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

So good morning, everyone, and welcome to this call. Sorry that we're a bit late, we had some technical problems here to start off. So my name is Jesper Söderqvist, and I'm the CEO of Boule Diagnostics. And with me here today at our headquarters in Spånga, I have our CFO, Christina Rubenhag. The agenda slide. So the agenda for today is as follows. We'll go through the financials for Q3. And then we will do a short introduction, mainly for those who -- of you who are new to the company. And after that, we'll also provide some insight to our updated strategy and our recent commercial and development activities. And then we will end this call with a Q&A. So let's get started. The key highlights of this quarter is that we have seen a continued recovery in the market. And during the third quarter, both sales and order intake increased. All product lines grow, in total 15% if you look in constant currency. And the main highlights are really that the continued strong sales in the U.S. has continued, mainly driven by our OEM business. And we have also seen that instrument sales have now grown for the fifth consecutive quarter since the dip in Q2 last year when we had the pandemic outbreak. Consumables is up 12% versus last year. It is still impacted by COVID restrictions, and it's mainly in some countries in Southeast Asia. We have seen disturbance in the supply chain that has impacted our profitability, both by increased production costs, but also challenges in delivering our solutions to our customers around the world, which has impacted sales. Very positive is that we continue to make progress on our strategic priorities, and I will come back to that later in this call. And also thanks to a very good order intake, we're entering the fourth quarter with a record high order book. So let's look into some of the details for our financials. Sales amounted to SEK 112 million, which is 13% more than the same period last year. And in constant currency, it's 15%. Compared with the second quarter of this year, sales increased by 1%. But however, we had a more favorable product mix in this quarter, and particularly since we have more consumables and consumables increased by 11%. We increased our gross margin compared to the previous quarter with 3 percentage points, and that's despite the headwind that we have with higher component prices and a number of supply chain disturbances. Also this quarter, we had a high proportion of basic instruments, mainly to India, which also put pressure on our gross margin. So this results in an operating profit of SEK 13 million, corresponding to a margin of 11.7%. And we delivered an operating cash flow of SEK 10.6 million. And we continue to make progress with our new product platform. And during the quarter, we invested SEK 11 million in new product development. So look at how sales has developed. So we have seen growth for all our product lines. Growth in instrument sales mainly came from Asia and Africa. Consumables are increasing or are stable, apart from a few countries in Southeast Asia we're seeing decrease due to extended pandemic restrictions. In India, which is a big mark for us, we saw that sales of consumables increase by a full 91% compared with the previous year. And our OEM business continued to develop very positively and increased by 44% during the quarter. In many of the developing countries, the vaccination rate is still low with continued restrictions, which results in fewer patients visits and fewer diagnosis tests being performed. This continued affect Boule as we have many active instruments in the developing countries. In the slightly longer term, we expect that test volumes return to more normal levels in this country and that will help both sales and profitability going forward. So I'll turn to the next slide to look a bit more into our profitability. As you can see, it looks like we're lowering our profit. But actually, last year, we had the payment protection loan of SEK 12 million from the U.S. government that was converted to, say, revenue. So the increased sales gave us SEK 6 million in contribution. Unfortunately, shortage in electronic and other components has burdened our gross margin and also expenses during the third quarter. The supply chain situation is challenging and creates significant challenges in both our development projects, but also production. But I must say, I'm very pleased and proud how the staff at Boule has managed these challenges during this year. But as you can see, it burdens our profitability. I would also make a note though that we are delivering this result with this headwind. And at the same time, we're also conducting a number of improvement projects and incurring costs for that to adapt the organization and also tools to equip Boule for the future. So I think we should be very pleased with this result. And it looks very promising for the future. If you look at our cash flow in Q3, we generated about SEK 10.6 million in operating cash flow. The financial position of Boule remains strong. And at the end of the third quarter, we had an available liquidity of SEK 82 million. Also during the period, we have taken up a loan of SEK 20 million to support our growth plans and our strategic investments. If you look at the total cash flow for the quarter, it's SEK 7 million. So let's take a look at the key priorities for the second half of this year, and I presented this slide in our call for the second quarter. And I think we have made very good progress during this quarter, and the supply chain is challenging. But we are adapting, we're working closely with our suppliers, providing longer-term forecasts, finding new suppliers where needed, redesigning and changing components when necessary to meet the customer demand. So I think it's a challenge that continues, but we have managed it very well during the quarter. Russia is a market with significant potential for Boule. And during the quarter, our Russian domestic reagent production started, and we did our first customer deliveries in Russia in September. So that was a great win for the team. Local production means immediate advantages in public procurement, also shorter lead time and we will also lower transport costs and, of course, that will also reduce our environmental impact from the transport. So these are very positive, that we reach this milestone. As I mentioned earlier, we are also making good progress with our next-generation platform, and we have an intense development work in progress. And that's really creating the foundation for Boule to become a leading player in this decentralized blood testing with innovative new solutions in the future. We also had our new marketing manager, Mattias Isaksson, joining us. And that is a key and that we have a stronger marketing team that is working to reach out to customers and distributors worldwide. And we are also now preparing for the launch in the end of 2022 of our new products. A very welcome decision from European -- a proposal from the European Commission is to change the implementation of IVDR, the new regulatory framework in Europe, to a more phased approach. This means that still need to update our quality systems and our processes and update our technical files for some of our products with lower risk class. However, this new rollout scheme means that we can continue to sell our products with a current CE marking until 2022. And this means that's work for us in the coming year, and that's very welcome since we have -- we're very, very busy with our other strategic activities. Also, during the quarter, we established a local presence in the Middle East and Africa, with sales manager based in UAE and Kenya. This is a slightly longer-term venue, but are already seeing new business opportunities in these regions. All in all, I would say it's a great performance of our organization. So let's look ahead what we have around the corner in terms of priorities. So our direction remains and the coming key priorities are, we want to convert the large order book we have now in Q4 to revenue. We need to continue to manage the global supply chain situation. We will continue to progress with the IVDR readiness, but now based on this revised schedule. And of course, a lot of activities is related to the industrialization of our new platform. And now it also includes full speed ahead on development of our cloud solution that I will talk more about later in this call. And we will continue to strengthen Boule based on the updated strategies that I will brief you on in the second part of this presentation. So a little market outlook. We see positive trends across all our product lines and all our geographies, even if recovery slowed down due to the continued spread of COVID and related restrictions. For us, it mainly is mainly Southeast Asia, where we see an effect of that. But COVID is there and the pandemic will continue. I think there's some 6 million people with COVID currently, which is almost double what it was compared to a year ago. However, we see that societies are opening up thanks to the vaccines. But we have seen a good order intake during several quarters, and we have a large order book. Of course, we will continue to face challenges with our supply chain and transport. But as I said, our staff has managed the situation very well. So with continued focus and hard work, I think we will manage well going forward. Also to note is that with reduced restrictions, cash sales will increase and our installed base will generate increased sales of high-margin consumables. So let's shift topic and look at Boule today and see how we will develop the company longer term. So Boule is a global niche player that provides near-patient hematology diagnostics or blood testing that allows physicians to directly consult the patients without the need to wait for central laboratory test results. We have a large installed base of some 29,000 Boule instruments, which is a key driver for our strong and recurring aftermarket sales. And also in October, we celebrated Boule Diagnostics' 25th anniversary. And that was when Boule was created and it became this focused hematology company. However, our history goes back to 1956 when the founder of Swelab Instruments, Erik Öhlin, developed Europe's first Boule cell counter. Swelab and Medonic was 2 companies that we acquired soon after the creation of Boule. So we have a solid foundation on -- with a large installed base. We're present in more than 100 countries. We have strong loyal partners that be with us for many years. And we have a growing business, both with our partners, but also our OEM sales. So we have a great history. We have strong power brands, and we have a solid plan for the future, which I now would like to discuss here with you. But first, let's look at the market that we address. So we are present in 2 attractive markets, both in the human and veterinary hematology market. The human market or decentralized near patient diagnosis has a total market value of approximately USD 650 million and is expected to grow approximately 5% per year. And the growth drivers are the usual macro factors, there's an aging population globally and an increased annual living, in particular, in emerging economies. So the demand for health care will increase and also the demand for diagnostics. And the type of diagnostics that we have are very cost effective and gives a lot of information that can help physicians monitor and select treatment for patients. Also, digitization and new technology will create new opportunities to create efficiency, which is also in turn lead to increased test volumes. If you look at the veterinary market, which is about 10% of our current business, and if you look at our market when it includes both hematology and clinical chemistry, it's almost as large our human market. The vet market is growing rapidly as many people have acquired companion animals during the pandemic. But also access to insurance for companion animals provides an increasing demand of veterinary service and testing. Today, Boule have a global market share of around 8% based on external market reports. And in defined niches and in select geography, we are the market leader. So let us look now how we will continue to capture market share and grow the company into the future. So the strategy that will take us from where we are today into the future is built on a few key elements. So I, all the staff at Boule and all our partners, are motivated by a common purpose. And that is to provide versatile, high-quality, near-patient diagnostic solutions for everyone, everywhere. To use a business model where we use partners for marketing sales and service, we have a large installed base of instruments that use consumables that generate steady and growing recurring revenue. We have strong product brands that give us access to several market segments via parallel sales channels in many of the markets that we are present. We have also formulated aspirations that will help us set and deliver on our ambitious targets. And those are -- is that we have the market's most satisfied customers. We are a highly valued employer that retain and attract the best talent in the market. And we want to grow the 130 million tests done on Boule solutions today to 0.5 billion tests sometime in the future. Our company culture is built on 6 core values that help us guide us in our daily work. And to capture the potential we have in the market, we have formulated 3 strategic pillars to ensure profitable growth. And in short they are, value creation for our end users and distributors. We work closely with our distributors and focus our development on value-added services. Our product development and our innovation efforts focus on ease of use and reliability. We will also invest in sustainable product and service development in the years to come. We are determined to develop a relevant and competitive product portfolio based on Boule's proprietary technology. And sales will increasingly come from solutions newer than 5 years. And then we want to make a difference, and we want to deliver our high-quality test to more people around the world. So we have -- one of our pillars is to increase the number of tests performed with our solutions. So based on this strategy, I want to share what we are working on here and now. And so you can see that this is not something that's going on in the future, it's going on right now. So let's go to the next slide. So we have since many years built local presence to ensure that we work closely with our sales partners and really understand the market dynamics, the end user need and the business culture in the 100 countries that we operate in. And we have sales offices in many of the markets around the globe. In the last quarter, we have increased our footprint and activities in 3 geographies. So Russia is one of the markets where we have a significant potential. And a few years ago, we established a sales company in order to get closer to the market and distributors. And during the quarter, our factory was completed and the first customer deliveries of consumables were shipped from our new production facility to customers in Russia. And we also added a key account manager to promote Russia domestic consumables. And we attended a major IVD Congress in Russia, just now in the beginning of October. And it was really good to see that the start of our production and our first customer delivery is really recognized by the market. So I'm very optimistic, and I'm very pleased with the progress we made in Russia lately. And also, we took the first steps to establish local presence in the Middle East and Africa, with sales manager based in UAE and Kenya. And those are 2 interesting markets for the future, where we will see growth in the segments that we are addressing. And it's a long-term venture, but I think we can already see now that the business opportunities are delivering -- also are converting to sales for us shorter term. So very pleased with the progress we made here to get closer to our users and distributors during this quarter. And in addition to selling the instruments and the consumables, we have unique expertise in the company. And we can generate and are generating more value to our partners and customers, and this will help us drive sales. So we have continued to build our capabilities in Boule Academy by dedicating more resources to produce technical training as well as supporting our distributors and end users with products, clinical and sales training. We have held several successful webinars in the last quarter. And just today, we have a seminar on applied hematology by one of our biomedical analytic experts to our sales partners. And I think there's some 60 people right now listening to that webinar. So there's a lot of things going on. And really, we are transforming the company from just focusing on product and more deliver on solutions and really add value in many ways to our partners. And the Boule Academy is one of the cornerstones in those efforts. So let's move to the next growth pillar. And which is that we are determined to continue to invest to -- into our product portfolio to have a relevant portfolio for our market segment that is built on our own proprietary technology. And the investment that we're now doing in the new platform will enable our entire product portfolio to be upgraded over the next 3 to 5 years. And we will leverage the platform and -- to broaden our portfolio. And as you know, and we have talked about earlier, is that the first phase is the 5-part instruments. But also an integrated part of our new product platform is a cloud solution. And initially, we will offer cloud services that are used in service and maintenance. But thereafter, new functionality will be added over time. And through connected services and training in the Boule Academy, we will increase the customer value and create differentiated solutions. And we are very focused now in hematology and fighting infectious diseases is really what this is about. But we also have the opportunity longer term to expand into nearby diagnostics, where we have a lot of synergies in the markets through our sales channels. In the third quarter, we delivered 2 major milestones. We completed a proof of concept for a new cloud solution, and we now have a team of developer realizing our first cloud solution release planned for end of next year. And of course, in addition, we are making good progress with our instruments and consumables development. And we are heading into the industrialization, verification and clinical validation of our new products. So very pleased with the progress the team is making. And we are really delivering on bringing new products and solutions to market. I then move on to the third pillar. As I talked about, the decentralized blood diagnosis is an effective tool for screening during health checkups but it's also very valuable to diagnose and monitor a wide range of diseases. And our long-term ambition is to continue to broaden our offering with new products and related service in order to deliver a high-quality test to more people around the world. We set an aspiration to long-term perform 0.5 billion tests annually from the 130 million tests we're doing today. And to deliver more tests and enhance consumables, we will continue our expansion in emerging markets. We will target segments of the market with high test volumes. And we will continue to expand our OEM business where we sell consumables to other IVD companies. And through these efforts, we contribute to improved health and well-being, reduce -- we're seeing rapid test results that can prove the efficiency of care, which also benefits the patients. So a few milestones in the third quarter is that consumable sales grew by 12%. Our OEM business is up 44%. We started up several new distributors where we signed the distribution agreements in EMEA in the spring, and we have 3 new area sales manager that is now reaching out to the customer. So we also say that our order book is filling up and that our consumables sales is coming back to levels equivalent to the levels we had before the pandemic started. So to summarize, short term, we have a large order book that we will convert to revenue. Midterm, we have a high level of activity that will grow our business and make good -- will make good progress with the first release of our new platform, and we'll see the first releases coming out end of next year. And we are really executing our updated strategy. So we look forward with confidence to the end of 2021 and the years to come. And with that, I would like to thank you for your attention and open up for questions.

Anyone that wants to start?

I can start. This is Jakob at ABG. Yes, so a question just on the market development in the quarter, can you say anything about how the sort of testing volumes or the demand for consumables have developed during the quarter if you perhaps exited the quarter at a higher level than going into the quarter?

Yes, I would say so. As you can see, I mean, I think it's -- if you look at our rolling 12 months consumable sales, you can see that we have turned the corner 2 quarters ago, and we are seeing increase in consumable sales. So -- and we also see that we have -- as you saw that we have a larger portion of consumables in our revenue this quarter and also in our order book going forward.

And the quarter so, I mean, continued strong sales from the OEM business. Maybe you could just give some more flavor on the underlying dynamics driving that.

So I think the -- we see a lot of opportunities in our OEM business. And what we see revenue from is really mainly from 1 customer, and that is related to the agreement that we signed last summer, like a year ago, where we provide consumables to a new product family that they are now launching worldwide. So we see a positive momentum from all our current customers. And I think we also have a pipeline of new projects. Of course, several of these new opportunities will take several years before they show up in our revenue. But it's a very positive development.

Okay. And just lastly, on the new product platform. When could we essentially see some more public marketing opportunities there? Or you're talking about it more publicly?

Well, as we've said, I mean, we are -- we plan to launch that towards the end of next year. So that's the time when we will be more specific on what we're doing. But yes, that's what we're working on. But I think we are investing and we're making good progress and we're taking the milestones. So towards the end of next year, you will hear more. Who wants to go next? Are there any more questions? Björn, who is raising his hand.

First of all, the challenges regarding the sales in third quarter. Could that be quantified in any way how much that affected negatively?

Yes. No, I think it's very difficult to say exactly. But we pushed some orders out from the third quarter to the fourth quarter. But you can see that we and the market in general have longer lead times. So I think what we see is also that the customers are more getting accustomed to longer lead times. So it's very difficult to quantify. But it's clear that if we had had higher production capacity, we could deliver more, and we could also generate more orders. So really now the limitations are more on the transport and logistics and supply chain challenges.

Yes. And the actual follow-up on that is, how do you think that will affect the fourth quarter? I mean, some of these challenges still remains, I suppose. So I mean it could be seen in 2 ways. I mean, too low sales in third quarter would affect the fourth quarter positively. Or these challenges remain, and we will also see sort of a low Q4.

Well, as I said, we have a very good order book, and it's a large order book going into Q4 than we had going into the third quarter. I think it's very difficult to answer that question because what's happening now with the supply chain disturbances is that you don't really know. I mean, you discovered 1 week to the -- from 1 day to the next day that suddenly, some deliveries is not coming and it could be delayed. So it's -- you have to constantly kind of live with this unexpected. So it's not working like normal. So it's very difficult to quantify. So clearly, there are some risks in terms of getting all the supplies that we need. I mean -- but I -- Well, I'll end a little bit to how we have managed during the second and third quarter that we have gone through many of these challenges, and we have managed to work around these things. But it's -- yes, it's hard work and it's new challenges every day. But the teams need to take all those challenges and we have managed very well so far.

And then another thing sort of slightly related to that is, I try to get my head around this, I mean you state that you have a solid sort of backlog. But still, the accounts receivables are the lowest levels in 10 years on an individual quarter. So could that be explained in any way?

Yes. So I think it's -- since we have seen, we use EKN, the Exportkreditnämnden, to help finance sales to -- in particular to the Asian countries and emerging economies. And we had pretty large sales. So when we use that, the -- we receive like a significant part of the revenue immediately. So that is really what you see.

Yes, but it's a big change. I mean, we haven't seen these low levels in 10 years. So it's something that...

Yes. I think -- I mean, I think maybe Christina, maybe you could comment on that. So I'll use Christina here.

Yes. Hi, everyone. No, I think that, as you know, we have been focusing on working capital, of course, during this period as well. So most likely, that is also what is giving effect that we actually have collected -- being very good in collecting the accounts receivables as well.

I would have expected some late invoicing visible in that figure, but perhaps not. We can move on to my last question, it's regarding the gross margin. There are obviously some challenges and so on. But it's not really that visible in the actual numbers. I mean, it's a pretty good gross margin despite all the challenges. So should that be viewed as an indication of underlying gross margin being -- I mean, will come up when things normalize, if they normalize?

Well, I think we can be sure that if things will normalize, the question is when. And yes, I think we are -- if we wouldn't have the challenge that we had and additional costs, we would see a gross margin increase. So everything is pointing in the right direction. We just have to get rid of this pandemic. Who wants to go next? Please raise your hand and speak up. Okay. It seems that there's no more questions. Then I would like to thank you very much for the attention and for staying, being here with us today. And I wish you have a great day. Take care. Bye-bye.