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

Good morning, and welcome, and thank you for joining us today. My name is Jesper Söderqvist, and I'm the CEO of Boule Diagnostics. And with me here today at our headquarters in Stockholm, I have our CFO, Christina Rubenhag. And today, we have the pleasure to present our results for the fourth quarter of 2021. Before we jump into our great achievement in this quarter, I would like to make a short introduction to Boule for anyone that is new to us. Boule is a global niche play that provides solutions for decentralized blood testing that allow physicians to inform and make treatment decisions without the need to wait for central laboratory test results. Lab diagnostics, in general, is an essential tool to discover diseases, monitor treatments and also a screening tool in health checkups. We sell instruments and consumables used for both human and veterinary diagnostics in over 100 countries that we serve through a strong and loyal distributor network. In addition, we sell white label consumables to other hematology manufacturers that we refer to as our OEM business. We have built strong brands offering user-friendly and reliable systems. We use a multi-brand product strategy with products using the same technology platform. This means that we have parallel sales channels in many markets. A value driver for Boule is the attractive business model where we place instruments that thereafter generates sales of high-margin consumables for many years. Thanks to our large installed base of close to 29,000 instruments and our OEM business, more than 60% of our sales are recurring revenue during a normal year. In the beginning of the pandemic in 2020, we experienced a big drop in testing due to restrictions. But last year, we have seen a gradual recovery in all markets, thanks to increased vaccination rates. Thanks to vaccines, eased restrictions and also hard work from our side, we ended last year with an all-time high sales record. So I thought we'll start to look at how our sales has developed before and during the pandemic. For the fourth consecutive quarter, we see the rolling 12 months revenue growth for both instruments and consumables, which is a clear sign of recovery in the market. Total revenue this quarter was all-time high, SEK 140 million. So very important is that the consumables sales is now above the prepandemic levels. Sales are up 47% versus last year and also 23% versus the previous quarter. In the fourth quarter, we also shipped a record number of instrument and we continue to report strong sales in the U.S., driven by our OEM business, all this during a period with a lot of disturbances in the supply chain that unfortunately impact our profitability. Despite the many challenges with supplies and logistics, we have continued to progress with our strategic development projects, and I will come back to that later in this presentation. So let us have a look at our financial results. I must say, I'm very pleased that we have delivered a record quarter for sales, and we have increased our profitability significantly. Sales landed at SEK 140 million, which is 51% more than the same period last year, and it's also up 25% compared to the third quarter last year. The all-time high revenues, SEK 9 million or 7% above our best previous quarter, which was the third quarter of 2019. Gross margin was 41%, impacted by extra costs related to supply chain disturbances and an unfavorable region mix. We generated an EBIT margin of 9.9% and an operating cash flow of SEK 11.8 million. The development of our new product platform has continued with full speed, and we have invested SEK 50 million in this quarter. I am both grateful and proud how my colleagues and our partners have managed the supply chain and the sales channels during the last year in a very turbulent market environment. And I think the outcome in the end is a fantastic result. And in a more normal market, we will deliver higher profits. So let us look at how the drivers for our sales growth look like. For the first time since the pandemic hit us, we delivered growth for all product lines and all regions in the same quarter. Growth in the U.S. was driven by the OEM business that continued to develop very positively and grow by full 110% compared to 2020. The biggest contribution to this growth are the ramp-up of sales and production of the products related to the 10-year supply agreement we signed in third quarter 2020. Instrument growth are mainly driven by more sales to India, whereas other parts of Asia is still much affected by the pandemic with restrictions and lower vaccination rates. Overall, we saw strong growth of consumables in all regions, and in particular, growth in Eastern Europe was helped by our new production site in Russia. The increased activity with our new sales organization in the Middle East and Africa also started to show results. So all in all, we grew sales by SEK 48 million, equivalent to 51% growth compared to the same period last year. So let's now turn to the next slide and look at our profitability. Operating profit was SEK 13.8 million, corresponding to a margin of 9.9%. Last year, we did a write-down of some technology assets. Without this write-down, the EBIT was negative SEK 1.6 million in 2020. So we delivered an EBIT improvement greater than SEK 50 million in this quarter. And as I already mentioned, during the quarter, the shortages of electronic and other components has created significant challenges for our development products and our production negatively impacting both sales expenses and projects -- progress in projects. To maintain production in this volatile market has required a lot of attention, extra work related to redesigns, and we have to pay more, in particular, for electronic components and transports. So in total, we have taken approximately SEK 6 million in extra costs to mitigate these issues during the quarter. Also, the product means with higher portion of instruments in India and more OEM sales with slightly lower gross margin is also putting pressure on our gross margin. Operating expenses have increased due to supply chain mitigations but we have also increased our marketing activities. We have started to travel, and we also participated in a large stage of America in November, and we have continued to strengthen our organization. So let's have a look at what's the result in terms of cash flow. So operating cash flow was SEK 11.8 million, and SEK 15 million was invested in our new product platform during the quarter. So the total cash flow was SEK 1.6 million despite the investments in the large sales growth towards the end of the year. We continue to maintain a strong liquidity position with SEK 89 million available at our -- at the year-end. So let's zoom out and look at our other accomplishments. So how have we delivered to the plans that we set out to do in Q4? So we entered the fourth quarter with large order book, and we managed to convert a major part of that order book to revenue, not all. Our sales were limited by suppliers, and we take some of the orders with us into this year. But I must say that overall, I think we have managed the challenge in the supply chain very well. This is something that will continue. And I think the situation will prevail also during the coming year. In the quarter, we also passed a major milestone for our implementation of the new European regulatory framework, IVDR. We had an audit in November that we passed without any observations. And that was a very welcome and well-deserved recognition for the work organization to adapt the IVDR during a long period of time. And of course, very important, the progress with our new product platform progressed very well. And I'm particularly very happy with how our connectivity solution has developed lately. But we have seen some delays in prototype deliveries, which is affecting our overall time schedule for the instruments that is shifted from, like late this year to early 2023 as a slight delay. But the good news is that we will do a first release of our connectivity solutions to select customers that will use it to service our current installed base. And then we have continued strength in Boule -- on our updated strategy, and that's of course in terms of tools, it's about improving processes, and we also have hired new talent to the organization. So overall, I think a very good quarter for us with also very good financial result. Since we closed the year, I think it's appropriate to also take a look at the full year highlights. And during the year, we have seen a gradual recovery of demand with greater uptake towards the end of the year. Our total sales for the year was SEK 463 million, which is a growth of 16% versus the previous year. And in constant currency, that is 21% growth. The gross margin of 42.9% and EBIT of 7.8% for the full year is below our potential. But given the many challenges with suppliers and logistics, I think the organization has done very well. A few very important milestones during the year is that we have updated our strategy. We have expanded our commercial organization, in particular, in the Middle East, Africa and Russia. We started local production of consumables in Russia. We have also ramped up our production of new products to one of our OEM clients successfully. And as I mentioned, we have made good progress with the IVDR implementation, where IVDR will be mandatory in the European market from May this year. And we have also increased our focus on innovation. We have made progress by new platform, which now includes connectivity, instruments and consumables. And in total, we have invested SEK 53 million in that program this year. The Board is also happy with our performance, and we'll propose a dividend of SEK 0.55 to the AGM in May, which is the same level as last year. So to summarize and look ahead into 2022, you do a bit of a market outlook. So what we see for the U.S. market is that we see strong performance and we have a positive outlook, in particular, for our OEM business. In Asia, we have seen that India is starting to recover, whereas other parts of Southeast Asia is still waiting for eased restrictions. And as those markets open up, we expect to see increased testing that will drive our consumables sales further, and will also increase instrument sales. Also in Eastern Europe, we have a very positive momentum, particularly thanks to our start of a local production in Russia. However, as we all know, there are some political risks with the political situation in Russia, and we'll see how that plays out for us. In the Middle East and Africa, it's looking very positive. And last week, we participated in a big trade show in Dubai, where we met many of our loyal distributors from those regions. But we also met a number of new distributors that really want to take on our products and open up new markets. So I think we can see continued good growth in that region. So very, very positive outlook, very good. However, globally, we have this continued disturbance in the supply chains that we have to live with and overcome. We expect that it will limit our sales in the beginning of the year and maybe also implying higher cost. But we expect that things will be more normalized in the later part of this year. So our plans for the coming year remains intact. And the key priorities going into this year is, of course, to take a strong order book and convert that to revenue, which is very much limited by how much products we can supply given what supply we can get from our suppliers. We're also working with price adjustments according to agreements to increase our prices to compensate for the higher operating costs that we see. We did some price adjustments now in January, and we will continue to implement price adjustments in all regions during the year as much as the agreements allow. As I mentioned that we'll have -- we'll continue to work with the supply chain situation. Some of that work will be unexpected given the situation. But we also have some plans to increase our production capacity, in particular in the U.S. site to serve our -- the demand from our OEM clients. And then, of course, very importantly, is that the new regulatory framework in Europe, IVDR, is coming into effect in May. And what's ahead for us now is to update the technical file to some lower risk products that are RC self-certified where there's new requirements with IVDR. So that's an intense work, ongoing, the coming months. And then, of course, the most important and I think the most inspiring is that we are working towards a launch of our new product platform. Starting with the connectivity launch of this year. And the first instrument and advanced 5-part instruments, the development will be ready in early 2023. And we will continue to strengthen Boule based on our updated strategy. We want to leverage our local presence. And also, we are increasing activity in Boule Academy where we train our distributors and also end users. And that has been very well received by our distributors. And I had very good conversations with many of our distributors in Dubai just last week about those efforts that we're doing. So to summarize, we continue to see a market recovery. We are executing on our strategy. We are increasing value for our distributors and also our users. We are investing in our product development to renew our entire product portfolio in the coming 2 to 5 years. And we're growing the number of tests done with Boule solutions by entering new market segments and new geographies. We will see some challenges in the supply chain in the coming year. But overall, I must say, we are very, very happy with the results that we take with us last year and now we enter this year with a strong order book. So we are very, very positive about the outlook for this coming year. So with that, I would thank you for your attention and open up for questions. Thank you very much.

So Jakob, do you want to start?

Yes, sure. First of all, congrats on a very strong quarter. I was a bit late here into the presentation. So I'm sorry if I'm asking something you have covered. But if we start with the price increases, is this sort of a reflection of you expecting these higher costs to be, let's say, withstanding over the full next year?

To -- yes. I think to some extent, some of this -- of the additional costs are related -- are temporary related to this specific situation right now. But we do expect that material cost, in particular, electronic components, will have a permanent price increase, which will affect our standard cost for our products.

And eventually then, should you be able to get gross margins back up towards more the 45%, 46% level?

That is our aim and that's what we're working towards. And then, of course, I think the situation we are in right now is unpredictable. And I think that's kind of the core issue here. So -- but we're working towards that, at least as a first step.

Okay. And then on the OEM and CDS sales, which, in my opinion, was very strong here in the quarter. Is this sort of a sustainable level you can continue on? Or is there any one-off here?

I see no one-off. It's a sustainable level with a very positive outlook for future -- for further growth.

Okay. And as well, the -- your expansion strategy into Middle East and Africa delivered quite strong results here. Is this also something we can sort of expect to continue going forward?

Yes. I mean, I see very positive signals. And I said, we were in Dubai just last week and we have many of our distributors from that region. And I think there's a lot of opportunities in that region. And then it's a bit difficult to predict how much of that potential can be materialized in near term. But at least longer term, we expect to see Middle East and Africa contributing to our overall revenue.

Okay. And then my final question, just on the cash flow and investments, quite high investment level in the quarter and I know this is you investing for your new line of products. But how should we think about the sort of capital expenditure going forward when you are approaching launch and maybe also after you have launched a new product line?

So I mean, I think what we have ahead of us is now that we also in the next year until launch, we are investing in the product development, but also in production equipment and new tooling and all of that. So this level will remain until launch, and then we will adjust it down slightly depending on how fast we plan to bring other products to market based on this platform. Any more questions? No more questions?

I can take another question if...

Yes. You're welcome.

Yes. Just thinking about your installed base, I saw you've done some efforts to sort of audit and get a better understanding of how it's done -- how it's looking. But how should we think about you entering a potential replacement cycle in the installed base now when there's quite a lot of instruments that were delivered, let's say, 7, 8 years ago? Is this an opportunity for you to drive sort of easy sales of new instruments going forward?

I think you can say that we -- apart from the new geographies and new market segments we enter, we're already in the replacement cycle. So I think that is -- I would say it as a kind of quite stable business going forward. And since we know we have a growing installed base, I think it's -- the new sales should really compensate instruments that is taken out of service. And I think you can see that. If you look at Boule a bit longer term, our consumable sales has grown year by year. And I think this pandemic was just a bump in the road. So -- and now we see that we're also getting beyond that bump, and we delivered a record quarter. So I think it's stable going forward.

And do you expect the new product line to sort of benefit to this end towards sort of existing Boule customers or users?

No, I didn't quite get the question. What was the question?

No, do you expect that sort of the existing users of Boule instruments will be eager to upgrade to your new product line?

Yes, I would say. So if you -- first, I mean, the first release will be a 5-part instrument. And clearly, that is a market that is growing faster than the 3-part market, where we have the majority of our sales. Some of our customers are waiting to switch from 3 part to 5 parts. So those are easy sales in the beginning for us. But we -- the new platform will also address new market segments. And I think part of our installed base is we will also wait for -- that we also release a 3-part version of this new platform later. So overall, I think we have a plan to convert all our loyal customers and we know that we have -- both -- our distributors are scoring us very high as a high-quality provider, but also we have a very good brand in the market. So I think there are many -- our views are looking forward for us to bring new products to market and we'll then convert to new instruments from both. No further questions? Well, thank you very much then. Thanks for taking time to listen to us and have a great day. We are very happy here at Boule about our achievements, and we look forward to meet you at another point in time. Have a great day. Take care. Bye-bye.