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

So good afternoon, and thank you for joining us today. Today, we have the pleasure to present the results for the first quarter of 2022. My name is Jesper Söderqvist, and I'm the CEO of Boule Diagnostics. And with me here today, I have our new CEO -- CFO, Annette Colin, and she will assist me during this call. And I think it was a great opportunity for you to meet Annette, and you will hear more from her in the future.

Thanks a lot to you.

Thank you. So during this presentation, you're welcome to ask questions. [Operator Instructions] So if you look at Boule's first quarter of this year, the highlights are that we again delivered a record quarter. This was an all-time high for the first quarter and the second best quarter in terms of revenue in Boule's history. We also see that the demand for testing for both instruments and consumables are back at the prepandemic levels. The growth was mainly driven by India, but also a good development of our OEM business, and we actually recorded double-digit growth for all our product lines. However, a range of external factors have impacted our operations. The supply chain situation has been difficult. And we also -- it also limited the production and sales in this quarter, and it has also impacted our profitability, and I'll come back to that. But as always, our priority is on our customers, and we have done our best to continue to deliver and provide a good service to our customers. And I must say that we have also seen that the market has opened up, and we are starting to meet customers again. In January, we participated in a bigger conference, Medlab Middle East in Dubai, and it was really good to see that come out and meet customers. We met old loyal distributors, but we also met many new potential distributors that are attracted to Boule as we now are driving growth in the Middle East and Africa region. And not only have we participated in bigger trade shows but we've also seen that our distributors are also attending local trade shows, sometimes by themselves, but also sometimes with Boule staff joining. And the image there, on the right-hand side, is from Vidarbha that hosted a pathologist conference, and this is a progressive region in Central India. So it's really great to see that the energy is coming back to the organization that we now are able to go out and travel and meet customers in a way that we have not really been able to do in the past 2 years. It's very good, and it's great energy in the organization, and I think it will also help grow the business going forward. So let's then look at our financials for this quarter. So net sales was SEK 133 million. It is actually just above the best quarter pre pandemic, and it's the second best quarter after the historic quarter in Q4 last year. Gross profits generated was SEK 57 million, which is equivalent to a margin of 43%. But this was burdened by extra costs related to the supply chain disturbances and also an unfavorable region mix as India and OEM are not our highest margin product. We are 1.5 percentage points below Q1 in 2021. But overall, I would say that this is still a good result. If you look at bottom line, we end up at 7.8%, which is 1 percentage point above last year. And if you look at our spend, we have continued at full speed with our new platform development. We have invested SEK 18 million in this quarter. In the end, I think this is a great result. And that, in a more normal market, with less disturbance to other factors, we will deliver higher profits. So if you look -- zoom out and look how sales has developed during the last few years, so here in this graph, you can see instrument sales per quarter, but also the graphs are rolling 12 revenue for instruments and consumables. You can see here that for 5 consecutive quarters, we have seen that the rolling 12-month average have increased, and we're really now back at the sales at the pre-pandemic levels. And this recovery is mainly driven due to the eased restrictions across the world. But I also would like to point out that not all markets have removed all restrictions, in particular, some markets, bigger markets in Southeast Asia is still experiencing restrictions. So from this point of view, we can expect further growth later in the year as the pandemic eases. So if you look at the revenue development from the product line view, we saw double-digit growth for all our product lines. And the strongest growth is consumable sales to other manufacturers, which we refer to as our OEM business. If we take the OEM business and include also the CDS brands, the sales almost doubled versus last year. Instruments are up by 20% and that was mainly sales to India. But very importantly is that consumable growth continued to be strong, and we hit the 29% increase in this quarter. So if you look at how the business has developed from, in the various regions, we can see that the growth is related basically to 2 regions, the U.S. and Asia. And in U.S., it's the OEM business that drive growth. In Asia, it's mainly India that drives the business. But we have also seen good growth in companies like Pakistan and Kazakhstan. And overall, there are still some countries which have much higher potential in Asia going forward. Eastern Europe, we also saw growth. And the growth was driven mainly by Bulgaria, but also good sales to Ukraine and Russia in the beginning of the quarter before the war started. In general, you can say that Africa and Middle East is a region that has developed very well for us in the last year, and we are investing there. If you now look at what the overall performance and look at the EBIT, we can see that our operating margin of SEK 10 million, equivalent to 7.8%, was a 1 percentage point improvement versus last year. The main improvement was the volume effect, but we also saw that the gross margin pressured the overall profitability. In total, just the increased purchasing costs for components burdened the gross margin with SEK 5 million. And we are now working and started already working last year with increasing prices to customers. And as you can see, the price increases implemented so far has partly compensated these higher costs. The higher OpEx that we have is related to both that we have additional costs to mitigate these supply chain issues. And this is kind of like a redesign of electronic boards to change to available components but also that we have started to participate in exhibitions and travel and have an overall higher activity when it comes to marketing and sales. And we have also done other hires to strengthen the organization, overall. If you look at the cash flow, it was weaker than normal. The operating cash flow was SEK 15 million, that was offset by our working capital increased, due both to larger sales volumes and also that several shipments was done late in the quarter. But we've also increased the inventory levels and much of that is related to -- that we want to make sure that we can secure future deliveries. And we have continued to, at full speed, with our product development and continued to invest in the new product platform development. At the end of the quarter, we had an available liquidity position of SEK 67 million. After the quarter, in April, we took a new bank loan of SEK 35 million to ensure that we can maintain high level of investments and high speed for our product development. So overall, I think we are well prepared from a financial point of view to deliver on our activities during 2022. So let's do a little bit outlook and look at the market situation going forward. We entered the second quarter with a stronger order book than normal. We are now delivering on that. However, we see that we see continued issues with the supply chain and logistics. There are component shortages, and there are lack of components, and we see increased prices. I think the biggest risk right now is that we see recurring lockdowns in China, in particular, in Shanghai, and we do have some suppliers in that region that we are depending on. If you look how demand will develop in the various regions, we continue to see that the OEM business is performing in the U.S. That will be our growth driver there. India looks very promising, and we see that many other Southeast Asian countries will ease the restrictions and that should generate increased testing and increased revenue for us. When it comes to Eastern Europe, we were all shocked by the Russian war in Ukraine. It's a terrible and tragic situation in Ukraine, and our thoughts are with all those people that are impacted. As all companies do, we follow all sanctions. But as health care products are not in the sanction list, we will, for humanitarian reasons, try to deliver product also to the people in Russia, if possible. We have implemented routines to make sure that for every future shipments, no products nor customers are on the [indiscernible] sanction list, and we will monitor development and are ready to act whatever it will be required. For Middle East and Africa, I think we have a positive outlook. We added sales directors there last week, and we see now that our new opportunity is coming, thanks to this local presence. And we have already signed up a number of new distributors and we see that we will get orders from this region going forward. So overall, the strategic direction that we've been on for some time remains intact, and we continue to invest in the future. If we look at the key priorities for 2022, it's right now coming very soon now in May. It is the implementation of the new European regulatory frame with IBDR that comes in effect in end of May. There's a lot of activities ongoing there right now, and we spend a lot of resources on that right now. We will, of course, need to carefully monitor and mitigate the supply chain. I mean there are a number of things that we are doing, trying to increase our preparedness to deliver higher volumes going forward. But I would say that it's not only about mitigating the supply chain issues, but also preparing to our normal production in consumables, in particular U.S., to be able to deliver higher volumes of OEM products going forward. And we are working with price adjustments to offset some of these higher operating costs that we see. We implemented a number of price adjustments end of last year but also in the beginning of the year, and we'll continue to do so going forward this year. Of course, one of the more really strategic, more important and very exciting project is the development of our new product platform. And the industrialization and launch preparations are ongoing. As part of this new platform, we'll also -- we'll have a cloud functionality, and we will deliver the first release of this cloud with some service functionality to the current installed base at the end of this year. And then, of course, very important that we are planning to grow sales by leveraging increased local presence in various regions, but very important, of course, in Middle East and Africa. And another important activity that we're doing is to increase our activities in Boule Academy, where we can train our distributors and we train end-customers. And it's a way for us to deliver value to our distributors and all our partners and also to make sure that we stay top of mind of them when it comes to our products. So in summary, I must say that I'm very proud of the organization, how we managed the difficulties that we've seen in the past 2 years during the pandemic and also the aftermath here related to supply chain disturbances. I must say that we can really look ahead with confident despite a range of external challenges. I think we have shown that we can manage this difficult situation, even very unexpected things that happens in this volatile market. And we have now delivered 2 record quarters, last quarter last year and this quarter are the 2 best quarters in Boule history. And also we see now with the restrictions that we start to see that increased testing, which for us means that we get a stable recurring revenue from a large installed base. However, we see that there's geopolitical instability and that creates some short-term uncertainties going forward. But a little bit longer term, we see that Boule has grown faster than the market, and we expect that we can continue to grow faster than market. The market will grow by 3% to 8% per year. And with a modernized product portfolio, we will address and penetrate the byproduct market more than we can with our current portfolio, and that is the market that is growing faster. So longer term, I'm very optimistic about the path and the journey we're on. So with those words, I would like to thank you for your attention, and I will open up for questions. Thank you.

Yes, Jakob Lembke, please go ahead.

I'll start with a question on the gross margin where you in the report mentioned the continued negative mix effects from high sales to Asia and India, in particular, I think. I'm just wondering if you expect this to -- just to normalize going forward or what the timing will be?

Okay. Sorry, we could not hear you. So I'm sorry about that. That probably means that if anyone tried to ask questions during the presentation, I would not -- wasn't able to hear it. I'm sorry about that. But Jakob, please repeat your questions so we can hear it as well.

Can you hear me now?

We can hear you now loud and clear.

Okay. Great. No, so my first question was on the gross margin that you mentioned, the continued negative mix effect from more sales to Asia and I think instruments to India, in particular. I was wondering sort of the timing of when you expect this to normalize going forward? And if you expect it to normalize even since you have had this for a couple of quarters now?

I think it's difficult to put an exact time. But what we see here that the consumables sales has developed positively during the last 5 quarters. So -- and then, of course, the mix between instruments and consumables is a bit hard to predict. But going forward, we expect that consumable sales will continue to grow. And then, of course, the question is how fast will consumer sales grow versus new instruments? Short term, of course, it's a large mix of instruments burdened the gross margin, but a little bit longer term, once those instruments are installed, they will generate higher sales of high-margin reagents. So I think it's not a bad thing to have a lot of instruments because that could generate future growth.

Okay. Understood. And a second question on the gross margin. It sounded like the situation with the access to components and so on became worse towards the end of the quarter. Does that mean that maybe we should expect sort of a headwind in the same magnitude as you had in Q1 and Q2 or even maybe a bigger headwind in Q2?

Well, I think we have lived with this risk for component shortages during the last 15 to 18 months. And I think we have managed quite well. It's very hard to say to what magnitude that will hit us going forward. But I would say that same level or hopefully improving towards later in the year. But that's very, very difficult to say where we will end.

Okay. Understood. And then on the Ukraine and sort of Russia situation, can you say anything how this has developed now more into April when the -- yes, when the war has been ongoing for some while? And if you maybe can say if you have any sales at all in the region?

We do have some sales in the region. And -- but clearly, right now, there are -- it's at a lower level than it was in the beginning of this quarter, and it remains to be seen what will happen. Christian?

Can you hear me?

I can hear you, loud and clear. Thank you.

Okay. Yes. Great I have a couple of questions, please. I would like to understand the order intake during the first quarter that seemed to be on a higher level than normal. And how much of the order intake that is related to India?

Well, we never give outlooks on that detail level. We don't comment the order intake in general and particularly not on the market-by-market level. So I'll -- I pass that question.

Okay. Fair enough. And also wondering, you mentioned that you had good sales in Ukraine and Russia before the war. Could you please comment if the sales was related to instruments or consumables?

I don't have the exact mix here, but what we saw was good development of consumable sales.

Great. I was also wondering if you could comment on the investment level of SEK 18 million in the new platform? If you will keep this level going forward during the remainder of this year?

Yes, we will be roughly at this level during the remainder of this year. As you know, we are now entering a phase where we start to do clinical testing, and we're also preparing production, buying production equipment, building pilot series, et cetera. So it is slightly higher investment level than it has been in the past.

Okay. And my final question, please. If you will keep stocking up the components in Q2 as well?

Well, to stock-up component is extremely difficult because we -- but we are trying to secure material as far out as we can, but it is an even battle. So -- but when we have opportunities, we do secure it, and we really are now looking -- even preparing forecast to our suppliers going out all the way to 2024 to make sure that we have a good understanding of the -- of supplies of components. But really some of these things that we see now in the market, particularly when we take like the lockdowns in Shanghai, many of those things you cannot really plan for, and they really have happened overnight with very short notice. But in general, we are trying to make sure that we prepare ourselves for this difficult situation to continue during this year.

I mean I just would like to add a bit there. I mean the stock-up is not the quantity or it can, of course, be the quantity, but it's the price level that is increasing as well. So it's a mix of that, trying to make sure to have enough in stock. And actually, the world we live in now is that some components are much more expensive than it used to be.

Any further questions? So if no one speaks up, I would like to thank you for your attention, and we're really happy that you join us today. We're really happy about what we delivered in the last quarter, and we look forward to see you soon again. Have a great afternoon. Take care. Bye-bye.