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

Good morning, everybody, and welcome to the fourth quarter's earnings call for Boule Diagnostics. I'm Holger Lembrer, CFO for Boule Diagnostics. With me, I have our CEO, Torben Nielsen. And after our presentations, we will open up for questions. Please also feel free to type questions in the chat field along the presentation. With that, I'm handing over to our CEO, Torben.

Thank you, Holger, and good morning to everybody on the call. Let's begin by taking a look at the Q4 highlights. Overall, it was a stable quarter in which we delivered slightly below last year. Instrument unit sales closed slightly above last year. However, overall sales was negatively impacted by lower average selling price on our instruments. Consumable sales was, as expected, negatively impacted by the transition to a licensed manufacturing model in India. This impact will further increase as we ramp up production in India for both consumables and now also instruments in 2025. OEM compensated partly for the lower sales and once again delivered a strong quarter. Our primary focus in 2024 has been on expanding our operating margins through structural cost reductions and fostering a culture of operational excellence. In Q4, we executed our third and most comprehensive restructuring round to date. This involved reorganizing our R&D team, streamlining operations and reducing overhead costs, resulting in an annualized savings in spend of approximately SEK 18 million. In the process, we established a new supply chain function, integrating purchasing, planning and order management to optimize our processes and enhance our customer service. In R&D, we restructured the team and put in place new leadership, tasked with challenging the project plan and scope. And finally, we have transferred all product maintenance projects to a newly formed product engineering team in operations. We delivered significant improvements in both operating profit and margin, and we begin to see the impact of all the initiatives we've taken to reduce cost and increase productivity. As a consequence of all these changes, we incurred higher restructuring costs, which adversely impacted our cash flow. From a portfolio perspective, Q4 has also been very eventful. Our license instrument manufacturing site in India went live in Q4, as scheduled, and we booked our first instrument license revenue in the quarter. And finally, we are very pleased to announce that Boule has entered a multiyear exclusive distribution agreement with VitalScientific for their Clinical Chemistry portfolio in the U.S. VitalScientific is a leader in benchtop Clinical Chemistry solutions, and they have been in the U.S. market for more than 20 years. Like Boule, VitalScientific develops and manufactures high-quality instrumentation for the decentralized segment. This agreement represents an important step towards building a more diversified and synergistic portfolio that meets our customers' needs. There is a strong synergistic fit with Boule portfolio of products. Our companies share similar customer target segments and a similar distribution model. Clinical Chemistry is complementary to hematology, which will add value to our customers and also give us bundle opportunities, and we can leverage our current sales and service infrastructure in the U.S., giving us some operational efficiency gains. We're excited about this future partnership, and we anticipate the commercialization of this agreement to commence in the first half of the year and be fully implemented in the second half of 2025. When fully implemented, this will add approximately SEK 20 million to our U.S. revenue with a good margin profile. In summary, we reported Q4 sales of SEK 143.2 million, down 3.3%, where 1.5% was related to currency, leading to a negative 1.8% organic decline, which, if we adjust for the India license model impact, is equivalent to a 1.2% organic growth. Adjusted gross profit was flat at SEK 65.7 million. Adjusted gross margin improved to 45.9% from 44.5% as a consequence of favorable mix and efficiency gains. Adjusted EBIT significantly improved by 85.7% to SEK 19.5 million as a result of the improved gross profit and lower operating expenses. And adjusted operating margin reached 13.6%, up from 7.1%. Cash flow from operating activities was SEK 15.1 million and available liquidity at the end of the quarter was SEK 58 million. Looking at our full year performance, we reported sales of SEK 559 million, down 0.6% organically, which, again, if we adjust for the India license model impact, it's equivalent to a 0.4% organic growth. Adjusted gross profit increased by 2.2% to SEK 250 million, adjusted EBIT significantly improved by 63% to SEK 64 million, and adjusted operating margin reached 11.4%, up 4.5 points. Cash flow from operating activities closed at SEK 47 million. Taking a look at the overall sales by quarter, Q4 was down 1.8% organically. However, we closed 2024 more or less flat, declining 0.6% organically, which, as I stated earlier, equates to approximately 0.4% organic growth if we adjust for the India license model impact. Looking at sales growth by region in Q4, it was a bit of a mixed bag from a geographical perspective. We had good performance in Latin America, Eastern Europe and India. In Southeast Asia, we continue to struggle due to competitive pressure from Chinese manufacturers and also local policies favoring local manufactured products. Africa, North America and Western Europe were challenged in the quarter. And specifically in Africa, we have been challenged with delayed payments blocking new orders. From a product mix perspective, OEM and consumables/license revenue continue to outgrow our instrument revenue. Zooming in at our hematology business specifically, we had a soft quarter. Sales declined by 11.9% for the quarter and full year closed 6.5% below last year. Adjusted for license revenue Q4 closed at approximately negative 3.5%. Main detractors in the quarter was a geographical mix with a proportionally higher sales in lower-priced markets. Instrument unit sales in Q4 totaled 1,144, which was 1% above last year despite the fact that we activated our instrument license model in India. Reagents and controls business was down 13% for Q4 and flat for the full year. In Q4, we started switching our instrument sales to India to a license model, which will have negative impact on our top line of estimated SEK 30 million annually, but with a positive margin impact. On the OEM side, we see continued good performance. In Q4, sales grew 10%. And full year, we are growing 14%, which is very encouraging. From Q1 2021 to present, OEM has grown 162% and our funnel continues to grow and mature. When we look into beginning of 2025, we see a lower order pipeline in the beginning of the year, but for the full year, we expect the business to be stable. So with that, I'll hand it over to you, Holger, to take a closer look at the financials.

Thank you, Torben. Starting with the financial summary of the quarter then, we had a slightly negative organic sales, as Torben mentioned. If you're looking into the cost of sold goods, that decreased and adjusted gross margin improved for us up to 45.9% compared to 44.5% last year. The positive change was mainly impacted from efficiency gains in the production but more so from a conversion over to a license model for India. Operating expenses adjusted for the onetime items related to restructuring decreased to 19.4%. And this is mainly an effect of restructuring activities we have implemented throughout the last 9 months in 2024. In Q4, we launched a second restructuring program, and that will lower our annual spend of SEK 18 million. This is mainly related to R&D and that will lower our capitalization of R&D activities throughout 2025. Altogether, that resulted in a significant decrease of our adjusted operating profit for the quarter and reached 13.6%. Cash flow from operating activities was a bit weaker in the quarter, mainly due to high payments for severance and restructuring payrolls. If we're looking on the full year, we had a slightly lower sales driven by FX and the changed business model in India impacted us negatively. From a profitability perspective, we have improved the gross profit with 2 percentage points and lowered our operating expenses with 11%, altogether that lifting our operating margins back into double digit of 11.4% for the full year. If we then take a look on our operating margin on the longer trend, we can now see 11 consecutive quarters with improving margins and rolling 12 chart was up from 7.1% last year to 13.6% for 2024. If we're looking how it's converting into values, we see here the increase -- a meaningful increase of 62% from last year's SEK 39 million up to the SEK 63.8 million we had for '24. If we're looking into the details then of the cost in relation to sales, the cost of goods decreased 1.4%, mainly as a result of the changed business model for India. Selling expenses was below last year, and this is mainly a result of a reduction of headcount and other saving activities that we implemented in Q2 and in Q3 '24. Administrative expenses was flat compared to last year. R&D expenses decreased 4.9%, due to less consultants, but also partly due to the restructuring we did throughout Q4 of R&D organization. In total, operational expenses was 6.2% points lower compared to last year in relation to sales. And our other operating income expenses were negatively mainly due to the fact that we had a negative currency impact from conversions from U.S. dollars to SEK. All in altogether, an improvement of our profitability margin with 6.5%. Looking then on the cash flow chart. The cash flow was a bit softer in the quarter, and this is mainly due to severance payments we have for activities restructuring implemented in the second and in the third quarter, partly also due to activities done in the fourth quarter. When we're looking into '25, we have about SEK 6 million in severance payments due in the quarter. So cash flow is expected to be lower in the beginning of the year and then turn into a more positive territory in the second half of '25. If you compare our cash flow conversion with operating -- from operating activities with our EBITDA adjusted for the write-downs we've done for Russia and intangible assets, the conversion rate reached 97% for the full year. Taking a look on the liquidity and credit facility. We ended the quarter with a cash position of SEK 23 million and including an additional unused credit facilities of SEK 35 million, taking us to an available liquidity level of SEK 58 million. And we had a net cash EBIT of minus 0.2x in the quarter end. In the quarter, we also increased our revolving credit facility with USD 2 million. With that, I'm leaving back to Torben.

Thanks, Holger. Q4 marks the combination of a year of significant transformation. Our focus has been on executing on our 3 strategic priorities that we outlined in the second quarter of 2024. And during the recent 3 quarters, we have successfully streamlined the organization and are now in a much better position to focus on our broader strategic priorities. While the continued work around improving our profitability remains a top priority for 2025, we will also be making steps towards accelerating organic growth and building a stronger growth-oriented portfolio. We've taken the first initial steps with our instrument license manufacturing in India and our distribution agreement with VitalScientific in the U.S. Finally, to sum up our performance, I would say that it's been a stable Q4 and a stable year. We've made significant improvements towards our financial target of reaching 15% operating margin. We continue our efforts to improve our profitability through process improvement and reductions in structural costs. And finally, we'll focus on relentless execution of our 3 strategic priorities. That concludes our presentation. Thank you for your attention, and let's open it up for Q&A.

So our first question comes from Christian Lee. Please unmute yourself and ask the question.

I hope you can hear me.

Christian, can you please repeat your question?

Can you hear me?

I can hear you Christian. I don't know.

We can hear you, Christian. Please come again. Sorry. Christian, will you please repeat your question? We have a sound back here in the studio. Okay. It sounds like we can't hear Christian. Patrick -- sorry, Philip Ekengren, you have raised your arm, please feel free to ask your question and mute yourself.

This is Philip from ABG. So I have a few questions here. Maybe starting on costs. So the gross margin, what should we expect in terms of run rate for '25? Is the adjusted gross margin for Q4, the best proxy going forward? Or how should we think about that?

So our gross margin is, I would say, pretty affected by the mix of sales we have because we have 3 different margin profiles of the different businesses. Underlying, of course, the shift into a license model in India will work favorable for our gross margin over time. It's hard to give you an exact guidance for it, but underlying that would support the margin step by step to gross margin-wise, but it's still -- it will impact -- be impacted also by the mix.

Roger that. And on OpEx, clear improvements here year-over-year. What can you say about that? You took some additional restructuring costs now in Q4. Is that the last cost we can expect related to the restructuring? Or is there more to come?

We can't -- it's hard to say any predictions for the future. Looking into what we did in Q4, we made a significant restructuring of our R&D organization. And that you should see that as it will be a lower capitalization of R&D going into '25 because the organization will be smaller and basically also a lot less -- lower investments into R&D. So less an impact on the cost than -- but of course, on the cash flow side, it will have a positive impact.

But on the improvements on OpEx, that should kind of continue going forward? Or should we expect a return to higher OpEx levels in '25?

I mean the ambition what we have done throughout the year is to get the OpEx run rate lower and that you see clearly for the full year. When I say -- and additions we did in the second and third quarter, that is a result of in the fourth quarter, that is, of course, to remain when we're going into '25, but the activities we did in Q4 was mainly related to R&D, and that will lower the capitalization of R&D spend.

Roger that. Clear message here. And on sales, I have a question regarding the number of sold instruments. That seems to have been down year-over-year in Q3, and then flat now in Q4. Can you comment on that and give more color on it?

I think that our performance in Q4 was in line with our expectations. We see that in the market, there is a continued shift towards 5-part technology. However, there's still sufficient demand for our 3-part technology. So I think it was a stable performance we had in 2024.

And on the lower selling price on the instruments, any comment on that?

I think that what we are experiencing in the market is, of course, as a consequence of the market demand slowly shifting towards 5-part technology, that puts pressure on the general pricing for 3-part solutions. We saw that pressure in -- both in Q3 and in Q4, but that's also coupled with the fact that we have taken a more aggressive approach in our sales. So we're sort of balancing the installed base growth objective with a slightly lower average selling price.

Perfect. And then finally from me, any news on the development of the new 5-part system, any updated time line or anything of that sort?

No, we're not communicating any updated time line. As we alluded to, we have done a rather significant restructure of our R&D department in Q4. It's no secret that the BM 950 project historically has suffered many delays. We've taken more of a proactive approach, changing the leadership, making sure that we get fresh eyes on the project. And as we stated here right now, this team is reviewing the project plan and the scope. But for now, we are not communicating any changes to our plans.

I see Christian, you're back on the call, please unmute yourself and try again.

Yes. I hope you can hear me now.

Yes, loud and clear.

Okay. Great. You mentioned that capitalization of your expenses in product development would decrease in 2025. You have previously indicated that the investments into the new platform would amount to around SEK 45 million. Are there any changes?

Given that the spend was a little bit lower in Q4 than we had guided for, it might be that SEK 45 million is a few millions too low, yes, SEK 50 million will probably be better proxy than something like that.

Okay. And could you also talk about the distribution agreement with VitalScientific. You mentioned that it will add sales of SEK 20 million when fully implemented with an attractive margin. How will this impact the margins going forward?

I'm not sure I understand the question. Could you rephrase the last bit, please?

Yes. This agreement with VitalScientific, will it have a positive impact on the margins or negative?

I think that remains to be seen. I think that to give you a little bit more context on the viable business, it's comprising of both sales and service. The first part that will be implemented will be the sales piece of the business and service will then follow in the latter half of the year. I would say that the margin profile is comparable to the profile that we have here at Boule. So I would say, from a percentage perspective, it will probably not change much, but it will add profitable revenue to our business.

Okay. And as you're ramping up the license sales in India for instruments as well, should we expect the instrument sales to decrease in 2025?

Yes. As we earlier communicated in Q4, we gave you an example, if, let's say, we sell the same volume as in 2023, but with the license model instead, it will probably have an impact on the top line of around SEK 30 million.

That includes both reagents and instruments?

Yes. That was happening in '24, but yes, that will continue also into '25. We have a question coming in from Rickard. Rickard, please unmute yourself and ask your question.

Rickard Anderkrans from Handelsbanken. Just 2 questions, please. So first, it would be interesting to hear an update on the 5-part system development, just essentially checking in a little bit on the time lines and the status of moving into sort of clinical validation steps moving forward. So I'll start there with maybe a bit of an update there.

Yes. Thanks, Rickard. So maybe just coming back to my previous statement here, we did a rather comprehensive restructure in this quarter of the R&D team, and we put in place a new leadership. We asked the new leadership team to take a look at the current plan, the current scope of the project to check if there are any, you can say, material changes or material risk that we should be aware of related to the project now that we have fresh eyes on the project. For now, we are still in the planning phase. We have not communicated any changes to the plans that we have communicated in the last earnings call. So from that perspective, there's really no change in the timing of the project as such.

Okay. That's great. And then I just noticed in the quarter, seems to be quite a step-up in sales in Russia, if I'm not mistaken. So any flavor on the driver of that, any stocking or any other dynamic to keep in mind? Just wanted to follow up on that number.

No, I would say this is more a reflection of timing. I would say, generally speaking, Russia performed to our expectations for the year. So we were possibly a little back-end loaded for the year when it comes to Russia. So it was maybe more of a timing impact than anything else.

Okay. And I noticed also in the CEO letter and the commentary previously, you mentioned sort of timing of orders or phasing of orders impacting the quarter overall, not specifically in that region, but could you add a comment on or elaborate a little bit on that comment, just to put it in perspective?

Yes. I mean, we operate in various different geographies, but I will say that in Q4, we were challenged, specifically in Africa, where we were facing problems with receiving payments in time. And that, of course, held back orders that will then be pushed into the following quarter. I would say that we've probably seen more challenges in Africa in Q4 relative to what we have seen in previous 3 quarters. That could be, again, just a timing issue, but I think it's something that impacted our quarter and close this year.

Okay. That's great. And any possibility to quantify roughly that magnitude of that delay or phasing?

No, that would be difficult for us to quantify that. We would not want to give any forward-looking statements here.

Thank you, Rickard. I think we -- that was the last question we had on the call. And with that, I'm thanking everybody for participating and listening into the year-end call for Boule Diagnostics, and I wish you all a great day. Thank you very much.

Thank you.