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

Good morning, and welcome to this call. My name is Jesper Söderqvist, and I'm the CEO of Boule Diagnostics. And with me online here today, have our CFO, Annette Colin. And in this call, we will cover the highlights and the results of the second quarter of this year. You can ask questions in the chat during the call or you may ask questions after the presentation. [Operator Instructions]. So let's start with the highlights of this quarter. The key highlight of this quarter is the all-time high revenue that we delivered despite that it was an exceptional quarter with multiple challenges, in particular related to production. Sales for all our product lines grow, and the main growth drivers were both instruments and consumables. A range of external factors have impacted our operations. And we experienced several production stops due to material and component shortages that delayed many deliveries to the end of the quarter. In the end, we managed to deliver everything as planned, which I think was a great achievement of the organization. As our priority is always to serve distributors, users and patients the best we can, and that has not been easy in the current market with the various and volatile supply chain. And it has implied that we have been forced to accept higher production costs and expenses in this quarter, which temporarily impact our profitability. Another milestone this quarter was that the new European regulatory framework, IVDR, is now mandatory since end of May for sales in Europe. And the new regulation is more demanding for the suppliers. And for Boule, as for many other suppliers, it has been an extensive project to update the legacy documentation of our product, which has required extra resources and expenses during the time. Now Boule is ready to operate in line with the new IVDR requirements, and it feels really good to have this work and the cost behind us. An important product is the development of our new product platform. And we are very pleased that we now have an instrument placed at hospital laboratory that is collecting clinical data. This data will be used to fine-tune the algorithms that classify blood cells. And it's a really important development step on the way to prepare new solutions for clinical validation. We're also happy to announce that we have signed a new distribution agreement with Fujifilm in Europe for our veterinary products sold under our brand Exigo. The Boule hematology solutions, combined with Fuji's clinical chemistry offerings, create an attractive solution for veterinary laboratories. This is a market segment that Fuji in Europe has a strong presence in, and they plan to grow further. The initial distribution agreement covers 3 countries in Southern Europe: France, Spain and Portugal. But we have already ongoing discussions to add more countries in Europe. We are both proud and excited that Fuji has chosen to work with us, and we really much look forward to how this will turn out. So with that said, let's turn into the more detailed financial results of the quarter. So net sales was SEK 141 million, which makes this the best revenue quarter in Boule's history. The organic growth was 14% compared to last year. However, gross margin was only 38%. And that was impacted by extra costs related to the supply chain disturbances and production stops. Despite the lower gross margin, the operating margin increased by 1.5 percentage point compared to previous year, and we deliver a 4% at the bottom line, which we are, of course, not pleased with. To develop our new platform has continued at full speed, we have invested SEK 20 million in this quarter. So a great sales growth, but the profitability is a disappointment. But I would like to point out that these are related to temporary external factors. And we will deliver higher profits in a more normalized market. But let's zoom out if we don't -- not just only look at this quarter, but look how Boule has developed over the last few years. I would like to show you this graph. So this graph shows the number of instruments sold quarter. These are the blue bars. The gray line is the revenue from instrument sales rolling 12 months in million SEK. And the red line is the rolling 12 months of consumables to our own instruments, also in million SEK. And you can see here that, thanks to our large installed base, our consumable revenue is growing every quarter. And the only exception is really the pandemic period here, around 2020. So even if there's some ups and downs in the quarter, I think this graph shows the strength of Boule's business model. By a large installed base, and we currently have around 29,000 instruments, generate recurring revenue from reagents, blood controls and calibrators during the lifetime of the instruments, which is around 8 years. So placing instruments will create future consumable revenue. And we have now seen 5 consecutive quarters where the revenue has grown on both for instruments and consumables, which is very positive, in particular that -- given that this has happened in a very volatile market. So let's zoom in back in on the second quarter. So the all-time high revenue was delivered by increased sales for all our product lines, but the stronger growth came from instruments and consumables. Our OEM customer has shown a very strong growth in the last year. Now the OEM business continued to grow but at a more moderate 14%. If you look now how the various markets are performing, you can see here that LatAm and Africa and Middle East have strong growth. U.S. growth is mainly driven by our OEM business. In Latin America, sales increased mainly, thanks to orders to Mexico and the Dominican Republic. And Africa and Middle East performed very well, mainly related to some larger orders to Egypt, where we have a very solid market position. So overall, good growth, basically in almost all markets, except for Eastern Europe due to the war in Ukraine and the sanction in the -- towards Russia. If you look at the resulting profitability, you can see here that sales growth and price increases implemented early this year drive top line and profitability. Unfortunately, our profitability is not where we want it and expect it to be due to a number of external factors. The biggest impact on the profitability comes from the supply chain issues. Just in the second quarter, we purchased electronic components for SEK 8.3 million more than our standard cost. If you look at the first 6 months, it adds up to more than SEK 13 million. In addition, the production stop experienced lower efficiency with further degrades of profitability. So without these temporary effects, we would have seen a profitability at a completely different level. Also, if you look at operational cost, you see that we have cost to mitigate the supply chain issues. And these are activities like adding new suppliers and by doing a redesign of electronics to overcome the shortages. Also in this quarter, we have increased our marketing and sales activities, which means that we have higher cost for exhibitions and travel, which is very positive. And as I said initially, we also had some more consultants to finalize the IVDR implementations. I would like to point out that these extra costs are overall of temporary nature, and the profitability will recover in a more normal market. With that said, we are, of course, taking measure to combat the current situations, which includes additional price increases that will impact the second half of this year. And of course, we're working closely with our suppliers and extend our forecast to try to avoid unplanned component shortages as much as possible. All in all, in a more normal market with less volatility, we will deliver higher profits. The going forward. So the cash flow was exceptional [indiscernible], with low gross margin and multiple production stop. The [indiscernible] many shipments were pushed late in the quarter to [indiscernible] before we can invoice customer. And of course, the large sales volume, of course, accounts receivables. The inventory levels went down in this quarter. But in general, they are very high in this market since we have to make sure that we secure the components for future production, particularly now during the summer where you have a vacation period with many suppliers [ going down ]. We have continued investments in new product platform at a full speed. And we took a loan of SEK 35 million to finance our product development. If you look at the available liquidity at the end of the quarter, we ended at SEK 67 million. So let's zoom out and look at the market situation in a bit broader sense. So we have seen a strong recovery in the first half year. The order backlog is not as long as it has been in the last year but still at a very decent level compared to what we were used to before the pandemic. We see that there's continued risk for the supply chains related to cost, in particular, longer production stops. But with that said, I would say that we have a very positive view a bit longer term, even if the near-term high is -- near-term market is volatile. If we look here now, we see that the U.S. are growing, and it's mainly driven by our OEM business. They grow more than double last year. And we will -- don't expect to see the same type of growth in the coming year, but there is still growth in that market. In Asia, we have seen strong performance from India. But we see that there are still opportunities in other Southeast Asian countries. In East Eastern Europe, we unfortunately don't see end of the war in Ukraine in sight, and the sanction toward Russia will remain. So we expect a decline of this business. Whereas in the Middle East and Africa, there are new opportunities, thanks to increased local presence. And we have signed a -- several new distributors in the last 6 to 9 months, which should deliver future revenue. One concern I have is really the increased spread of COVID. You may ask, is that a temporary hike in sick patients? Or is -- will the pandemic continue to affect the business going forward? We have many opportunities in emerging markets, but we have seen that this market is very volatile. And the growth in many emerging markets rely on public investments to improve the health care. I think there's a risk that in particular in Africa, some public tenders are either stopped or delayed for some time. But overall, I would say that the opportunities in these regions are long term very positive for us with our current market position. So what are we working on? Well, clearly, what has really impacted our operations and our profitability lately has been the supply chains. So to continue to work on avoiding production stop is really essential. We work with longer forecast together with our suppliers. We have an agile organization. We have shown that we can do redesigns quickly when needed. We are working with -- to reduce our dependence of Chinese suppliers. In the second quarter, we had delivery stocks from Shanghai during very many weeks. And now we are in the process to reduce our dependence of those suppliers in China and are establishing second sources in Europe. We're also working to increase our production capacity in our Florida facility so that we can continue to deliver to -- in higher volume to our OEM customers. We did implement price increases in the beginning of the year, but they were not sufficient given the current market conditions. So therefore, we increased prices again in the second quarter. But as always, there is some lag in the realization. So the latest price increases will help us during the second half of this year. And given the market, with rising inflation around the world, we will increase prices also going forward. We are, of course, carefully watching our cash flow and managing our expenses and focus our working capital. But also on the expense side, we have a high degree of flexibility with many consultants so we can temper lower expenses to balance the operating cash flow. The extra cost that we have seen in the last year is of temporary nature so we are confident that we can deliver higher profits when the market and supply chain normalize. With that said, we are determined to maintain investments in the new platform as this will secure both long-term growth. So to summarize, we have generated 3 quarters with record revenue and the growth trends are stable. I think that the business model we have, with sales of high-margin consumables to a large installed base, is as strong, and it will create stability in this volatile market. And the gross margins that were weak are really held back by temporary events in supply chain with higher material costs and logistics challenges, but also an unfavorable product mix, where we have had now a few quarters with a high mix of instruments to lower price markets. The good thing though is that, that builds an installed base and that will generate higher margin consumable revenue in the coming years. So geopolitical instability, inflation and component shortage create some short-term uncertainties and pressure to profitability. But for all we know, all of these are temporary effects and that will return to normal at some point. As we are a healthcare company, we will benefit from the macro factors such as the growing aging population that will consume more healthcare. If you look at the niche decentralized hematology market where we are operating, it grows by 3% to 8% year-on-year. And Boule has now shown, in the last year, but also in many years before that, that we can grow faster than the market and we can gain market share. So even if this was not a quarter where we are happy in terms of profitability, we move ahead with confidence and we are determined that we will continue to grow and we will generate higher profits once we overcome these external challenges. So with that, I would like to thank you for attending this call. And I will open up for questions.

So who wants to start? Christian Lee, I can see you raised your hand, so please.

As of May, you seemed confident about being able to release the new product platform in the first half of 2023. And now 2 months later, you say that the launch will be delayed. So what has happened during this period that changed your view?

I think there are 2 things. One is that we also -- when it comes to supplies to our prototypes, we have seen delays in deliveries of -- particularly on electronic components even in smaller volumes. So that has -- are pushing some things forward. Also, we had to reprioritize some of our internal resources so that we actually have work -- taken some of the resources that was planned to work with the project to work -- to fix some of these supply chain issues, particularly redesigns of electronics. And also, what we have seen now, even if IVDR was implemented in -- now in May, the number of notified bodies in Europe is still at a very low -- is very -- they are very few, and the lead times for the regulatory approvals are very long, longer than we expected.

Yes. And also, management, the Board will review business plans and financing as the cash flow in the first half has been soft. Does this mean that you do not expect the cash flow in the second half to recover enough to support the current investment pace?

Yes -- No. I think we are uncertain on that. I mean I think we have seen now that there have been -- particularly, this production stop is really kind of -- is hurting our cash flow. And that's something that we cannot guarantee that we will not see going forward even if we will do everything we can. So I think it's a very volatile market. And it's -- we need to make sure that we have to be a bit careful how we spend our money. And that's also the reason why we also are looking at how we -- what pace can we do investments in going forward. So we expect the cash flow to recover, but we also need to plan for the worse.

Sure. And my final question, please. Do you plan to continue your business in Russia, given that your funds there are being locked up?

Our current position, and that we may reevaluate, is that we try to operate according to the sanctions. And also, in line with the sanctions, we should be able to get payments and our money that are tied up in Russia out of the country. But unfortunately, that's not really how the Nordic banks are operating currently, so we have funds locked up in Russia. And exactly how that will pan out remains to be seen. So I cannot give you a better answer right now. Thank you, Christian. Anyone else who want to ask a question? Are there any questions on the chat? Okay. Since that there is no more questions, then we would like to thank you all for attending and listening to us. And we hope that you will all enjoy summer and look forward to see you soon again. Thank you very much. Goodbye.

Bye. Bye.