goes back to the installed base for them, certainly, if they already have a fairly stable installed base, they will probably not see negative effects in a situation where they are not placing a lot of new instruments.Certainly, this was another thing in China during the COVID crisis because all lab capacities -- one could actually say -- I heard a customer of us saying that everything, but COVID is down or everything, but COVID and related parameters are actually down, which means it -- certainly, it was a tough time for our customers in certain areas. But actually, what we saw, particularly towards the end of the quarter, nice additional demands and some of our customers actually already started filling their warehouses. So -- but as I already mentioned before, here I was mainly talking about forecast for Q2 and actual demands of Q2. I think I mentioned before that additional business generated in Q1 coming from the COVID crisis was actually only in the area of EUR 600,000, EUR 700,000.I think it is extremely tough for me to describe a situation for our customers. First of all, I cannot get you inside information. But from an overall perspective, I would say that, in Q1, the business ex COVID and ex China was fairly stable, and the utilization was nice. I think, for us, this was a smooth process from a nice regular demand into a fairly stable regular demand in the regions of the world and certainly the on-top demands coming from the COVID crisis.Talking about the areas where we see slight weaknesses. I think it's important to understand that, certainly if we see the relative contribution of the relevant businesses to our revenues and earnings, I think it is important to understand that if we see group-wide sales, certainly -- let me pick out Instrumentation. I think it's harder to describe from an overall revenue perspective to include development and consumables activities. But if we just pick out Instrumentation sales, today, more than 75% of our instruments are sold in the area of molecular diagnostics and chemiluminescence immunoassays, which are instruments, which can be used for genetic testing or antibody screening, which means they may see additional demands coming from the COVID crisis. The remainder of the business areas to include hematology, then certainly immune hematology and then certainly, to a minor degree, clinical chemistry. We see some flattish going demands in hematology, where we see that, in human hematology, it's getting weaker; in veterinary hematology, nice additional business; then in immune hematology, we see kind of flattish development with the tendency to become weaker. And on top, certainly clinical chemistry, very poor performance in Q1, but actually, like I mentioned before, the overall contribution to clinical chemistry is in the area of less than 3% to the group sales, which means really, really minor. This is a business, where -- which is only a focus area of STARTEC in certain regions of the world. So there are way better and bigger players than us. We only have this segment -- we address this segment if it comes to supplementary sales in certain areas geographically and from a test kit perspective.Then talking about our molecular business. And again, it's tough for me to say, A took more, and B took way more, and the percentage is dissented. What we clearly saw that particularly those instruments, which are using genetic testing in -- on a molecular basis. So those customers who are actually known customers to play a major role in this space are actually Hologic and DiaSorin, both with additional demands. DiaSorin with the LIAISON MDX and Hologic with the Panther Fusion and now with the Panther, yes, they are in the final stage of developing a TMA-based COVID-19 test, which means that the COVID-19 tests will run on a stand-alone Panther on Gen-Probe's or Hologic's proprietary amplification method called TMA and on a Panther Fusion, which will then use PCR-based tests, with both an additional multiplexing portfolio and so on. So actually, a nice respiratory panel on both ends.I think this -- I hope this addressed your questions, Jan. And I hope this makes sense. So I think we can continue now with other questions, if you like.

[Operator]

[Operator Instructions] Next question comes from the line of Michael Heider from Warburg Research.

[Michael Heider, Head of Research]

Yes. I have a couple of questions also. Regarding COVID, I know it's very difficult for you to estimate the impact at the current stage, but I was wondering whether you can give us some background on your current capacity. So what do you think, how many instruments would you be able to produce on top of your normal output that you are planning? Or can you tell us a little bit more about how many shifts you're running at the moment? And how much more you could do if you need it? That's the first question.The other one, just for my understanding, I mean you said that you see roughly EUR 600,000 to EUR 700,000 additional sales impact in the first quarter due to COVID. And I was wondering how you really judge this? I mean, do you know from your customers how your instruments are used? Or -- because I guess that, while COVID tests can probably be run on machines or instruments that are already in the market and -- yes, so how do you judge this? How can you really see how that's related to COVID or not?

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

Yes, Michael, thanks very much really. Allow me to answer the second question first. Actually, I asked the same question internally, when I said how much was the additional revenues generated through COVID. And we have certainly determined what we're doing. So certainly, at the time, this was only molecular testing, right? So it actually limits the number of assays anyhow because, at the time, antibody screening was not available.And then we determined that down to 2 instruments, and we simply compared the forecast given at the end of Q4 last year towards the actual demand towards order income, and that was the difference. So the addressed difference. That was the only mean and measure how we could do that. You're right that we don't know what our customers are running on it. But if we see additional demand in this crisis, we said all additional demands coming from that. And if you talk to our customers, what's currently running on Panther Fusion and what's currently running on LIAISON MDX, they will definitely let you know that the majority is COVID testing or their respective remaining respiratory panel, which is actually only needed to distinguish respiratory diseases caused by COVID versus influenza and others. So this is actually all related to COVID-19.Again, and I think discussing capacity means an in-depth understanding what capacity means for STARTEC and what's determined by capacity. Today, if we are talking about capacity, there are a couple of easy-to-be-tackled factors like laboratory space for final testing. We all have that. But there are 3 elements which are actually a bit tougher to be tackled. First of all, means manual labor work. So employees doing assembly and final testing. Here, we have actually pulled back increased resources, increased our qualification metrics, are working in 2 shifts. So actually, we do what's actually feasible to do, and we do that in our 3 main manufacturing sites in Hungary, Switzerland and Germany. In Austria, it is a little bit better because the majority is actually injection molding, which means a high degree of automation anyhow.Another determining factor is actually final testing tools. We were here at capacity level, particularly at the end of March up until the end of April. In the meantime, the situation improved, and we have actually increased capacities as far as final testing kits, tools and equipment as needed. And -- but I think what's currently the data mining factor is that we have to increase input where our suppliers, first-tier suppliers, have to ship more subassemblies, more parts and that's actually data mining factor. They are certainly ramping up as well to the degree possible, but they are, on the other side, dependent to the second-tier and third-tier suppliers, which makes it even more difficult. So at this point, the real challenge is getting the input materials at the time or in time. And like I mentioned before, we certainly had some minor interruptions in manufacturing, like we couldn't ship products for a week. But what we did is that we preassembled the instruments anyhow and lacking parts or lacking subassemblies have then been finalized the next week, and we have put huge efforts into final testing for a 2 weeks manufacturing lot, which means after 2 weeks, we caught up to the degree needed. That's what we do.So actually, what keeps us away from trying to determine the overall demand is, I think it's obvious that, at this point, we have huge additional demands. But we don't know. And certainly, if we are looking into Q2 and Q3, this seems to be sustainable. We have actually asked some of our partners to give us firm orders already for Q3 rather than putting it in the established forecast system, just making sure that we are managing our capacities and priorities properly.Thing which makes me worried is that we don't know yet what is going to happen in Q4. At this point, we think that still genetic testing will be important. And on top, we will see some demands for antibody screening, but I think it is important to understand that the majority of our partners are selling on their installed base as far as antibody screening is concerned, and the additional demand is actually just for backup solution, safety stock, like if Quest Corp runs 10 instrument of a certain kind, they put 2 next to it in order to do proper work balancing and load balancing. And if they put an instrument on service that they have the replacement there. That's what's happening. So the thing which keeps us away from trying to project Q4 is actually uncertainty. And that's why we said we -- the thing we are saying at this point is that we have huge additional demands, some minor weaknesses. Net-net, it's actually still huge additional demands, but that's the only thing we can address at this point. I hope that makes sense from your perspective. Thanks, Michael.

[Michael Heider, Head of Research]

May I ask additionally? I mean, so if we now assume that Q1 only saw a small impact of COVID, and you're now saying you see huge demand. So that would basically mean that this will come on top of this growth rate that we're already seeing being very strong in the first quarter. Is this correct?

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

That's correct to a certain degree. Allow me to get you some details here. So if you would raise that question, and I would answer that question from a gut-feeling perspective, I would say, yes, in Q4. Q3 will become fairly strong. I hope it's going to be in the area you just mentioned. Q2, probably not, and that's actually, again, just a basis effect. Probably you remember that we had huge growth rates in Q2 2019, mainly coming from development. So definitely, development revenues in Q2 2020 will be weaker than development revenues of Q2 2019. And that's why the growth rate of instruments will most likely be higher than you just said, but the net-net, including that development effect, it will probably be slightly weaker, just managing expectations.

[Operator]

A follow-up question from the line of Jan Clark from Deutsche Bank.

[Jan Koch, Research Analyst]

I have 2 more questions, please. Firstly, you announced that your KleeYa platform received CE marking in Europe. Could you remind us on the potential for you and provide a roughly time line for a potential launch? And secondly, in the last 2 quarters, there was a significant decrease in the tax rate. What can we expect for the future, especially in the second quarter?

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

Yes, KleeYa first. KleeYa is -- so I think it makes sense to slightly dive into the history. We have been very successful with certain platforms we have launched in the early 2000s. Platforms for STARTEC differs a lot to the definition of platforms in the industry. Our platforms are not a generic pipetting robot where somebody could place process module on top like a reader or a washer, which then gets into a more batch analyzer system, which is then more generic. KleeYa platform is a unique chemiluminescence immunoassay platform, which allows for different methods of chemiluminescence immunoassays, including glow and flash, immunoassays to be proceeded on the KleeYa platform. The overall idea is that companies, midsized companies who are coming from the generic ELISA area, with declining prices and huge pressure as things are getting more commoditized, want to move their business closer into the more-sensitive and more-specific methods of chemiluminescence immunoassay where currently nothing has been available as a generic platform, but still a random access analyzers, state-of-the-art, tube-in result-out, everything, which has been expected. It's a proprietary instrument, which will be slightly modified customer per customer. But again, not this generic pipetting robot, which looks like a pipetting robot. It's like a nice-looking instrument, state-of-the-art technology, like from a software interface state-of-the-art. From haptics and user interaction and user experience, really state-of-the-art.We have currently about 10 customers lined up to use that platform, all in a different stage. We have some in a very early feasibility, where they are currently about to transfer their menu into chemiluminescence immunoassays. And we have a few which are actually already validating their test menu on KleeYa.Launch, again, is a fairly complicated phrase because launch means the commercial availability of a CE-marked test and CE-marked assay running on the instrument, but an instrument can only -- like this, in the case of a closed system solution, because our customers are selling it as a closed system solution, which means if company A is launching that instrument, even if company B is launching the same instrument, different kind of instrument of the same platform, if A validates the assays, it's going to be sold as a closed system solution, and the tests of B will not run on KleeYa of customer A, which then helps our customers to enter into reagent rental programs and so on and so forth. So it's a fairly complex business model running on the KleeYa. However, I was about to say that, I would expect that the first instruments will probably be launched towards the end of the year if everything goes smoothly, but then certainly, with a very limited number of assays and a very limited number of customers, probably in Q3, early Q4. But I think the major step for STARTEC is done with the CE marking.Now getting into tax rate. Actually, I would expect for Q2, a slight growth. So we said last year, on a full year basis, we would expect between 20% and 22%. We were slightly south of 20% on a full year basis. At this point, I would actually say it's a good assumption to think about 18% to 20%. Again, very difficult to say because it's very much driven by the relevant businesses and the contribution of the businesses in Hungary, Switzerland, and Germany, all with different tax rates, which means if the demand for instruments manufactured in Switzerland goes up, typically, the tax rate goes down. It's certainly based upon earnings, but assuming the same relevant earnings per instrument. Again, a good expectation between 18% and 20%. I hope that makes sense.

[Operator]

There are no further questions at this time. And I would like to hand back to Marcus Wolfinger for any closing comments. Please go ahead.

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

Great. And thanks, Stuart. Thanks, everybody. Ladies and gentlemen, thanks very much for your interest in STARTEC. And if there's anything we can do for you, let us know. If there are probably further questions, please do not hesitate to call us. And now I would like to wish you a good day. and thanks very much. Please stay safe and stay healthy.