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

Good morning, everybody, and welcome to the Second Quarter's Earnings Call for Boule Diagnostics. I'm Holger Lembrer, CFO for Boule Diagnostics, and with me I have our CEO, Torben Nielsen. [Operator Instructions] With that, I'm handing over to our CEO, Torben Nielsen.

Thank you, Holger. Good morning, everyone, and thank you for joining our Q2 earnings call. I've now been in the role for close to 100 days, and would like to share my first impressions and thoughts on Boule and the direction we are setting out for Boule in the short to medium term. Through the countless introductory meetings I've had with team members across our organization, I've learned that Boule is resting on a foundation of truly great people that are united by the desire to deliver quality medical equipment and great service to our customers. And visiting our sites in Sweden and U.S. and our partner-site in India, I've realized that Boule has some unique capabilities in our ability to develop and manufacture an entire hematology life cycle, from high-quality, robust analysis through proprietary reagents and controls to aftermarket service, support and continuous education. And speaking with our partners, distributors and customers, I've learned that Boule, with its history of pioneering hematology dating all the way back to the 1950s, has earned a strong brand recognition in the market and a very loyal following of both distributors and end users. From a strategic perspective, however, I see a need for us to challenge the way we do things, by creating a culture of continuous improvement, and develop our ability to execute. We operate in an attractive but highly competitive, decentralized hematology market. And therefore, we need to improve our processes and operating efficiency across all functions to secure our profitability and position in the market. With that understanding, we have defined the following three priorities, which will set the direction for the company in the short to medium term: we want to expand operating margins through disciplined execution and reductions in structural cost; we want to accelerate our growth through strategic organic investments; and we want to build a better, stronger growth-oriented portfolio. In Q2, we made the first strategic adjustments, primarily focused on cost and efficiency gains. We did an organizational restructure, reducing eight headcounts with an annual gross savings of SEK 8 million, affecting both manufacturing and commercial. We are accelerating our COGS savings program on the BM850 3-part analyzer for humans. On the commercial execution side, we reorganized commercial operations to flatten the organization, implemented standard work across our commercial regions with direct report to me, the CEO, to facilitate faster decision-making and better execution. We have onboarded new channel partners in veterinary care in the APAC region to support our global veterinary expansion strategy with the H50V 5-part analyzer. And finally, we have reached some important milestones in our portfolio strategy. I personally had the pleasure of participating in the inauguration and go-live of the new state-of-the-art license reagent manufacturing plant in India with our partner, Q-Line, and also had the chance to inspect the soon-to-be license instrument manufacturing site for our value M20 3-part analyzer specifically designed for India. The reagent plant fully complies with all Western standards of quality and the buildup of the instrument manufacturing line is tracking to schedule, expecting the first instruments to be produced in Q4 2024. And finally, we are getting ready for performance evaluation of the new BM950 5-part analyzer, which is on schedule to commence in the second half of 2024. Next slide, please. Taking a look at the quarter highlights, Q2 was a stable quarter, driven by lower-than-expected unit sales partly offset by strong OEM sales. We continued -- we delivered continued improvements in operating profit and margin as a result of our targeted initiatives focusing on reducing cost and increasing profitability and productivity, and our portfolio initiatives are trending to plan. Next. If we look at the financial summary for Q2 2024, net sales totaled at SEK 137 million, which is down 2.5% year-on-year, with organic growth down 3.5% offset by favorable currency of 1.1%. Adjusted gross profit was flat at around SEK 60 million, with adjusted gross margin improving by 0.9 percentage point due to efficiency gains. Adjusted EBIT was SEK 9.9 million, up 13.8%, and adjusted operating margin was 7.2%. Our operating margin was impacted by SEK 8.5 million in one-time restructuring expenses and tax penalties. Adjusted operating margin improved 1 percentage point. Our cash flow from operating activities significantly improved, and we continue to invest in our new technology platform. Looking at our sales growth by quarter, Q2 sales declined by 2.5% year-on-year, but it's important to emphasize that the impact from moving to a license model in India reduced the top line by 1.3%. Year-to-date, we are growing 1% organically. Looking at sales growth by region in Q2, LatAm and Asia Pacific continue to be our weakest regions. In these two regions, we are challenged by low-cost Chinese manufacturing and the market is gradually switching from 3-part to 5-part technology. We saw growth in North America, Europe, Middle East, Africa and India. If we zoom in on the hematology sales in Q2 2024, it was a soft quarter. Number of instruments in Q2 totaled 883 units, which is roughly 10% below last year. On the human side, 3-part unit sales were up 14% year-on-year, supported by the remaining part of the large UP order to India, and the 5-part unit sales were down 65%, driven by two factors: one, a very selective tender approach in order to secure profitability; and two, a strong comparative figure from India in June of last year with regards to big 5-part instrument orders. On the veterinary side, our 5-part -- our 4-part instruments were down, primarily in APAC, but our 5-part is on plan, driven by good performance in Europe. Reagents and controls were slightly increasing, but negatively impacted by India switching to a reagent license business model. On the OEM side, we see continued good OEM performance. From Q1 of 2021 to present, OEM has grown 118%. We are up 12% year-on-year, but we're happy to see that the pharma continues to grow and mature.

Thank you, Torben. Continuing then into the financial summary. Starting -- looking into it, we see that we had a negative organic growth of 3.6%. Cost of goods sold was decreasing in terms of value with an improved adjusted gross margin profit of -- a gross margin of 43.6%. Operating expenses adjusted for one-time items decreased with 5% compared to last year. And altogether, that resulted in a good increase of adjusted operating profit for the quarter, giving us 7.2%. Net financial items were slightly lower due to lower interest rates on our bank loans. Cash flow from operating activities continued to improve significantly and was up 306% compared to last year. Looking into the longer trend of our operating margin, we continue to see quarter-over-quarter improvements over the last 9 quarters. And looking on the 12 months rolling curve, we see an improvement from last year's 6.2% up to 8.3%, and so a step-up of 2.1 percentage points over the last 12 months. And if you're looking on it in terms of value and operating profit, we can see that margin improvements also transforming well into improvements of profitability, have increased from SEK 34 million last year up to SEK 47 million on the rolling 12-month basis, up 38%. So a good improvement on the profitability side. And that leaves us at the level that is the highest in the last 5 years. So back to pre-pandemic levels on the profitability side. Looking into the adjusted cost breakdown, where we're taking out the one-off costs to see underlying business development, we see that the cost of goods sold improved with 0.9%. Selling and marketing expenses was down with 1.1% compared to sales, mainly as an effect of lower spend on material as well as on external consultants. And this function remains a focus area for us going forward to improve further. Administrative expenses were slightly down compared to last year. Also here, we have reduced the spend on external consultants. R&D expenses was up 0.4%, and here we have invested a little bit more on growing our OEM business in the quarter. In total, operational expenses decreased to 5% if we adjust out the one-time costs. Other operating income and expenses was lower due to less currency effect compared to last year. And that altogether giving us 1 percentage point up on the EBIT compared to last year. Looking into the cash flow development in the quarter, we continue to have a positive trend. Looking into the bars in the waterfall chart, we see a strong improvement on operating receivables. So that is mainly coming from lower account receivables from improved collection, and our DSO was down 8 days compared to last year. Our liabilities increased significantly, and this is mainly due to accruals we made for the restructuring activities that was booked as one-off costs in the quarter. Altogether, we reached a cash flow from operating activities of 13.8% (sic) [ SEK 13.8 million ]. If we're looking on the chart to the right, we can see the continuous positive trend over the last quarters, and that's coming from both improved profitability as well as improvements on the working capital side. We expect to continue to have a positive cash flow in the coming quarters, but we have catched up a bit from the low levels we had during '22 on -- related to stock up for managing a shortage on the supply side. So perhaps a little bit strong -- less strong effect on the rolling 12 months basis, but still, of course, a positive cash flow [ expected ]. Liquidity, looking into the situation, we had a stable, solid cash position of SEK 35 million with additional SEK 47 million in unused credit facilities, leaving us with a net cash/EBIT ratio of minus 0.0. And looking into the current spend we have on the investments for the BM900 project, we forecast that the spend will be about SEK 45 million for the second half of the year. And then going into 2025, the spend on the project will drop with about 50%, down to more of a level of SEK 45 million for the full year of 2025. And we see that we have the financing required for completing the project, of course. With that, I'm leaving back to you, Torben, for your final conclusions.

Yes. Thanks, Holger. So to sum up our performance year-to-date, I would say that it's been a stable performance. We continue our efforts to improve our profitability, focusing a lot on process improvements and reductions in structural costs. Our overarching priority remains to short-term complete the new 5-part instrument to help fuel our continued growth. And we continue to invest in both our veterinary channel expansion, but also our OEM consumables business. With that, I'd like to thank you for your attention, and let's open it up for Q&A.

So we have the first question coming from Christian Lee.

Yes. I have a couple of questions regarding your focus areas that you have defined, if you could please elaborate on them. Do you need to invest in building an organization to implement your action plan? And if so, what does it mean in terms of investments? And when do you expect results from these initiatives?

Yes, maybe I can take a stab at answering this question. Thank you. We don't expect that we'll need to build a new organization to support the organic strategic growth. We have a strategic initiative to expand veterinary care. We have the portfolio; in veterinary care, the regulatory barriers are significantly lower than on the human side, but it does require that we build up a stronger distributor network that are dedicated to that space. We have a very strong distribution network on the human side. Now we're investing in setting up distribution network on the veterinary side. We have the commercial organization to support that, but we need to spend more effort making sure that we can build up that network. In terms of timing, I would say that you would -- and I expect to see gradual improvements from those efforts on the veterinary side.

Okay. Are these initiatives conducted to reach your current financial targets, or do you need to update them regarding growth and margins when they are fully implemented?

I think that's difficult to answer right now. I would say what we do is to invest in our future growth. I will not make any forward-looking statements in terms of what we expect to see from these initiatives. But clearly, we do this not only to secure our short-term performance but also to set us up for future growth.

Next question comes from Sten Gustafsson from ABG.

Excellent. So I have a few questions, and I know you don't want to talk about maybe the outlook here, but can you give us any indication regarding the -- what you see in terms of growth in the second half? I notice that comps are getting a little bit tougher, but do you still expect to see growth to return in the second half? That would be my first question.

Holger, any comments from you?

Appreciate that we're not giving any forward-looking statements and forecasts at this stage. There's nothing which we can, let's say, specifically comment on in the second half of the year. It's also that a lot of orders we're getting is not long-term orders when it comes to, let's say, tender process orders like we did for India that we booked in for December and the first quarter and beginning of the second quarter this year. There's nothing really I can specifically comment on that is moving around us then at this stage.