© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Welcome to the Hamilton Thorne Ltd. 2018 Fourth Quarter and Year-end Earnings Conference Call.Before turning the call over to your host today, please be reminded of our standard public company policy on forward-looking information. Certain information presented or otherwise discussed on this call may contain forward-looking statements. These statements may involve, but are not limited to, comments relating on strategies, expectations, planned operations, product enhancements, scientific advances or future actions. This information is based on current expectations and are subject to significant risks and uncertainties and are difficult to predict. Should one or more risks or uncertainties materialize or should assumptions underlying the forward-looking statements prove incorrect, actual results, performance or achievements could vary materially from those expressed or implied by these forward-looking statements.These factors should be considered carefully and prospective investors and other parties should not place undue reliance on these forward-looking statements. The company assumes no obligation to update such forward-looking statements or to update the reasons why actual results could differ from those reflected in the forward-looking statements unless and until required by securities laws applicable to the company.Additional information identifying risks and uncertainties is contained in filings by the company with the Canadian security regulators, including, without limitation, the company's management's discussions and analysis for the quarter and year-end December 31, 2018, which filings are available under the company's profile at www.sedar.com.Now let me turn the call over to Hamilton Thorne's CEO, David Wolf.
Thank you, and good morning to all. And welcome to the Hamilton Thorne Ltd. 2018 Year-end Earnings Conference Call. I'd like to introduce myself. I'm David Wolfe, President and CEO of Hamilton Thorne. On the call with me today is Michael Bruns, our Chief Financial Officer.This morning's call will have the following format. First, I'll provide a summary of operations and financial results for the 2018 calendar year and the fourth quarter with a focus on our sales, markets and operational performance. Michael will follow with a more detailed discussion of our financial results in the periods as well as a review of our financial positioning and liquidity as of the end of the year. I'll then return for a few minutes to provide some information on our outlook for the remainder of 2019, and we'll open up the line for questions. I'd like to remind all participants that we are not providing financial guidance, so I'd ask you to limit your questions to either historical periods or general trends in the business.I'll begin with our sales results. 2018 was another successful year for Hamilton Thorne. Sales for the year ended December 31, 2018, increased 32% to USD 29.2 million, largely due to contributions from a full year revenues from our Gynemed acquisition, supported by organic growth in equipment, consumables and services sales.Sales into the human clinical markets and animal assisted reproductive technologies, or ART markets, increased significantly while sales into the research market declined somewhat, reflecting our continued increased focus on ART. During 2018, we continued to add personnel to our sales and support teams in order to increase our direct sales footprint and take better advantage of the cross-selling and marketing synergies between our North American and European operations.We also broadened our product portfolio with a mix of third-party manufacturing products, new OEM products and we continued to invest aggressively in marketing programs. I'm pleased to report that through these sales and marketing initiatives, we are able to regenerate approximately 12% organic growth for the year, which we define as growth in operations owned by the company for more than 1 year. We also look at organic growth by applying the current exchange rate to prior periods for any sales that are not recorded in U.S. dollars, which is our reporting currency. For the year, our constant currency organic growth was somewhat higher at 13%. We think that sales in constant currency is an important measure of looking at growth in the business as it largely eliminates the effects of currency fluctuations.We are also pleased to see that the recurring revenues that we generate from our consumables and services offerings, which have expanded to cover a wide range of customer needs, accounted for 60% of our sales in 2018 versus 55% last year and less than 30% in the prior year.Fourth quarter sales increased 12% to $8.1 million. Organic growth was 10% for the quarter, 12% in constant currency as we had a relatively low impact from acquisitions in the quarter. Sales for the quarter were positively impacted by significant growth in our equipment business in the U.S. as our expanded sales force gained traction and saw growth of our equipment, services and consumables businesses worldwide. Gross profit margin increased from 54.5% to over 56% -- 56.8% (sic) [ 56.7% ]for the quarter. For the year-end quarter, including the effect of realization in the fourth quarter of a deferred tax asset of $1.1 million largely related to our U.S. net operating loss carryforwards, the company reported net income of $3 million for the year and $2.7 million for the quarter. Michael will provide a more detailed discussion on this deferred tax asset recovery in his remarks.Adjusted EBITDA, which is one of the key metrics we use to measure our progress, increased 24% to $6.2 million for the year ended December 31 versus $5 million for the prior year. For the fourth quarter, EBITDA increased 26% to $1.75 million. With sales up 12% in the period, we are seeing some of the EBITDA margin expansion that we know is inherent in our business.On the acquisition front, in July, we acquired the ZANDAIR product line in the air purification systems and consumables. These systems support a clean environment to the ART lab by reducing volatile organic compounds, or VOCs, and other contaminants which are -- a reduction of which is essential to embryo health. The addition of the ZANDAIR product line is consistent with our commitment to quality in the ART lab. From a financial perspective, we are already seeing revenues from the ZANDAIR product line grow as we leverage our established sales and marketing resources worldwide.I'll now turn the call over to Michael to provide a more detailed discussion on the numbers.
Good morning, everyone. I am Michael Bruns, the CFO of Hamilton Thorne. First, I'd like to cover the results of operations for the year. As David said, Hamilton Thorne sales increased 32% to $29.2 million for the year ended December 31, 2018, an increase of $7.1 million (sic) [ $8.1 million ] over the prior year. The significant growth came from the full year of contribution from the Gynemed acquisition, which was only 8 months in 2017, driving services and consumables sales growth to 42% in 2018. Equipment sales increased 20% due largely to the results of our investment in our U.S. direct sales group.Gross profit for the year increased 25% to $16.5 million, an increase of $3.3 million due primarily to sales growth. Gross profit as a percentage of sales declined to 56.5% for the year compared to 59.6% for 2017 primarily due to product mix, particularly the impact of a full year of sales of somewhat lower margin third-party products to Gynemed customers and additional direct sales of third-party products in the U.S., all of which were partially offset by increases in direct sales of higher-margin proprietary equipment, branded consumables and quality control testing service sales. The decline in rate is intentionally planned and closely managed as we continue to expand our product offerings.Operating expenses increased 20% or $2.1 million to $12.9 million for the year primarily due to the addition of a full year of Gynemed expenses, again, only 8 months in 2017, including increased amortization of acquisition-related intangibles. We invested significantly in personnel costs related to our expanded U.S. direct sales and support teams. We continue strategic investments in research and development, sales and marketing resources, travel and trade shows as well as noncash share-based compensation expense resulting from stock option grants. These investments were all partially offset by reduced spending on the company's acquisition program and some expense reductions.Net interest expense increased $323,000 to $1.15 million for the year. Increase is attributable to a full year of interest on the increased borrowing to partially finance the Gynemed acquisition and partly offset by a reduction in the company's revolving line of credit.The gain in fair value of derivative increased to $573,000 from $68,000 in 2017 primarily due to the weakening of the euro for the entire 2018 year and partially offset by an increase in the company's share price at the measurement date. The variables in this Black-Scholes valuation model are dynamic, and substantial variations occurred each quarter in 2018 and will occur in 2019 as well.Income tax expense was $48,000 for the year compared to a $4.1 million tax recovery in 2017. In 2017, the company recognized $4.1 million of tax assets generated by HTL's historical U.S. federal NOL carryforwards and recognized a final $1.1 million in 2018. The company recognized these assets under IFRS as we believe that is now more likely than not that the substantial benefit from NOL carryforwards will be realized based upon expected future U.S. taxable income streams.Current income tax expense increased to $266,000 for 2018 due primarily to a full year of German taxes on Gynemed's income for the period following the acquisition.The company generated net income of $2.96 million for the year ended December 31 compared to $5.7 million for the prior year, with that decrease of $2.7 million attributable entirely to the differences in the recognition of the deferred tax assets in 2017 versus 2018.Income from operations actually increased $1.17 million or 48% driven by increased revenues and gross profit margins and partially offset by our investment in increased operating expenses relating to acquired businesses, strategic investments and R&D, sales and marketing and noncash share-based compensation. Adjusted EBITDA, which is an important measure for our business, for the year 2018 increased 24% to $6.2 million compared to $5.0 million in the prior year due to revenue and gross profit growth and partially offset by increased operating expenses in the period. Please refer to the company's reported management discussion and analysis, our MD&A, for a reconciliation of adjusted EBITDA to net income.And now I'd like to do a brief summary of the results of operations for the fourth quarter. For the 3 months ended December 31, 2018, sales were up 12% to $8.1 million, a new record for Hamilton Thorne. Gross profit was up 17% to $4.6 million. Sales and gross profits were up primarily due to organic growth in operations owned by the company for more than 1 year and augmented by added revenues and gross profit from the ZANDAIR acquisition.Gross profit percentage increased to 56.7% for the quarter primarily due to favorable changes in the product mix. Operating expenses were up 15% to $3.8 million for the year primarily due to increased share-based comp and continued strategic investments in our sales and marketing resources. In the fourth quarter of 2018, the company's net income was $2.7 million compared to $4.7 million in the prior year, again, attributable to the -- primarily to the deferred tax asset and associated deferred tax recovery described more fully up above for the full year and in our MD&A. In the fourth quarter, adjusted EBITDA increased 26% to $1.75 million versus $1.4 million in 2017. This improvement was due primarily to increased sales and gross profits and partially offset by our increased operating expenses. Fourth quarter cash flow from operations increased $600,000 to $1.85 million, up 51% over prior year Q4.Now turning to the company's balance sheet and cash flow. We substantially enhanced our cash position in 2018 by closing a bought deal financing in Q3 with net proceeds of USD 7.1 million, completing the year with cash on hand of $13.7 million.Working capital increased to $14.2 million as of December 31. The increases in cash balances and working capital were generated by cash flow from operations and the private placement and were further augmented by proceeds from warrant and option exercises and offset by investments in capitalized R&D expense, the acquisition of ZANDAIR and principal repayments to our bank under our existing term notes.Cash generated from operations increased 33% to $4.3 million for the year compared to $3.2 million in 2017. We invested over $800,000 in inventory growth for the year to facilitate expanded product offerings, primarily in the Americas, and to enhance production efficiency and fulfillment turnaround. We'll continue to review and manage our inventory to optimize our new and existing opportunities.On the cash flow statement, cash used in investing activities was $1.7 million, primarily for the investment in the ZANDAIR product line acquisition as well as ongoing investments in intangible development costs and lab equipment.Cash provided by financing activities was $5.4 million attributable to the proceeds from the September 2018 equity private placement as well as warrants and option exercises and offset by scheduled term loan payments and reduced borrowings under the company's revolving line of credit.This compares to the larger 2017 private placement and term loan facility utilized for the Gynemed acquisition. At December 31, 2018, our revolving line of credit has been reduced to $800,000 and we have an additional $1.7 million of availability on the total line of credit of $2.5 million. In addition to that, we had $3 million of availability in the new acquisition line of credit, which we negotiated in November 2018, in order to expand our ability to complete acquisitions with a relatively lower cost of capital. We are well positioned for 2019.At this point, I'd like to thank you all for your interest in Hamilton Thorne's financials, and now let me turn the call back over to David to comment on the HTL outlook.
Thank you, Michael. Looking forward into 2019, we expect to see continued growth driven by our substantial growth in our U.S.-based equipment business, augmented by continued strong performance of our equipment services and consumables brands worldwide. With a number of relatively large dollar but somewhat lower-margin workstations and full lab equipment sales in the pipeline for 2019, we may see some variability in gross profit margins from quarter-to-quarter, but we expect profit margins for the year to normalize around the levels we saw in 2019 (sic) [ 2018 ] as we manage product mix between our own higher-margin products and services and third-party products.We may also see some variability in our reported results due to some significant exchange rate fluctuations between last year and this year. For example, the euro dropped almost 8% from Q1 of 2017 versus -- Q1 2018 versus Q1 of this year, 2019. We will continue to provide information in both reported and constant currency to provide a clear picture of our performance.We will also continue to make investments in personnel, R&D programs and systems to support our growth with an eye to balancing top line growth with sustained EBITDA expansion over the longer term.On the regulatory front, we continue to make progress in obtaining U.S. market clearance for the Gynemed line media products. We were somewhat delayed in pursuing regulatory clearances by the U.S. government shutdown early this year as well as some competing internal priorities. We do expect to launch the majority of the Gynemed media products portfolio in the U.S. and additional markets by the third quarter of this year.Finally, as our acquisition program continues to be an important element of our growth plans, we continue to maintain active outreach including ongoing discussions with several targets. We also plan to develop additional resources to this area during this year as well.With continued earnings growth, strong positive cash flow from operations, cash balances of $13.7 million and increased borrowing availability, we believe we are well positioned to execute on our acquisition program.We will now open the line up for questions.
[Operator Instructions] Your first question comes from David Martin from Bloom Burton.
First question, and so you mentioned expecting substantial growth of your U.S.-based equipment business. I'm wondering, how much of that is due to increased sales to your legacy customers? Is there a replacement cycle underway which should tail off at the end of 2019? Or are they seeing a strong uptick in their business? Or is this mainly increased sales to new accounts that you're selling into with the expanded sales force? And if that's the case, how many new accounts are you selling into now?
Okay. Well, thank you for the question, David. In general, we have strong penetration in the U.S. market and sell our products or services at some level to a vast majority of clinics. So I would say this is less new account penetration and more -- new account capturing and more additional penetration of additional products into existing accounts. The growth is coming both from our own manufactured products, so let's say, somebody who's buying additional equipment as they expand their activities or perhaps replacing products, and we see both; and new lab developments where, again, we offered -- began to offer the opportunity to provide a full suite of equipment, including our manufactured products combined with third parties to provide either complete workstations or, in some cases, even the entire lab.
Okay. How much is the organic growth in fourth quarter? So 10% reported, 12% on constant currency, as well as -- how much of it is due to higher third-party product sales in 4Q '18 versus 4Q '17?
So I'd have to take -- frankly, I'd have to take a look at that at that granular level, but we had strong growth on the organic side, both in our own manufactured products, particularly in the image analysis systems as well as significant sales in the third-party products. On a percentage basis, obviously, third-party products were greater because we were starting from a lower base. But from a dollar basis, it's clearly more sales in -- of our own manufactured products.
Okay. I've got one more question and then I'll get back in the queue. So we've seen seasonality in your revenues in previous years with first quarter a bit lower than fourth quarter in the previous year. Last year, though, we also saw R&D sales and marketing and G&A expenses lower in Q1 '18 versus Q4 '17. Should we expect to see the same this year with a dip in those expenses into Q1 '19?
So we clearly continue to have seasonality in our business from a revenue perspective, as you noted. Fourth quarters for a variety of reasons tend to be very strong, particularly in equipment business where people are looking at end-of-year spending and end-of-budget-cycle spending.On the expense side, I think last year was a little bit of an anomaly in the sense some -- in some ways surprised that we saw SG&A go down -- our sales and marketing go down because we added significantly to our sales force in Q1 2018 versus Q1 2017. So overall, I would say we've continued to focus on overall expense control. We do tend to have a little more spending in the middle of the year as sales and marketing exhibitions heat up, but I would not expect to see significant decreases in expenses in Q1.
What about for the year? Should we annualize the 4Q operating expenses and increase that by 5% to 10% for 2019?
Well, I might ask Michael to expand on this. But in general, Q4 also tends to have higher operating expenses in part because we -- particularly, in this year, we did a significant stock option grant in Q4, which tends to -- all -- in this case, all bundled into Q4. So I would say multiplying Q4 by 4 would not exactly be accurate either. Our 2018 operating expenses as a whole are pretty -- again, with various quarter-to-quarter fluctuations, I think, are relatively -- on a relative basis are pretty typical of what you would expect to see in 2019 with some obviously increases in some areas that we've mentioned. Michael, would you want to add something?
Yes. David Martin, I would just add that David is exactly right. There are some sort of onetime variables in Q4, so a "let's create times 4" would not be a good mathematical outcome for that, much more driven by the -- some of the variabilities of seasonality that you had talked about earlier. And also pointing out that Q3 and Q4 tend to have more of the trade shows and additional marketing efforts there as well.
Your next question comes from Doug Cooper from Beacon Securities.
You just mentioned the organic growth rate, 10% in quarter 4 and for the year and so forth. What is the -- what's your take on what the industry's growth rate is, I guess, vis-a-vis your growth rate?
So we -- as we've talked about in the past, it's very hard to find good data on -- from analysts. The analysts that we tend to think are the best is a firm called Technavio, which has -- their expectations are in the 7-point-X percent, I think 7.3%, 7.4%. Our most pure-play comparable, Vitrolife, talks in general about 5% to 10% organic growth is what they see is the industry growing, though they had 4% of their growth last quarter, which was a little bit lower. So in general, I think we're clearly growing faster than the consensus of the industry and for good reason.
Maybe just focus on the U.S. Do you have any data on what the U.S. market is growing at, considering your focus there?
So again, if you take 2 steps back, the U.S. market is an important market -- obviously, it's an important market for us as it's where we're headquartered and one of the large markets in the world, but it still represents well less than 30% of our global annualized sales. So it's the probably largest market that we have, but it's by no means the market that continues to drive the bus. There are some specific activities that are going on in the U.S. that I think auger well for us. We are seeing more new clinic openings in the U.S., certainly than we're seeing in Europe, and that's part of our -- the initiative that we've launched towards the end of '17 and really accelerated to '18 to be able to take advantage of that trend.We're also seeing -- somewhat surprised to see this given the general state of stasis or lack of movement from the U.S. health care system, we are seeing significant moves towards more reimbursement for ART in the U.S. We've talked in the past about the addition of employer-sponsored plans where large companies are now offering supplemental benefits that aren't necessarily mandated by state or federal law to attract and retain employees and certain knowledge-working professions. We've also seen, in the end of last year, some increased expansion of funding in the U.S. federal government for, I would say, veterans who have fertility issues as a result of -- in this case specifically of combat; and in early this year, increased mandated funding in the State of New York, which is obviously one of our larger population centers in the U.S.And so I think we're going to see continued strong growth in the U.S. maybe a little bit faster, but certainly a little bit faster than Europe and faster than some Asian countries that are more mature but certainly slower than the more developing countries. That being said, it's hard for me to quantify that which circles back to your real question.
Okay. Just sticking with the U.S. in terms of your anticipated product launches of culture media in Q3. You talked earlier that you have good penetration within the U.S. clinics today and establishing, I guess, a greater penetration within those clinics. This being a higher-margin product, if it's a successful launch, what do you think the impact in terms of EBITDA margin could be over the long term?
Well, that's a question of how long is long term. Clearly, today, we are running around a little bit USD 30 million in revenues and 21%, 21.5% of EBITDA margins. We should clearly see -- well, depending in part on product mix and how we get there, but there clearly will be EBITDA expansion as we increase the size of our business. If we were to let say increase our business to double it, I would expect to see EBITDA margins in the mid-20s, whether it's 23% or 27% would be too much of a crystal ball for me to look at because that will be -- depend a lot on margins -- a lot on product mix, but we certainly would expect to see EBITDA margin expansion.
Yes. I guess is there a way -- if somebody can help us quantify, like what is the gross margin contribution of the cell culture media product? Maybe that can...
Yes. So cell culture -- and again, it also depends on time frame. So the cell culture media product is at the high end of our gross profit margins. We don't give out the number as much for competitive reasons as anything else, but it's clearly at the high end -- when sold direct sales, at the high end of our gross profit margins. So it would be higher than our blended margins.I would remind you that the cell culture media is a significant area of spend in the IVF clinic, but it's also a significant -- it will take a significant effort to change people from their existing cell culture media. In almost all cases, we're talking about displacing an incumbent where there's already cell culture media being used. In some cases we do have unique and additional products that I think we can capture some more market share.So I think, overall, I just want to remind people that we are very optimistic about our ability to grow our business in -- worldwide, frankly, with our culture media, but it is going to be a long, slow growth with a long tail.
Your next question comes from Tania Gonsalves from Cormark Securities.
Just focusing on that culture media line again. Could you provide us some clarity on where that's sold into right now? I know you're still waiting for the U.S. launch. But has it been -- are there sales in Asia? And if not, what's the regulatory process in China as well as the potential to expand one day into rest of the emerging markets?
Thank you for the question, Tania. So in general, we have our greatest penetration of cell culture media in the markets where we -- the Gynemed business is most established, so in the European market in general and in the German-speaking countries specifically. So we have significant market share in Germany, Austria and parts of Switzerland. We have begun to offer the products in other European markets where again we have the same issues as we will have in the U.S., which is there are established players. So we have to fight and battle for market share.Outside of these established markets, in emerging markets, in some ways, it can be a little bit easier because there's so much expansion going on, new players both at the clinic level and at the supplier level that we can have more of an opportunity to capture some share. So we are seeing some reasonable consumables business in certain markets in -- primarily in Southeast Asia. We are looking at expansion into other more established markets in Asia like the Japanese market, again which I think will have dynamics similar to the European and U.S. market. China has always been a little bit of a different kettle of fish. The good news is the companies -- the market there is growing substantially, so there's lots of market opportunity. But there are significant regulatory hurdles that need to be cleared in China. So for the most part, we are focusing on -- in Asia and other developing countries, other developing areas, countries that have a lower regulatory hurdle and putting out more significant regulatory efforts today into the U.S. market. Once we get clearance in the U.S. market, then we'll turn our attention to China.
Okay. That makes sense. And you mentioned having added personnel to Europe and German sales and support teams in 2018. I know you've talked about the U.S. personnel expansion. Could you provide any clarity of how many direct sales people you added to the German team?
So in -- the German team is relatively a full team, and we added a combination -- when we look at that number, we're thinking of both direct salespeople who are field personnel, service personnel, who again are out in the field as well as internal personnel who are doing order processing and particularly on the consumables business, maybe doing outbound phone calls and inbound phone calls.So -- and we added across the board and we'll continue to add those kinds of people across the board in a much more measured way than we did in late 2017, early 2018 in the U.S. So we're talking -- short answer is we're talking about 1 or 2 people in each of these markets.
Okay. Perfect. And then lastly, pivoting a little bit. We did talk about you having some strength in the imaging analysis segment. So I think that refers to the Oosight business. We saw that Vitrolife announced a partnership with Virtus Health and Harrison.AI for embryo analysis using artificial intelligence. I'm just wondering, what are your thoughts on this, maybe this is more long term, but the potential to perhaps incorporate this into your Oosight offering?
So we have imaging systems that today provide image analysis on sperm, both on motile moving sperm as well as sperm that have been fixed in slides to get very specific morphology data in terms of looking at them. We also have our Oosight system, which is useful for looking at structures within unfertilized eggs or oocytes with a C-Y-T-E-S, that you can't see with conventional microscopy.And the third area where people are getting data on embryos where our products today do not support this, is by doing time-lapse imaging on embryos as they are cultivated in an incubator. I would say that this is a highly developing field. We are active in doing both basic and some level of applied work on the AI side -- basic research in some level or applied work on the AI side and applying these to our products. And it will take some time for that to shake out.We clearly view that there's some opportunity for significant breakthroughs in performance of IVF by combining -- I think it's probably more than imaging, [ might be ] imaging and genetics and helping to determine -- making better decisions about both embryo, embryo choices and maybe even basic pathways of diagnostics.
Okay. And then lastly, you mentioned -- Vitrolife, I know in Q1, they posted organic growth at 4%. Was there anything there in the macro environment, I suppose, that impacted you negatively just because their organic growth rate was a little bit lower than they typically liked to see?
So we -- again, I don't want to get too much into our Q1 numbers because we haven't proposed -- we haven't put those out yet. So we are not seeing anything that I would say at a high level from an organic perspective that gives us pause. Europe is I think -- and for Vitrolife in this case, Europe was their area of significant -- most significant weakness. And so we want to keep our eye on that. Currency, as I alluded to in my remarks, will be a big issue for us this year from a reported perspective. So I think, again, we're going to focus a lot on making sure people understand the difference between our reported results and our constant currency results.So I think the short answer there's -- that's unclear whether that's a trend or an event, but it's not something that seems to be affecting us at this point.
Your next question comes from Andrew Hood from M Partners.
My first question is the environment for acquisitions that you guys are seeing, so...
I'm sorry, his line has dropped. [Operator Instructions] Your next question comes from Brooks O'Neil from Lake Street Capital.
I was curious about the comment you made about the variability in your margins as it relates to your expectation that you'll have some high revenue but lower-margin products this year. And then I think I heard you say but you expect margins to kind of equal 2018 margins when all is said and done. So perhaps you could comment about those categories that you think are going to shore up your margins to offset the negative impact of the high revenue but lower-margin product sales you anticipate this year.
Sure. Thank you for the question. Appreciate the opportunity to expand on that. So we have, in a way, 3 areas you should think about our business at -- we generate our revenues from -- with a margin structure from 3 different kinds of sales. The highest margins that we make are from direct sales of our own products that we manufacture or manufactured for us sometimes by contract manufacturers, but generally, our branded products that are sold by our direct sales teams to our customers. And those margins tend to be, with some variability, tend to be very high, whether it's equipment, consumables or services. Obviously, as we talked about earlier, some of the consumables have extraordinarily high margins, but the equipment also has -- can have very good margins, again when it's our equipment sold direct.We also sell a significant portion of our business, which is primarily, in this case, our equipment business, so a little bit of our consumables where we sell products, again, that we manufacture ourselves but sell them through distribution. So in this case, we're paying our distributor a portion of our margin to manage the sales and marketing, both pre and post-sale support, invoicing, collections, inventory management, shipping, all of those kinds of things. And the third area -- and that's sort of I would say intermediate margins, good margins [ but probably ] quite as high as the [ firm ] -- the first part.And then, of course, the third would be products that we, in fact, sell on behalf of others where they're manufactured by a third party, and we are getting paid the distributor margin for doing the kinds of work that I described earlier. And that's that somewhat lower-margin set of products that can -- particularly on the equipment side, can be significant revenues from time to time because they involve a workstation, which can be $100,000-plus or even a full lab setup, which can be $200,000 to $300,000 at the low end to well over $0.5 million to perhaps $1 million at the high end.So the offsets are and what we do expect to see for the full year is consistent margins with what we saw in 2018 as we try to move more of our products through our direct sales teams to get the highest margins that we can and augment that through the what would be, I would say, the lower margin -- the lowest margin of our various offerings, which is third-party products that we distribute on behalf of others.Over the longer term, we would expect to see, on a measured basis, a continued expansion of our direct sales teams as well as more and more of our products being under our own manufacture, either due to new product development that we do and we introduce new products and therefore don't sell as many third-party products or by virtue of acquisitions, we bring some of the products that either we're distributing today or they are the classic product that we distribute today in-house and begin to manufacture those ourselves and sell those with the consequent manufacturing margins.
And Mr. Andrew Hood from M Partners has rejoined us.
So the first thing I was wondering about, could you guys speak to the environment for acquisitions in terms of if some of your competitors have been making acquisitions? And also, in the past, you've had a universe of about 80 companies, I believe. Has that changed substantially in any way?
Okay. So thank you. I would say that the environment for acquisitions for us has stayed relatively stable in many ways. Certainly, the number of targets that we're looking at is stable and perhaps, in some ways, increasing as we grow our business, establish ourselves in more geographies. We can actually look at businesses that may have been either too small for us or too small for us considering where they were physically located. But today, I would say a business in -- a smaller business in Central Europe would make a lot more sense to us because we have a significant base of operations in Germany, than it might have 2 years ago.So if you look at us over the past, say, 3 or 4 years, our acquisition universe has actually increased in size. There has been some decrease due to acquisitions by our competition, but the acquisition and the number of acquisitions by some of the other competitors who [ we get to ] compete when we look at a company has actually slowed down. A company seem to be doing -- a couple of large companies seem to be doing maybe 1 acquisition every year or so, whereas 3 or 4 years ago, there was certainly 1 large player that was doing 4 or 5 acquisitions a year.We also expect to see over the longer term perhaps our acquisition activities decrease as we begin to complete the product portfolio. And therefore, there have become fewer areas of sort of greenfields where we have no existing products or services and therefore are looking to add them. So that's sort of one dynamic.In terms of the environment in general, we are seeing that sellers are perhaps, in some ways, more active and more educated as there's been a lot more active space. They have a higher expectation of competition. We are seeing some people who we tried to, as you know, source our own deals so that we don't get in competitive situations or auctions, but we do see people who have brought brokers on board to try to bring their companies to market. We do know the number of companies that have gone to market and have not been successful thus far in a -- in completing a transaction because I think, as I said earlier, the buyers are getting maybe a little more selective as well as we have always been.And then lastly, I think you didn't quite specifically ask about, I'll talk a little bit about valuations. We are seeing a little more upward pressure on valuations as people begin to see a fairly large and growing list of comparable deals to look at with some very fair level of difference in valuation parameters. But sellers, as you can imagine, typically focus on the deals with the higher valuations. And so I think we are seeing buyer -- seller expectations inching up a little bit as well.
All right. Another question I had, in terms of recurring revenues, I saw you had that uptick to about 60% recurring revenues. Is this closer to where you aim to be? Or longer term, once you've got more clinics outfitted, you're looking at 70%, 80% recurring?
So I think given where we -- so let's take 2 steps back. If you look at the entire industry, it looks like about 70% of the industry is recurring revenue, maybe 75% and 25% to 30% is capital equipment sales. Since we came from a base of capital equipment sales, I would expect to see us perhaps always a little bit higher than the industry. But as we grow, I do believe in reversion to the mean, so I think we would see ourselves continuing to increase our recurring revenues, again because of primarily more consumables and services sales.
Yes. Okay. Because I imagine cell culture media will also have a relatively large impact in the medium term on that number.
Yes. I think that's one of the areas where we would see continued increase.
Okay. My last question, I'm wondering -- I'm assuming you can't tell me everything here. But in terms of your manufacturing capacity, are you relatively comfortable with your ability to meet demands in the medium term?
So I would say it varies by product line. Across the board, I would say, we're very comfortable in our ability. And again, we do have some things made by third-party contract manufacturers. We are very comfortable across the board with our ability to meet demand. There certainly are a couple of -- and I don't want to get into details as you can imagine, a couple of -- at least one specific product area where we have seen supply constraints in the first half of this year. And we're in the process of adding an additional supplier -- additional contract manufacturer to make those products for us again under our own brand, so that we can alleviate those constraints. I would say, over time, we may see some of those constraints happen from time to time in certain categories, but we do our best both through combination of planning and, to an extent, it's through supplier and supplier management to ensure that we continue to have the capacity to meet the increased demand.
Okay. So just as a quick follow-up then. For those ones where you might have some supply constraints, do you have options of attaining another supplier for that product? Or are you dependent on that exact company?
So it's really going to vary a little bit by product line. In the case that I mentioned, we found a third-party provider who can make the -- essentially the same product to us to our specifications. And given this particular category, the regulatory hurdles in using another manufacturer are relatively modest. So that's been -- it is a regulated product. It's a medical device from a regulatory perspective but kind of a lower category. So we see that as being more easily manageable. There could be -- there are other product lines that are harder to switch around for various reasons, and they're obviously the ones where we put more effort into making sure that we have our capacity, is matching our demand.
Our last question comes from David Martin from Bloom Burton.
So just a couple more, if I could. The Gynemed products you mentioned whether -- it will be a tough slog going into labs that are buying competing products already. Like are the Gynemed products differentiated? Do you have a wedge to get in the door with the products?
Yes. So thank you for that question. So we have 2 significant areas of differentiation. One is on the product side, there are particular products that we sell, they tend to be more nichey products, as you can imagine, that are unique to the marketplace. In some cases, they are products that labs will be using today, either they're using other off-label products or making them themselves. And they, I believe -- we'll find out, but we believe they will welcome the opportunity to buy regulatory, like cleared, properly labeled and sterilized products. So I think we have the opportunity, to use your word, to drive a wedge to open at least the door to allow us to sell some of those products.We also have products that have -- our products generally have much longer shelf lives than most competing products. Most competing products in the market have shelf lives that are measured in weeks to low single-digit months. Our shelf lives tend to be in the 6-month time frame. And that's an advantage, both for us frankly, in managing our supply chain, but also for the clinic that can have more confidence that the products will be available and usable if they -- for a longer period of time.And that ties into one of our strategies for accessing clinics where there is an existing player, which is maybe hard to completely eliminate the existing player, but in general, most clinics particularly need -- and we sort of -- the flip side of we talked about earlier, where we get our supply, do one second source, so that if there's some kind of either manufacturing or regulatory or product recall problem, they're not completely out of business. So one of our strategies for generating sales is to position ourselves initially as a good-quality second source. And with longer shelf lives, that gives us a significant advantage versus other possible second sources. And it's much easier to manage products with long shelf lives than it is products with a short shelf life.
What is the size of the U.S. cell culture media market in IVF labs?
So that's a question -- I guess, I should take out my calculator, but it's probably at least a $50 million market. It does about $200 to $300 of cell culture media spend per cycles, 150,000, 200,000 cycles. So you can do the arithmetic.
Okay. And then last question. Vitrolife was off the market in China with some of its lasers at the end of last year due to a delay in reregistration. Are they still off the market?
As far as I know, yes. But I don't know the answer to that.
Sorry. I do have one other question. Time lapse, it sounds like you're maybe trying to build your own time lapse. I thought there was an opportunity to bring it in to the U.S. from a supplier that you were distributing in Europe already. Is that not the plan?
So we look at -- I guess we look at all options, which is providing -- if we had a U.S. customer that wanted time lapse, we would do our best either to source it today from a third party. Over the longer term, we would like to have, as I said, and I'm not specifically talking about time lapse in this case, but in general, we would like to have the vast majority of our products and ultimately all of our products being manufactured by us or sold under our own brand name, under -- contract manufacturing OEM relationship. And whether it's time lapse or flow hoods or some other areas that we don't -- that we typically -- today we don't make ourselves, that is our long-term plan.
There are no further questions at this time. I turn the call back over to David Wolfe.
All right. Well, thank you very much. I would like to thank everybody for their participation today and particularly to the questions, there's some challenging and thought-provoking questions. I'll just spend a little more time thinking about and maybe be proactive in our next call in giving you some of the answers and some results on those.We look forward to speaking again towards the end of next month. This is a short reporting cycle, as you know, as we've already completed Q1 of this year and we'll be reporting in the third or fourth week of May. So thank you again, everybody, for your participation, and look forward to our next call.
This concludes today's conference call. You may now disconnect.