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

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

Yes. Thanks, Holger, and good morning to everyone, and thank you for joining this Q1 earnings call for 2025. We'll begin by taking a look at the highlights of the quarter. And overall, it was a bit of a mixed bag. Despite a satisfactory order intake in the quarter, we were unable to complete many of our orders in time for Q1 close, which led to declining sales of both instruments and consumables. Due to the geopolitical instability and uncertainty about the U.S. tariff policy, many of our core markets in the Middle East and Africa restricted local access to U.S. dollars, which led to delayed payments and ultimately delayed shipments of instruments and reagents. On top of that, we delivered an unusually big order of 600 instruments to India in Q1 of last year, which combined then led to an unfavorable year-on-year comparison of minus 25% total organic growth in the quarter. This naturally looks dramatic. However, we're encouraged by the fact that we begin Q2 with a larger-than-expected backlog of orders. On a positive note, our OEM business delivered 7% organic growth in the quarter, and we managed to both extend and expand one of our supply agreements with a leading global IVD company. The quarter saw -- also saw significant improvements in operating margin, driven by favorable mix and the full read-through of all the restructuring activities we had in 2024. As communicated earlier, expanding our operating margin remains a top priority also in 2025, and we continue to execute on that priority. In Q1, we realized SEK 13 million in annualized spend reduction from rightsizing our R&D team in Sweden as a direct consequence of the BM 950 project closed down. In addition, I'm excited to share that we, this month, April, signed a new and expanded lease agreement for our second manufacturing site in Spånga, giving us the opportunity to consolidate our entire Swedish operations into one site and vacate the current head office. By doing so, we optimize our footprint, we reduce our cost, and we can design our workflows for optimal efficiency in accordance with LEAN principles. We expect the site consolidation to begin in Q4 2025. In Q1, we onboarded a new regional sales manager for Southeast Asia based in the Philippines. This was the first step in our strategic efforts to invest in organic growth by adding resources in the region, staying close to our customers and operate efficiently. In Q2, we will onboard another 2 sales representatives in the U.S. to support our efforts there. In March, we announced the closure of the BM 950 5-part hematology analyzer project. The decision was taken due to newly identified technical issues that significantly impacted the project's time to market and overall profitability. We concluded that we would not be able to bring the BM 950 to the market fast enough to support the current demand. And therefore, we took the decision to close the project and adjust our portfolio strategy. For many years, we will have enjoyed successful collaboration with technology partners to supplement and strengthen our proprietary portfolio. Moving forward, we will focus exclusively on collaboration with leading technology partners to build a competitive instrument portfolio that meets the evolving needs of our customers in a timely and more cost-effective way, which is critical when wanting to stay relevant to our distribution partners and end customers. In line with our new strategy and our strategic objective of building a better, stronger growth-oriented portfolio, we have extended our technology partnership agreement for our current M51 5-part hematology analyzer. This means that we have this solution available through 2027. And in addition, we are on track with the implementation of exclusive distribution agreement for the VitalScientific clinical chemistry business in the U.S. We expect to begin the commercialization in Q3 2025. So what will the new portfolio strategy mean to the business? Here, we've put together a simple graphic representation of how our instrument portfolio will develop over time. Our current portfolio is made up in large by instruments that we source through technology partners. And our new portfolio strategy should really be viewed as an evolution of the way we've been building up our portfolio in recent years. In our human portfolio, we have our own proprietary 3-part hematology platform marked in blue. And we have a 5-part hematology analyzer, the M51 from a technology partner marked in green. We added the M51 5-part analyzer in 2023, and we expect to double sales of this instrument in 2025. In Q3 this year, we will add chemistry in the U.S. through our distribution agreement with VitalScientific, and we are actively engaging with both current and potential partners to explore options for our future portfolio enhancements. In our veterinary portfolio, we have our own proprietary 4-part analyzer and have supplemented with a 5-part hematology analyzer, the H50V and a compact chemistry analyzer C200, both from technology partners. Here, we are currently actively evaluating a potential new hematology addition to our veterinary portfolio. By not engaging in own instrument development in the future, we benefit from being able to focus our resources much more and build the necessary capabilities required to test, validate, register and market new technologies fast. Through our partners, we have access to the most recent technological developments and can essentially operate at the speed of the market and do this at significantly lower cost. Proprietary technology often provide a higher level of differentiation, which may give you a competitive advantage. However, given the competitive landscape in hematology and the speed of innovation we've seen in the recent decade, we believe that Boule will be in a better position to compete when deploying a technology partner strategy. With this strategy, we can continue to leverage our strong distribution network, brand legacy and reputation of high quality of service as a competitive advantage when adding new products to our portfolio in the future. Taking a look at the Q1 financials. In summary, we reported Q1 sales of SEK 113 million, down minus 23.6%, and we had a 1.5% favorable currency impact leading to a total 25.1% negative organic growth. Adjusted gross profit was down at SEK 53.7 strategic [ 53.5 ] million due to lower sales, but adjusted gross margin improved to 47.4%, up from 46.2% because of favorable mix and efficiency gains. Despite declining sales, we achieved SEK 17 million in adjusted EBIT, mainly driven by savings from restructuring efforts in 2024, now fully materializing. And our adjusted operating margin reached 15.1%, up 2.2 points from 12.9%. Cash flow from operating activities was minus SEK 7.8 million, negatively impacted by severance payments, increased inventory and receivables. And we closed the quarter with available liquidity of SEK 38 million. If we look at overall sales by quarter, Q1 was down minus 25% organically due to delayed shipments and unfavorable comparison to last year. And from a geographical perspective, in Q1, it was also a little bit of a mixed bag. Southeast Asia was down primarily due to India. In India, we saw low sales compared to last year due to an unusually large instrument order and also a gradual transition to instrument license manufacturing. In Southeast Asia, as stated earlier, we onboarded a new regional sales manager based in the Philippines as part of our growth strategy. Africa and Middle East were down mainly due to delayed payments caused by in large restricted access to U.S. dollars. And U.S. and LatAm delivered a soft quarter. In the U.S., we've had open territories and are now onboarding 2 new sales reps in Q2 to support our growth. Looking at our hematology business specifically, we had a soft quarter due to the delay of orders and tough year-on-year comparison. Sales declined by 31%, and we only shipped 543 instruments. We closed Q1 with a higher-than-usual backlog, which will benefit Q2. In Q4 2024, we started switching our instrument sales in India to a license model, which will have a negative impact on our top line of estimated SEK 30 million in 2025, but with a positive margin impact. On the OEM side, we see continued good performance. We grew 7% organically and managed to extend and expand one of our supply agreements with a global IVD company. Our sales funnel continues to mature in line with our expectations. 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. We had a negative organic sales growth, as Torben stated, while we see our cost of sold goods decrease and gross margin improved to 47.4%, up from 46.2% last year. The improvement of the gross margin was mainly an impact of efficiency improvements, but I would say more so to a favorable mix of having less sales of instruments in the quarter and the growing OEM business for us. Operating expenses adjusted for onetime items decreased to 21% from last year as we now see a clear result from our restructuring activities that was done throughout last year. In Q1, we closed the development project BM 950 and the closing and related restructuring costs to that project resulted in a onetime cost of SEK 18.5 million. In total, our adjusted operating profit for the quarter was SEK 2 million below last year due to lower sales. However, our operating margin increased to 15.1%, which is our highest margin since 2020. Cash flow from operating activities was soft in the quarter, mainly due to high payments related to severance payments, but also inventory buildup in the quarter. Taking a look then on the margin in a longer trend, we have now seen our operating margin quarter-over-quarter improving over the last 12 consecutive quarters. If we're looking on the rolling 12-month chart, we can see that our margin have improved from 8% last year up to 11.8%. So an improvement of 3.8 percentage points from last year. And then looking on the profit in terms of value, we have seen the increasing margin also transferring over in an improving profitability in absolute value. And despite lower sales in the quarter, we continued at a good level. Taking a look on the adjusted cost breakdown as a percentage of sales, our cost of goods sold improved with 1.2%, so down to 52.6% as a result of favorable [ mix. ] Selling expenses was in line with last year despite our lower sales, and that's a result of reduction in number of head counts and other saving initiatives that was implemented last year. Administrative expenses in percentage of sales was slightly up compared to last year. R&D expenses increased 0.5% in percent of sales. However, R&D was down in costs if we adjust for the closure of a development project. Just taking a stop there at the R&D expenses. In R&D, in 2024, we spent SEK 115 million on R&D, where we capitalized SEK 77 million. Given the closure of BM 950 project, the saving -- and the savings we have implemented in last year, the R&D spend is expected to go down with about 50% on an annual basis, all else equal going forward. Some R&D resources that has been previously working on the project will be moving over the focus on OEM products as well as developing blood controls. And since we will not capitalize R&D going forward, the cost that is booked in the P&L is expected to increase somewhat. However, the spend from a cash perspective on R&D will decrease with about 50% on an annual basis going forward. In total, operating expenses decreased to 21% if we adjust for onetime items in the quarter. Other operating income expenses was slightly negative due to currency impact in the quarter. Altogether, adjusted operating margin increased in a good way, up 2.2 percentage points compared to last year. If we take a look on the cash flow from operating activities, we see a lower quarter, that was, to some extent, expected due to the guidance we gave last quarter of having severance payments coming through in the quarter. We had about SEK 8 million of this in the first quarter. And there also remains about SEK 6 million to be paid in Q2 and another SEK 2 million to be paid in Q3. Taking a look then on our liquidity and credit facilities. We ended the quarter with a cash position of SEK 20 million and including an unused credit facility of SEK 18 million, available liquidity for the company was SEK 38 million. To strengthen our liquidity, we took a loan in the beginning of April of SEK 20 million. And despite remaining severance payments, our operating cash flow is expected to improve in the second quarter, and we run the ambition to get operating cash flow into positive in the second half of 2025. With that, I'm giving back to you, Torben.

Thanks, Holger. So Q1 was another quarter focused on executing on our strategic priorities, and we continue to make progress. On the operating margin side, our focus is on ensuring that we operate both efficiently and effectively. In the wake of the BM 950 project cancellation, we rightsized the R&D organization, and we have initiated a site consolidation project, which will optimize our footprint in Sweden, further reduce our operating cost and design our workflows around LEAN principles. We've begun to focus our attention more on a growth agenda. We added a regional sales manager for Southeast Asia based in the Philippines to accelerate sales in the region and to stay much closer to our distributors and customers. In the U.S., we have signed on 2 sales representatives who will onboard in Q2, and we are continuously evaluating other regions to assess the potential organizational investment. Finally, we made the decision to close the BM 950 project and focus our portfolio strategy on technology partners. We have safeguarded our 5-part human hematology business with a contract extension, and we're in the process of adding clinical chemistry to our portfolio in the U.S., creating a more synergistic and a higher growth offering. That completes our formal presentation. I'd like to thank all of you for your attention, and we will now open it up for questions.

We have our first question coming from Christian Lee.

You delivered only 543 instruments in Q1. Would it be possible to disclose how many that were delayed due to the supply chain issues or quantify in terms of sales?

I think that the way to look at it, Christian, is that we normally would sell roughly 1,000 instruments per quarter on average, but we were satisfied with the order intake we did in Q1. And obviously, what we saw was a combination of orders being shifted from Q1 into Q2, but also this unusual high comparison with last year due to the order in India, where we had an overall instrument order intake of more than 1,300 units in total, but in India, specifically 600 units. So I don't think we will quantify exactly how many instruments, but it's fair to say that we saw a satisfactory order intake in Q1.

Okay. Do you expect to deliver the delayed order shipments into the second quarter?

Yes. We expect that those orders that due to delayed payments and could not be shipped in time for the close of Q1 that those orders will be shipped into Q2 and executed on.

Okay. Perfect. You also wrote in the report that you increased your license fees from India. Would it be possible to disclose by how much?

Holger, do you have an estimation of specifically how much the license fee impact was in Q1?

No, we will not give a specific figure of it. What was increasing for us in the quarter was the license fees for reagents in India.

All right. Okay. My last question. How much did M51 account for all of total sales in 2024?

In units?

In terms of sales, please?

I think that the best way to look at it sort of quantifiably, I would say that the M51 sales in 2024 was roughly 15% of our overall unit sales.

We have another question coming from [indiscernible].

Can you hear me?

Yes.

Excellent. So I have a few questions, but the first one on technology partners. I'm just trying to understand who owns the IP? Like do you buy the IP or do you lease it? And how does this affect the margins basically?

Yes. Thanks. That's a good question. No, we do not own the IP. There are different setups related to technology partnership agreements. For some technology partners, we operate with instruments that we slightly modify to fit our specific needs, but the IP will still be owned by the original manufacturer. For other agreements, specifically VitalScientific, this is a pure distribution agreement, where we will not add our blue branding and basically taking the instrument as it is. From a margin perspective, I will say that on the instrument side, given that this is a razor-razorblade model, I don't think we can say that the margin profile is significantly different to our own proprietary product portfolio. So in that respect, the difference is not material.

Okay. That makes sense. And do they get some sort of rev share on the consumables you sell on the systems?

They sell reagents to us. And of course, they have their own margin on whatever they sell to us, but it's not as if we share any -- we don't have any profit sharing as such with our partners.

Okay. So they license out the IP for the system. You don't own the IP. You pay a cost of sales for that. The margin doesn't differ. And then the part of consumables are meant more like you sell your own consumables on those machines, right? Hence, they don't get any part of the revenue?

Well, in the current setup and with the current technology partners we have, we source reagents directly from the technology partners. In the future, that could be a hybrid model. We could decide to also manufacture on license to our own installed base. But the structure we have today is that we basically just source the reagents directly from the technology partner and we sell it to our customers.

Okay. Got it. Just a quick question on R&D. So Holger, you said that you didn't capitalize anything this quarter and that OpEx side will increase and the total will decrease with 50%. I'm just trying to understand like should we expect 0 in CapEx going forward as well as in Q1?

There will be [indiscernible] I would say, normal CapEx related to investments in machineries and equipment. That will be, let's say, continuing as usual. What will be -- that we will not have going forward is capitalization of R&D costs. So that part is going out.

Got it. Okay. And then on Russia, so you're incrementally writing down for each quarter. I'm just trying to understand what are these SEK 5 million, right? So you wrote down everything related to Russia last year, but you still have an ongoing business. But where do the SEK 5 million come from? Is that SEK 5 million of EBIT? Or I'm just trying to understand this.

Basically, what we do for Russia is that we set down the asset value of our Russian business to 0. And since that business is still ongoing, the value of the asset is changing quarter-by-quarter. And to keep it 0, we need to write down to 0. It could also be that we had taken too much, so it could be the other way around. So far, since the business is profitable, we have been -- need to write down in both Q4 as well as in Q1. So it's basically an accounting element coming through that we're valuing the asset to 0 for Russian business.

So it's not SEK 5 million of profit generated during Q1 and write-down related to Russia?

No, no. It's just the valuation of inventory in Russia.

Okay. Got it. And just one more before I let people in. You wrote on the summary slide, SEK 13 million additional lower cost on an annual basis. Is that part of the SEK 25 million one-off? Or is this a separate part? And which cost category will it affect?

You mean the SEK [ 13 ] million?

Yes.

That's part of basically lowering R&D spend going forward since we closed the project. We will have basically the spend of R&D going forward after now the closure of the project.

Okay. Got it. All right. I have a few more points, but I'm going to go on mute and let someone...

I don't see any more questions on the line. Sorry, here we got one. Michael, please unmute yourself and ask the question.

Can you hear me?

I'm able to hear.

So the sales, there were some sales delayed in Q1, but you think that will occur in Q2. So could we expect an unusually high sales then in Q2? Or will there be further delays down the road?

That's a good question. Obviously, we cannot speculate on the future. I think that what you can expect is that it will stabilize. Obviously, it's our hope that the market will come down and that we will see that the banks in certain regions, specifically Africa, Middle East, that they will get better access to U.S. dollar currency. And that way, that will take away some of the bottlenecks we've had in the payments and subsequently the shipments. So I think that what we expect is, of course, that we are coming into Q2 with a higher backlog than anticipated given the situation. And we are also hopeful that some of the geopolitical instability will stabilize and then take away some of the bottlenecks that we have seen in Q1.

We don't have any more questions in the queue. Sorry, we got one. Please go ahead, [indiscernible].

Just a question on your OpEx savings. So you have been doing a great job in cutting costs. I just want to understand now from here on, do you expect any further cost reduction programs? Or are you happy now with your organization in terms of sales costs and admin costs and also R&D?

I think that we have taken all the big decisions now. I think that the last big organizational adjustment we did in the wake of the cancellation of the BM 950 project. Having said that, we will still be very focused on driving our business as lean as we possibly can. So we will be looking for making small adjustments along the way. But I don't expect any big organizational restructure activities to take place in the coming quarters.

Okay. And just on the R&D, just to clarify, excluding the one-off, it's SEK 7.4 million, if I'm not wrong now. You said you expect this to increase slightly from here. Can you tell us about how much you think R&D per quarter will amount to in cost because you're not going to capitalize anymore?

We hesitate from giving a specific forecast about the future. But mathematically, if we would have to spend, if we have SEK 115 million and you don't capitalize anything, you will be left with SEK 57 million, SEK 58 million on an annual basis, basically, and then that will be distributed over the quarters.

Yes. Okay. Perfect. And just that, can you say something about how much EBIT you make in Russia on an annual basis?

We don't comment specifically on the margins per country. We don't report it basically that way. But for us, Russia is a profitable market. It was about 7% of sales in 2024. I see a question in the queue on that one as well. So in 2024, it was about 7% that was coming from Russia, and that's a profitable business for us. We have another question coming from Amir.

Yes. So just following up on the Russia part. So I understand that you're generating profit. I understand that you're continuously doing write-downs, but do you get any cash inflow from that profit? Or is it completely restricted?

What we can do is basically that they are sourcing supplies from the group. And those we can get paid for to a third country. So yes, we can access money, but it's restricted. So it's not -- we can't do direct transactions with Russia.

So the money is still in Russia that you generate?

When they're sourcing, they can pay for what they're sourcing because our products are not affected by any restrictions. So it's not like we have been building up a massive amount of cash in Russia. That's not the case. If I recall correctly, I think we had like SEK 5 million or something when we did the write-down in 2024 in cash.

Okay. I think it's just maybe a question for Torben, very super high-level question. I don't know if it's a question, maybe a comment, but a lot has happened with this company in the last 12 months, a lot of good job like cutting costs. I think it was a good decision to cut the BM 950 as well given the history. I think as an investor, I'm just trying to understand how to position this company, right? Are you going to be a pure distributor and hence, we should have put a distributor multiple on that. And today, you're even lower than distributor multiple? Or are you a semi, like some hybrid between distributor and own products? Just trying to -- I think this is like super important for us to understand what kind of company is Boule and that will make a huge difference on the multiple we can pay.

Yes. I think that's a really good question. And obviously, we're still working through a lot of the strategic parts given the decision to close down the BM 950 project. However, I think high level, we should view Boule having 2 major business legs, one being our instrument and reagent sales business and one being our OEM blood controls business. If we look at the instrument reagent sales business, it is a bit of a hybrid today. In that, we have our own proprietary technology, which we intend to keep. And then we bolt on with technology partners, we're effectively strengthening our portfolio and making our value proposition much more appealing to our distributors today. If we think of our instrument and reagent sales business, one of our core strengths, which we may not have talked so much about in the past is really, one, our reach. We have a very extremely good and well built out distribution network. So we're able to, you can say, access customers in a very efficient and effective way, and we can leverage that channel to bring new innovation to the market. And then we have our ability to manufacture reagents. We can manufacture reagents in region. We can also manufacture reagents from a centralized position, which gives us the opportunity to compete on cost. And then, of course, we have the Boule legacy of having a very strong brand recognition in the regions in which we operate, where we are known for delivering very high quality and a very high level of service to our customers. And that combined, I see as a strong vehicle for a technology partner strategy, in which we use this vehicle basically just adding technology that fits our portfolio and solves a problem and meets the need of our customers, and we will continue to do so. And by leveraging this technology partner strategy, it gives us much more flexibility, and we are able to pivot when we see the market change, we can stay -- you can stay [ recent ] and we can stay on top and ahead of the technological developments. So it will be a bit of a hybrid setup on that side of the business. If we look at our OEM and blood controls business, that is, I want to say, more of a traditional business where we have and where we are strengthening our R&D capabilities to be able to develop a portfolio of high-quality blood controls. We have unique capabilities today. And I think it's capabilities that have been underutilized and underleveraged up until now. And now we're in the process of building up our portfolio strategy around blood controls and OEM reagent capabilities where we can expand beyond hematology, but also offer OEM solutions and services to large multiple multinational IVD companies beyond hematology. And that's the work that we've started now that we have, you can say, the resources to start branching out and be a little bit broader in where we invest and where we can spend resources going forward. I hope that answers your question. We will, in the coming quarters, communicate much more about our future strategy. We also start communicating more about all the growth opportunities we see in our OEM business and in our blood controls business.

We have another question coming in from Christian Lee.

Just a follow-up on the number of units sold. You mentioned that you expected to double the units of M51 in 2025 compared to the previous year, right?

Correct.

So if you delivered around 600 units in 2024, that would also imply that your 3-part instruments would decrease by 20% in 2025 if you would keep the total number of delivered units around 4,000 for the full year. What would be the driver for decreasing by 20% in 2025? Is it the transition to the license fee model in India? Or are there any other factors?

Well, I would say that, obviously, high level, your math is correct if your assumptions are correct. Of course, we don't -- we will not communicate on our full year projections of total instrument sales. But I would say that naturally, the drivers in the market is that we do see a continued switch in demand from 3-part to 5-part technology. That is effectively driving more 5-part instrument sales. At the same time, we also are ramping up our license manufacturing for instruments in India, which you can say also will impact our overall unit sales negatively. However, in parallel with that, we focus a lot on trimming our organization and our strategy to be more of a razor-razorblade model. So being more aggressive in the market in an attempt to drive our installed base growth because that's really what's going to feed our future growth. So I'd say, on one side, we have the switch from 3 to 5-part technology, and we have the strategic switch where we are now delivering instruments through a license agreement in India that is, you can say, negatively impacting the 3-part business. However, at the same time, we're investing in better coverage, more sales reps in order to be able to, you can say, counter that negative impact and keep the momentum we have in the 3-part technology side. We are still -- we still probably have the best 3-part solution in the market, and it's highly recognized by our customers. And there are still pockets in the market that are underinvested in hematology in general. And we still have markets that has significant growth opportunity for 3-part technology. And that's what we are trying to tap into by investing more in expanding our sales reach and becoming much better at target these specific segments.

I think we'll come to the end. We have one last question...

Just a detailed question on the cash flow before changes in net working capital. I understood you had SEK 8 million of like severance payments. But if you compare this quarter to the last quarter, same year, it's a huge difference in the cash flow from operating cash flow before net working capital, even if you exclude this SEK 8 million in severance payments. So I want to understand, is there any -- the difference, is it other type of one-off costs you actually paid this quarter?

No, the 2 other main drivers would be that we increased the inventory in the quarter, partly due to what Torben has been describing before with delayed shipments of orders as well as we had an increase of receivables in the quarter.

Yes. I know but I meant before net working capital. So you had this quarter minus SEK 1 million and last year was SEK 25 million, but your adjusted EBIT was approximately the same number. So how come there's a huge difference in those numbers before net working capital.

I will need to get back to you on that question. We can follow up separately. Thank you very much. With that, thank you, everybody, for calling in today and wishing everybody a great day.

Thank you.