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

So good morning, everyone. My name is Jesper Soderqvist. I'm the CEO of Boule Diagnostics, and thank you for joining our call here where we will present our earnings results for the last quarter of 2022. So 2022 has indeed been an eventful year with a lot of challenges, but also a lot of opportunities. And I must say that towards the end of the year, I'm very pleased to see that we have progressed in a number of milestones so that we can move into 2023 with full confidence. So looking at some of the highlights in the last quarter. Important to notice is that the testing at our installed base is back at the prepandemic levels so that our consumable sales remain stable and growing. In the fourth quarter, we saw a decline in the number of sold instruments, particularly in Asia. And bear in mind that this was related -- it's compared to a very, very strong quarter in 2021. So the drop is less dramatic than in short. Okay. Now they point that I have missed to flip the slide, I'm sorry for that. Also, we saw a strong growth of our sales of our consumables to our OEM partners. And overall, we saw a total growth of revenue, thanks to our currency effect. Very nice to see was that the gross margin improved, both to the previous quarter but also compared to the previous year. That was mainly thanks to 2 things: a favorable product mix, but also that our price increase realization had a full effect in this quarter. We're also making progress with our strategic programs, in particular the development of our new product platform. It's really nice to see that we now have more and more products coming out, and we do more and more testing, which is really creating a lot of energy in the organization, and it gives me a lot of excitement for the future. We also accomplished a first form of release on the -- on a new platform, which was the release of our cloud software. Another initiative we have for going into 2023 is to set up local manufacturing in India for the local market, and that project is progressing as planned, and we are targeting to ship our first products to the customer in the third quarter of 2023. Also in the last -- in the end of the year, we did a right issue, which was significantly oversubscribed, which we have improved our financial position significantly, which means that we can now execute our plan to develop our new product platform at the speed that we really want. So if we look at the financials for this quarter, the overall growth was 6%, but that was thanks to a strong dollar. If you look at organic growth, it was a decline of 8%. But very important is to -- is that we increased our gross profit margin both the previous year by 3.5%. And with 4 percentage points compared to the third quarter in 2022. Still, we see an effect of the supply chain issues that we have been facing for quite some time. What was very positive is that even if we see that there are spot purchases, which is equivalent to about 3 percentage points in -- for the gross margin in the fourth quarter, we saw a decline towards the end of the year. So it seems that the market is really improving. Overall, our operating margin decreased by 3 percentage points, and we have an EBIT margin of 7%. We invested about SEK 15 million into our new technology platform. If you zoom out now and look at the -- how our sales and business are developing, I really like this graph because I think it shows the strength of the business model that Boule has, where we place instruments that use consumables for the lifetime of the instruments, which is like 7 to 8 years. As you can see here, the blue bars are the number of instruments placed per quarter. And that -- we have fluctuations, and it -- usually, we ship around a 1,000 instruments per quarter. But the red line is the rolling 12-month revenue from consumable sales. You can see that, that has been increasing before the pandemic, and then we had a dip during the pandemic. But since early 2021, we have seen quarter-by-quarter increase, and that continues. It is nice to see. As you can see, we have a significant drop in the number of instruments placed in the fourth quarter. And that is -- I think it has 2 effects. It comes both that we shipped quite a lot of instruments in the beginning of the year. And we also shipped the instruments to distributors late in both the second and the third quarter, which means that the purchase of our additional instruments has been pushed forward. We also see that there is limitations in how much they can invest and do payments due to the weak local currencies in several of the emerging markets where we have quite a large part of our business. However, as you can see, the revenue remains almost stable, thanks that we have increased prices mid of last year and also that we also get that effect of a stronger dollar as we now have prices in dollars and Europe. So if you look at the sales in the quarter, per product, we saw a drop in instruments, which is quite a lot in a number of instruments, but the decline in revenue is less severe as we are realizing higher sales prices. The sales to our -- of consumables or installed base grow or thanks to the price increases and the stronger dollar, but it remains roughly at the same level as it has been. The real positive sign in this quarter was the growth of our sales to our OEM business, which actually increased by 49%. And during 2022, we saw a significant uptake of that business, so which we really have good momentum there also going into 2023. If you look across the regions, you can see that the growth is really coming from the U.S., thanks to the currency again. But really, very much also that are -- we see continued growth of our OEM consumables. If you look at Asia, the main reason for the decline are less instrument sales to India. And we -- but we do see a lot of opportunities in other Southeast Asian countries. In Eastern Europe, the decline is mainly driven by lower sales to Russia. And Africa and Middle East is a region which, I think, we have a lot of opportunities going forward. However, several of the central banks have restrictions and the amount of payments in foreign currencies since there is lack of dollars in those countries. And one example is that we had some orders to Egypt that was actually postponed from the fourth quarter into the first quarter of this year due to the limitations of payments. If you look at the profitability, we saw -- a considering contribution from increased volume that was driven by the strong dollar. Gross margin improved both due to the product mix, but also that we -- the price increases that we implemented mid last year had a full effect in the fourth quarter. As I said, spot projects are still negatively impacting our gross margin and that's our profitability. But we saw some very positive trends towards end of the quarter. So going into 2023, I see some light in the tunnel. Our OpEx has increased during 2022 compared to the previous year. Some of the costs are related to the supply chain issues that we had to mitigate -- but we also had some additional expenses of onetime nature to some regulatory work that we are doing, but also very positive is that we are now attending exhibitions. We are traveling. We're seeing customers again, which is very, very positive. There's also a category here, which is in others, and that's mainly related to the currency effect, both in terms of purchases of material but also for the expense of our U.S. organization. If we look at our cash flow, we did an investment of SEK 15 million in a new development. The operating cash flow was SEK 13 million. But of course, a big part of the cash flow of this quarter was the financing of this -- when we did the right issue. So after the -- all the costs, we added like SEK 139 million to our balance sheet. So we leave 2022 with an available liquidity of SEK 156 million. Looking ahead, I think, we are still in a very volatile market, and we know that we have to be very lean and mean to manage all of the things that are happening in the market. Good thing is that we had a good order intake towards end of the quarter. We know that some of the supply chain issues will remain but we see that they are less pronounced now at the end of the year. In U.S., we have a strong momentum in our consumer business to the OEMs. In Asia, we continue to see there are opportunities in many countries also outside India. For next year, a very important initiative is, of course, to set up local manufacturing that will help us win also public tenders. Eastern Europe is, of course, an ongoing concern. We don't see any end of the terrible war in Ukraine. Our business is not limited by sanctions, but we do have limitations in restrictions on payments to the-- in the banking system. So overall, I could say this that the uncertainty of the business in Russia remains, and we'll see how that develops. And that's something, of course, that we follow and trying to consider what we should do on a weekly basis. Middle East and Africa is a region where we have invested to have more local presence. We see that we have momentum in getting new distributors, discussing new tenders. This has not really yet been reflected in order intake and sales, mainly due to that there are payment restrictions in many of those countries. But we know that going forward, it will create a positive revenue growth for us. One concern could be in this kind of very volatile market is, of course, is that we don't really know how the public tenders will be affected when there are less money available, particularly in the emerging markets. So, so far, we see that there are some slowdown. But overall, the business continues. But of course, we will keep an eye on that. If you look at our progress, both with our strategic and operational plans, of course, the new product platform and the renewal of Boule's product portfolio is, of course, great importance. And that's also why we are investing, and that's also why we did the right issue to ensure that we can execute on that strategic plan. In the fourth quarter, we did the first technical release of our cloud software, which is a great achievement for the organization, and it really gives me confidence that we will be ready to have these connected instruments once we release the first instruments. The first release on this platform is an advanced 5-part instrument. We have now built a number of prototypes that is now used to verification and that will be used to clinical validation during the first half of this year. To drive growth, to improve profitability and improved cash flow, we have a number of initiatives. Over the last 2 years, we have really been affected by the limitations in the supply chain. Good thing is that we see there's a decline towards the end of the fourth quarter, and it feels that we are in a much more stable situation until 2023 than we were early this year. We have also taken initiatives to reduce staff, particularly in instrument production and some support functions to make sure that we have expenses at a level that can be supported also by some lower instrument sales in the near term. But we also have initiated a program to save and improve productivity and increase digitization. So -- and I feel that, that -- the first step of the savings has now been implemented during January. And I feel that we are really on a good track to improve our profitability. Of course, happy customers cannot be achieved if you don't have employees that are passionate and dedicated and like what they're doing. And I must say that I'm very proud of the -- our organization because they really have a lot of passion and energy and really want to deliver our solutions to customers globally. But there's always opportunities to improve. We have reduced the size of the executive team in the beginning of this year to make us more faster and more nimble. We're focusing a lot on our culture and talent management that has been elevated, and we have a new HR head that is really driving these initiatives, which makes me very positive about the future. And very importantly is that we -- both in the fourth quarter and planning also now in the first quarter, we -- is that we are participating in exhibitions -- we were at Medica in Germany in November. That was very, very positive to see the customers again. Next week, we are traveling to Dubai for MedLab Middle East, where we're meeting customers. And after almost 3 years with the Teams meeting, it's really great to meet customers again, and I think it creates a lot of energy in the business, and it opens up new opportunities. So to summarize where we are, I'm pleased with the progress and the milestones we passed in the fourth quarter. We moved into this year with confidence. What I take with me is that we saw improved gross margin in the fourth quarter. We'll continue along that way going into this year. We started this efficiency saving program to drive profitability further in 2023. I'm sure there is a lot we can do and will do. And of course, very important is that we did the right issue, which means that we have a financing in place so that we can deliver with full speed on a strategic plan to bring new products to market. Given that we recently did a new rights emissions, the Board is not proposing a dividend. But I would like to stress that our financial targets remain. I'm sure that we can hit our -- both our profitability targets and our growth targets quite soon. So with that, I would like to thank you for listening in to this call and open up for questions.

We have a question from Gonzalo.

The first one is you mentioned that the gross margin increase is due to a higher favor product mix, which seems to be now shifted to a higher share of consumables, right? So my question is, how do you see margins going forward? I mean you explained that the -- by the shift from a 3 to 5-part systems, but -- can we expect that the instrument sales will remain lower on average than previous years in the upcoming quarters? And if so, what do you think that these numbers will -- when do you think that these numbers will ship back to the higher end?

We usually don't give a forecast going forward. But I think -- 2 things when it comes to the gross margin, we have initiatives in place now, and we already have taken measures to lower our production costs by reducing our staff in production. I think we will see slightly lower volumes that we saw in 2021 going forward. Remember that we do have entry-level 5-part instruments also. So I mean it's not that we need to wait that we have only the new products to drive sales also in the 5-part instruments segment.

Okay. Great. And another question is regarding the observations noted by the FDA in the U.S. I mean, you mentioned that you're correcting them now. But -- could you give us some words on the path forward here? And once they are corrected, do you expect a notification from the FDA closing, let's say, this case or -- and what about in Europe in your site operations?

So I mean, I mean there's not like a process where you really get a closure from the type of observations that we have. That's only if you have a warning letter. Usually, a warning letter is issued quite soon after 483 is issued. So I'm not too concerned about that we will get the warning letter anymore. And I must say that we -- all the observations we had in the U.S., we put a program in place in August to address all of those observations, and we have really delivered on all those activities. And we have also reported on a monthly basis to the FDA, and we haven't heard anything from them, which is a good sign. FDA also conducted an FDA inspection in Sweden. We have two smaller observations that already has been addressed.

Okay. So it's more like an ongoing process that we shouldn't expect any kind of notification sooner or later.