Boule Diagnostics AB (publ) (BOUL) Earnings Call Transcript & Summary

Okay. So let's start. Welcome, everyone, to the conference call for Q4 for Boule Diagnostics. So this is Christina Rubenhag. And I also have [Technical Difficulty] conference call for Boule Diagnostics. This is Christina Rubenhag, and I also have Peter, Chairman of the Board here. And can I ask everyone that don't have questions to mute their phones because otherwise, there will be an echo.

And so guys, could you please mute your phones?

Okay. Then we start. It would be appreciated if everyone mutes, but otherwise, we continue here. I think that we skip -- you can find the presentation on the homepage when it's uploaded. And I think that everyone following knows pretty much what the company is doing. So I think that we skip the first slide. And then if we continue a little bit, you will see the updated product portfolio that we have had since end of '17, beginning of '18, with an addition of 6 new products, which is one of the reasons for the growth during this year. So if we go into details of Q4, which is the Slide #5. Q4 was a quarter where we saw all-time high in instruments delivered, the growth continued, and we also had improved profitability. Net sales was SEK 129 million, and this corresponds to growth of 22%. Looking in fixed currencies, it was 18%. We had very strong instrument sales during the quarter and number of delivered systems increased with approx 12%, which is a new all-time high. And revenue for instruments increased with 13%, meaning that the ASP was higher compared to previous Q4 last year-end. And that is mainly impacted by increased prices in Asia because if we look a little bit closer to the delivered systems, you will see that main part of the instrument sales was to Asia, specifically India. And for the ones that have followed the company, you know that instruments sales to Asia/India normally takes down the gross margin. And there is also an impact of that in this quarter. But still with higher ASPs, the revenue increase of 13%, which is quite good. Consumable sales for own instruments continued to increase during this last quarter as well, 31%. Full year, it's a growth of 21%. Specifically in Q4, sales was driven mainly by consumable sales to India. And it is very good that we now finally can see that the instruments that we delivered in the big tender to India has started to generate consumables much later than we thought when we did the -- did that sales. But now we finally will see revenues generated from that one. And can I please -- there's a few people who haven't muted. Can you please mute the phone? It's -- okay. Then in this quarter, we also had a second shipment to the African tender that we had in end of '17. End of '17, we delivered instruments and consumables to Africa, and the consumables covered consumption for approx 2 years' time, meaning that we haven't delivered so much to Africa since then. So this is the second delivery that has happened to Africa. This time, it's approx 1-year consumption. So of course, it's a big one and probably will cover next year. If we look at the full year, I think that the main reason for the growth this year is the initiatives that have been taken during the last year and then end of '17. We broadened the product portfolio, both in the human and veterinary area. We have strengthening the sales and marketing resources. And we have also made changes in the distribution structure, mainly in East Europe and Russia, specifically. With high instrument sales and the main part to Asia, gross margins was 44.6%, much higher compared to Q4 last year, but it's slightly lower compared to the full year gross margin. Even though we had high consumable sales, the instrument has an impact. So that's why it's slightly lower. But we should remember that instrument sales is important because that will -- that's really to increase in consumable sales going forward. Expenses was slightly above last year's Q4, and mainly driven by investments in sales and marketing. And the EBIT margin improved to less than 7% in Q4, last year was 3.2%. Cash flow was SEK 20 million, mainly impacted by the positive operating profit. Any questions on the financials? Okay. Then we continue to next one, where you can see instrument sales per quarter, the blue ones, that is sold number of instruments. And then you have the gray, the gray one is the rolling 12 sales of instruments. And as you can see, it weakened end of '17 and beginning of '18. But with the addition of the broadening product portfolio and other changes that have been made, instrument sales has increased over the year. And consumable sales has a very healthy growth as you can see on the red/pink line. In the consumables, as I have said, main reason for the growth in Q4 was driven by Asia, but also deliveries to Africa. And if we continue to the next one, you will see growth per product line in the different product categories. And you have first the Q4, and then you have the year-to-date. And Q4 was driven very much by increase in consumables on instruments. But also increase in instrument sales as such. And year-to-date, consumable sales increased, that is the main driver, and also instrument sales. And instrument sales is mainly the new 5-part system that was launched in '18 under broader product portfolio. And consumable growth is mainly driven by changes in the distribution structure in Eastern Europe, that has resulted in increased prices and increased sales. And also a healthy growth in all the regions. And at the top, you can see the percentage and the share of the different product categories, where you can see that consumables' own instruments represent 43% of the total product portfolio under revenues. And if we look at sales per region. In Q4, Asia had a very good growth, driven by instrument sales and also by reagent sales. And sales to Africa is mainly based on the -- on the second delivery on this Africa tender, but also instrument sales. Growth in the Eastern Europe was little bit declining this quarter, but they have had a fantastic year so far. And if we look at year-to-date, you can see that Eastern Europe is growing compared to last year. The main growth component is Asia, but also U.S. And in U.S., we have both sales of instruments and consumables, but also the OEM business, which has continued to -- that has been growing quarter-over-quarter during this year. And for the first time, Asia and U.S. is equal in size, 29%. Historically, U.S. has also been -- has always been the major region, but Asia is catching up. So now they are equal. So if we take the next one, looking little bit into the gross margin, this is a little bit of a busy slide, but what you have is that you have number of sold instruments that is the blue bars, and then the gray ones are sales of instruments to Asia, and you also have in percentage that is the gray one. So you can kind of see that quarters where we have had high instrument sales and especially high portion of sales to Asia, the gross margin has normally been lower. And we have a slight impact of that this quarter. But even though it's extremely high instrument sales, all-time high and a very high portion to Asia, gross margin is still 45%, which is historically quite good, actually, if you look back in the same numbers. And we normally talk about the fact that gross margins are dependent on both geographical and product mix and especially then instruments. And we can have tender sales in the different quarters, impacting both instrument sales and gross margin. We have not had any instrument tender sales during this year. And actually, the only kind of big chunk of tender related sales is this sales to Africa this quarter of consumables.

Page 10.

Page 10? Yes. FDA. So what has happened, as you probably know, third quarter 2019, we address -- we completed the warning letter and -- to end everything that we have committed towards the FDA. In July, when they conducted on-site audit, we received 2 new observations. Both observations has also been addressed according to the committed plans and was finalized now in mid-January 2020. So right now, we are in dialogue with FDA and -- positive dialogues, I would say. So we will need to wait and see what the next step is. But we have done what we have promised and committed. And we have kept everything that has been committed to the FDA. So if we take the last page or the next one, at least, Jesper Söderqvist has been appointed as CEO, and he will join Boule, May 11. So that we are looking forward to. Other changes that have been made, both when it comes to organization, but also how we organize the companies that -- to be able to strengthen production and really focus on further improvements on quality work, cost efficiency and also start the preparation for the new 5-part platform. And we have taken the decision to establish local production of consumables in Russia. We have decided to divide the responsibility between production of instruments and production of consumables. So in the U.S., we have 1 site producing reagents and controls, and Eduardo Pagani is the Product Manager for that site. He has now also taken on the responsibility for reagents production here in Sweden. And at the same time, Mikael Ekholm has recently started and will be responsible for production of instruments here in Sweden. And the reason for this is to increase the pace of this work and really make sure that we drive this in a diligent way. And just to summarize, going forward, we don't give any guidance or any forecast. But what we normally say is we have to guide what will happen depending on where the business -- in what direction the business goes and veterinary market and increased growth in that will have a positive impact on revenue and also on gross margins. Distributed products is great when it comes to revenues, but of course, since they are distributor, the gross margin is not as good as if we have had own production. So that is negative on the gross margin side, when it comes to the percentage. Continue to developing the distributor network that has a positive impact on both revenue growth and gross margins. And then we are growing, as you saw, in emerging markets. And that we think will continue having a positive impact on revenue, but a slightly negative impact on the gross margin since instrument prices often are lower in gross margins. And then, of course, we continue to work with cost reductions and that also includes regional manufacturing that we are working on right now with the new factory site in Russia. Yes. So for -- and with that, we'll open up for questions.

This is Victor from ABG. So I'll start with a question regarding your consumable development, your sales development. Could you elaborate a bit more on your 5-part systems and the growth you've generated in instruments during this year. What do you foresee for next year in terms of consumables for those systems? How that will support both sales and also margins?

It will, of course, support sales. So with higher -- I mean, with the higher installed base, no matter if it's 5 part or 3 part, that will generate consumables going forward. When it comes to 5-part consumables, the new 5-part systems that we have launched, we do not produce those consumables on our own, but they are sourced as well. So that means that the margin is lighter -- lower compared to production of own consumables.