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

So good morning. It's 10:00, and we welcome to this investor call, where Christina and myself will present Boule's progress and results in the second quarter. Here in Sweden, we have a beautiful summer day, and I hope you have the same. So thanks a lot for joining us here today. So before we dive into the presentation about our progress and our financial results during the second quarter, I would like to briefly introduce Boule to newcomers and also elaborate how Boule will regain growth and profitability also after the pandemic. Diagnostics, in general, is an essential tool to discover, monitor and treat patients with the relevant care. Blood testing can help address accelerating health care costs by monitoring health and discover a range of common diseases, including infections. And this has been much emphasized during the last year with the attempts to control the coronavirus spreading. Boule is a global niche player that provide near-patient hematology diagnostics or blood testings that allow physicians to directly consult the patients without the need to wait for central laboratory test results. Thus, Boule is well positioned to serve anyone who want to provide immediate test results. Boule's expertise in hematology has been built over many decades, and our roots goes back to the innovation of the first automatic cell counters in the '50s. We sell instruments and consumables [Technical Difficulty]

Jesper? Jesper? Jesper, sorry. You need to unmute because when I muted everyone I muted you as well. So if you please unmute.

Now I hope everyone can hear me.

Yes, now we hear again.

Very good. Where were I? So I think -- I think I lost you somewhere -- so we are a global niche player that provide near-patient hematology diagnostics or blood testings that can allow physicians to directly consult their patients without the need to wait for central laboratory test results. Thus, we are well positioned to serve anyone that wants to provide immediate test results. Our expertise in hematology has been built over many decades, and our roots goes back to the innovation of the first automatic cell counters in the '50s. We sell both instruments and consumables both for the human and veterinary medicines. We have a large installed base of Boule instruments, which is the main driver for our strong and recurring aftermarket sales. And that has really been impacted now during the pandemic, but we see now when the market opened up that we will recover that sale. In addition, we also sell consumables to other manufacturers, our OEM business. And if you look at the total, our recurring revenue is about 60% of our total sales. And we are present in over 100 countries via strong distributor network. So let's have a look at what we have accomplished during the second quarter and how business has developed. So the key highlight for the quarter is that we saw strong sales growth and signs of recovery in the market. Sales grow by 22% in reported figures, which is equivalent to 34% in constant currencies. For instruments, we saw a good growth for the fourth consecutive quarter since the dip we had in Q2 last year when the pandemic hit the world. Today, we see recovery. However, many markets remain affected by COVID-19, with restrictions keeping patient visits and testing at continued low level. This affects our sales of consumables for the quarter that continue at a reduced level, although we see an increase of 6% in reported figures compared to previous year. And of course, that is even more in constant currencies. Also, the spring has really been impacted by the many disturbances that we've seen in the supply chain due to component and raw materials shortages and, of course, also transport issues. This forced us to delay some orders in the quarter and also incurred expenses that pressured our profitability in the quarter. However, if you look at the graph on your right-hand side, with the rolling 12-month figure, we see that we are really turning a corner now, and we see a growth for both instruments and, most importantly, also for the consumables. What I'm also very pleased with is that we have continued our work and also invest in strategic projects. So let's look at what we have accomplished in the quarter. These priorities, I think, you may recall from previous presentations. So despite that we have spent a lot of resources and efforts and money to manage the supply chain issues to maintain customer levers, I think our team has done a terrific job and delivered on our business plan for this year and also our strategic initiatives. I have talked about the importance to be more online and digitally to be able to support our distributors and sell when we cannot travel. The work with our digital platforms, our partner portal, social media, industry press has been intensified in the quarter. We continue to add trainings and hold courses under the umbrella of Boule Academy. We work not only with our new distributors, but with all distributors. And we see that the increased engagement from Boule's side is much appreciated. A very important market for us is Russia, where the local production is now nearing completions. All equipment was delivered in June, and we are now in the validation. And we expect that we -- our first commercial deliveries will be at the end of the summer. Last year, we signed a supply agreement with an existing OEM client that is launching a new product. And the ramp-up of those products in our Florida production has worked well, and the increased volume is also clearly visible in our sales figures for this quarter. And of course, we're also very pleased to see that the development of our new product platform continue according to plan. So let's see what this give us in terms of financial results. So our net sales in the quarter was SEK 111 million. This is a growth of 34% in constant currencies. The growth from the first quarter is about 9% in reported figures. We shipped about 974 instruments in the quarter. And in general, you can say that the instruments are growing faster now than consumables, so we have a high share of instrument sales. And the product and region mix really pressure our gross margin. And on top of that, you also have the supply chain disturbances, which further pressure our margins. Our operational expenses are up in the quarter, about SEK 4 million, and that is due to increased sales and marketing activities. Of course, more commission with sales, et cetera, and also some recruitment costs as we're building our organization for the future. And then, of course, we -- if you look at our total cash flow, it's impacted by the investments we're doing in the new platform, which was SEK 13 million in the quarter. So let's look at the top line. So if you look at the sales per share (sic) [ per product ], you can see a recovery in all areas. The recovery is driven really by the instrument sales, large portion to Asia. And also, very happy to see that our OEM business has shown strong performance. If you look at the growth per region, we now see that there are no regions that are declining. The Asia growth, which is the highest growth in the quarter, is driven by instruments. And growth in the U.S. is 34% -- is 39% in constant currency, and that is driven by -- mainly by the OEM business. So in terms of what is given on the bottom line then, this is, of course, something that we are not so happy with, and I know that we as a business have the capacity to perform better. Our EBIT is SEK 2.3 million in the quarter. And it's mainly the sales that has driven the recovery of the EBIT margin. But of course, we don't really get the gross margin with us now when we increase sales. That are due to temporary effects, and we expect that the -- to see gross margin improvements post pandemic when we don't have these additional costs that we have now to manage the supply chain. But if you look at the rolling 12-month EBIT, you could also see there that there are signs of recovery, both in terms of percentage but also in real money. So we are very optimistic and hopeful about the future. Our operational cash flow was about SEK 8 million in the quarter. Now I would say that's a very good number given that we increased sales quite a lot. I think we manage our working capital well. And bear in mind that we also built inventory to enable higher production volumes in Q3 and also manage the vacation period in summer. Inventory is up SEK 8 million in the quarter, but our total working capital is -- it's not increasing as much, so I think we've done a good job. And then, of course, what really use our cash is the investments in our future platform, which I said is SEK 13 million in the quarter. Also, during the second quarter, we also paid a dividend of SEK 11 million. And since we expect to see further growth and -- which will require working capital, we have also prepared ourselves and taken up a loan of SEK 20 million to support growth plans and strategic investments. That was done after the period, so our total cash position is about SEK 87 million that we have available. What do we think about the remainder of the year? Well, if you look at the market outlook, I think it's very positive that we see the signs of recovery. However, the pandemic really continues. I think it's very positive -- we see positive signs for all markets outside Asia and some countries in Asia, but you should bear in mind that many of the countries in Southeast Asia are still very much affected by the pandemic. We clearly see that the rollout of vaccines is really what's driving the recovery. However, we see that there's continued uncertainty for the second half of the year, how things will develop, and particularly in South Asia, where we have a large installed base. Access to vaccines and also what will happen with the new mutations will really determine how the market develops over the next 6 to 9 months. We think that the transport and logistics issues that we've seen basically since the start of the pandemic will continue. We also see now that when -- with many market recovery that we have to struggle -- we have a lot of struggle to source components and raw materials. We expect that, that will continue also in the second half of the year, but we think that it will improve and become better and better, even if it will not be back to normal. I think one of the strengths that we as Boule has shown in the spring here is that we manage many of these supply chain issues. And that's thanks to that we have all of the functions, both R&D and manufacturing in-house. So to have an integrated team and very flexible has really allowed us to act on these external factors. And we have solved many of the issues that we experienced during the first half year, which I'm extremely pleased with. And I think that gives good hopes also for the future. So if you look -- so what we will focus on now during the remainder of the year for the second half? Well, we have to continue to work and manage the supply chain situation. It is what it is. Of course, we are very eager to see the first commercial deliveries from Russia, which we expect at the end of the summer. A lot of our efforts is going into developing a new platform. And over the next 6 to 9 months, we have important milestones such as design freeze and start of clinical validation. Our plans to launch an advanced 5-part instruments at the end of 2022 remains. We are on target. Of course, with not only development, but also want to prepare our launch. Therefore, we have taken measures now to strengthen our marketing team, which includes also hiring a new Global Marketing Manager, Mattias Isaksson, that will join us latest October 1. So this is -- I'm very pleased, and I really look forward to see him and some other key hires to join Boule in the fall. And as you know, there is a new regulatory framework that will be rolled out in May of next year. The IVDR regulatory framework is a lot of work for all suppliers. And there we are on -- we have spent a lot of efforts, but we are on plan, and we will continue to prepare our both quality management system, but also the technical files and all of the certifications needed to ship products after May next year. And then, of course, we will continue to work both with our new distributors, but also our old ones. So overall, I would say that, even if the result didn't really get to where we wanted to be, I think we see positive signs. I'm very pleased with how we managed the supply chain issues during the spring. And I think it's great to see the sales recover and that we see growth basically in all areas. So with that, I will close my presentation and open up for questions. Thank you very much for your attention. So who wants to start?

I can start. It's Jakob Lembke at ABG. I have a few questions. Maybe first on the order backlog. You mentioned that it's higher than usual. But can you maybe talk a bit about how it has developed during the quarter? Have you perhaps expanded the backlog? Or are you on level with sales or...

Yes, we have expanded our backlog during the quarter. And I think I mentioned it, maybe not in the presentation, but we also had to delay some orders, but that's a very small part of the current backlog. So I mean, it just seems that there's good momentum basically in all markets. And I think many of our distributors and customers also see that there are longer lead times due to the supply chain situation. So we also have orders also beyond the third quarter already secured. So I think it's -- overall, it's a very positive development.

Okay. Great. And then on the gross margin, is it possible to maybe quantify the temporary effect more?

We cannot quantify everything. But if you just look at the direct costs we had affecting COGS in the second quarter, it's equivalent to about 2.7%. But then, of course, there are also the additional production variances, too. This has been quite a lot of off and on, and we had to kind of work very hard during certain periods and then had to wait for component during certain periods. But the direct expenses related to the issues we've seen in the second quarter is equivalent to 2.7%.

Okay. Great. And then on the selling expense, you mentioned in the report that you had gotten back to your first trade fair in a year.

Yes.

Maybe now -- have you started to get a feeling for where these types of activities will balance out post the pandemic? Do you expect to sort of get back to pre-pandemic levels in terms of marketing activities and fairs and so on?

I think the trade fairs and exhibitions and trade shows, they will not be back to where they were before the pandemic. And I think that's the kind of -- I think we changed the way of working, so -- but I think there was a lot of -- I think the trade shows and exhibitions will come back and also the big -- the biggest trade show and most important trade show in Americas, American Association of Clinical Chemistry (sic) [ American Association of Clinical Chemistry ], that meeting will now take late in September. It's usually in Chicago at a big exhibition hall, but it's now moved to a smaller one in Atlanta. So we see that these activities will start up, but I don't think today will be as big and not at the same level. And again, I remind you that this is just some of the more -- over the -- in areas or regions where the vaccine has really come the furthest. So I think if you look at trade shows in Southeast Asia, for example, that there will be limited activities. So we will need to focus more and more on our online omni footprint.

Okay. Great. And then just the last question on the IVDR. Have you taken on any consultant costs or any other incremental costs relating to getting ready? Or are you expecting to do so?

We have already -- since the last 6 to 9 months, we have already taken on additional costs to manage IVDR. And that will continue basically until -- not until May, but -- and what's new here is that we have a notified body, and we also need to submit the technical files for reviews for all our products. That's -- we will send in all our technical files during this year. So there's a lot of work ongoing. So there are additional costs probably up until first quarter next year. Who wants to go next?

Jesper and Christina, this is Christian from Pareto. I was wondering if you could elaborate a little bit on the instrument sales. I was a bit positively surprised by the strong delivery to Asia. What markets was the driving force in the second quarter?

I think it was entirely India. That's the driver in Asia.

Okay. Could you please give us some kind of geographical split in your order backlog? Do you expect to deliver a large -- larger volumes of instruments to India in the third quarter as well?

Yes. We have a good strong order back -- book for India. Any more questions? I don't see anyone raising their hands. I see -- I don't see the first...

This is Robert Harju-Jeanty from Medical Lead. I see that you are starting up activities -- production activities in Russia. Boule had a previous production unit in Beijing, China, and that was finished because it's very hard to control the quality far away in this type of country. So why do you think you will manage better in Russia than in China?

First of all, in China, it was instruments. And now in Russia, it is consumables. It's our own manufacturing plant where we control everything. So it's our own staff, it's the same procedure, same process, same equipment as we use in Sweden actually that we're deploying in Russia.

And maybe we can also add that the reason for closing the factory in China was not the lack of quality. It was actually that it wasn't profitable enough because we don't sell that many instruments in China, and it turned out that it wasn't really any cheaper to produce there than in Sweden. So it's much more related to profitability compared to anything else.

Any more questions? Very quiet. So anyone who want to take a last question? Okay. Then I thank you for the attention and for taking the time to join us here today. And we wish you a very nice summer and hope to see you soon again. Take care. Bye-bye.

Bye-bye.