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

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

Thank you, Holger. In the third quarter, we returned to organic growth in a market that continues to face structural challenges. Although we still suffer from currency headwinds, we are starting to see early signs of stabilization, with slightly more balanced pricing of instruments and improved demand in our key markets as government tender processes resume. Our instrument sales were strong as we continue our focus on strengthening our installed base. Reagent sales continue to suffer from unfavorable FX and delayed payments. We expect to see sales stabilizing as distributor inventories deplete. OEM sales was flat when adjusting for currency, and we maintain a positive outlook for the year. Despite high instrument sales, margin improved from last quarter, and we delivered positive operating cash flow for the second consecutive quarter. And finally, this month, we signed a technology partner supply agreement for a new veterinary instrument, which will launch in 2026. Taking a closer look at the Q3 financials for the group. In summary, we reported Q3 sales of SEK 127.2 million, down 2.4%, and with a 4.1% unfavorable currency impact, leading to a positive organic growth of 1.7%. Gross profit landed at SEK 52.4 million, down from SEK 61 million, primarily due to lower instrument pricing and the impact of the weakened U.S. dollars. Gross margin declined to 41.2% from 46.8%, however, showed a 2.4 point margin improvement over Q2. We reached SEK 12 million in adjusted EBIT and achieved positive operating cash flow of SEK 1 million. Available liquidity ended the quarter was SEK 37 million. To clarify our strategic direction and increase transparency, we will begin to report and steer our operations in 2 business segments going forward: Boule Diagnostics and CDS OEM. This change will help clarify the drivers for each business area, increased strategic focus, and at the same time, make it easier for our investors to follow the progress towards our long-term goals. In conjunction with the new business segment focus, you'll notice that we are implementing a new brand identity with updated logos and a new and more contemporary look and feel. The 2 business segments are defined as follows: Boule Diagnostics, a global provider of high-quality diagnostic solutions for the decentralized human and veterinary market specialized in hematology. In Clinical Diagnostic Solutions or CDS OEM, a contract development and manufacturing organization specialized in OEM reagents, calibrators and blood controls. Our strategic priorities remain the same: to transform Boule into a higher growth and higher-margin company, expanding the operating margins, accelerate organic growth and building a stronger growth-oriented portfolio. In our Diagnostics business, our immediate focus is still on improving overall profitability, while investing in better sales coverage and implementing a technology partner portfolio strategy. We've made significant improvements, reducing operating spend by 30% year-on-year, expanding our sales team, and brought in new technology partner products, and we will continue this focus. In our OEM business, our focus has been on expanding our project funnel and defining a new blood control portfolio strategy. Now we focus on implementation and operational execution of our R&D pipeline and project funnel. Now let's take a closer look at each of the segments, starting with the Diagnostics business. Boule Diagnostics seeks to leverage the following strengths: the legacy and brand recognition of Boule as a pioneer within hematology, known for reliable and high-quality solutions. The global reach, an extensive distribution network. Boule Diagnostics operates in over 100 countries through more than 200 distributors supported by local sales and support teams. And finally, our suite of instruments, primarily within hematology, for both human and veterinary segments, supported by a complete range of reagents, calibrators and blood controls. The decentral hematology market is attractive and the business model is robust. We operate exclusively indirect, which allows us to have global presence and good market coverage. It is a razor blade model, growing the installed base to drive consumable sales with approximately 60% recurring revenue. Today, we have more than 30,000 instruments in the field. majority of them being RFID protected and locked to our reagents. The market is generally split into human and veterinary hematology, 3- and 5-part technology. The human market, being the largest of the 2, growing low single digits and dominated by 5-part technology. Here, we have a stronghold in the 3-part segments, and we are growing into the 5-part market. The veterinary market is smaller but growing high single digits. This market is less regulated and easier to enter with new technologies. Boule Diagnostics operates in more than 100 countries and have built up a vast network of distributors. Sales is set up in 9 strategic geographical locations, allowing us to stay close to our partners and customers. We operate 3 manufacturing sites: in Sweden, in the United States and in Russia, as well as one licensed manufacturing partner in India. And our revenue is fairly distributed, with Europe being our strongest region. The instrument portfolio consists of both proprietary 3-part technology as well as instruments we have sourced through technology partners. Currently, we offer hematology and clinical chemistry solutions for both human and veterinary decentral markets. Earlier this year, we made a strategic decision to focus exclusively on new portfolio adds through technology partners. The rationale for this decision is that it gives us access to the latest technology faster at significantly lower costs. In Q2, we added clinical chemistry in the U.S. market through our partnership with VitalScientific. And this month, we completed a new technology partner supply agreement for a new addition to our veterinary portfolio, which were launched in 2026. In Q3, our Diagnostics business realized organic growth of 1.8% despite currency headwinds and delayed payments. Instrument sales were strong, growing 16%, supported by high sales of our 5-part instrument. An adjusted operating margin was impacted by currency and mix, but improved from last year due to efficiency and cost reduction initiatives. Now let's take a look at our OEM business. Our OEM business is founded in Clinical Diagnostic Solutions based out of our plantation site in Florida, U.S.A. The business segment focuses on contract development and manufacturing specialized in OEM reagents, calibrators and blood control. At CDS, we're unique in our ability to do custom design of reagents, controls and calibrators for impedance, optical, fluorescence, imaging-based detection technologies, specifically for hematology, flow cytometry, chemistry and copulation systems. We are for flexible and scalable manufacturing services, from small to large batches, serving both start-ups and large global IVD companies. And we have deep subject matter expertise in the development and manufacturing of universal blood controls with extended in-use stability in shelf life. The OEM market offers significant opportunities for stable and profitable growth going forward. We are convinced that with our ongoing investments, the special expertise in these product areas so we can become a reliable partner for more diagnostic companies worldwide. In Q3, we finalized our new OEM strategy aimed at expanding our pipeline of reagent projects and developing a generic portfolio of high-quality, differentiated blood controls. The OEM business is characterized by long-term contracts that has delivered steady sequential growth. Over the past 5 years, our business has grown [ 137% ]. The OEM market is vast. We break the market into 2 areas: OEM reagents and hematology blood controls. Both markets offer significant growth opportunities. Within the OEM reagent market, it is our assessment that we have capabilities that enable us to play in a sizable segment of the market. Focus here is on project funnel growth through new customer acquisition and maturing the projects that we have in pipeline. In the hematology blood controls market, we're now developing a portfolio of generic blood controls to take share in this attractive niche segment. We will launch new generic blood control products in 2027. OEM sales volume was stable in Q3, with an organic sales growth of 0%, with a negative currency impact of 10% in the quarter due to translation of lower U.S. dollars. Gross margin was stable for the quarter at 47.4%. Operating margin declined due to increased operating expenses with SEK 4 million R&D investments in new OEM products, blood controls and reagents as well as investments in our sales organization and customer projects. With that, I'll hand it over to you, Holger, to go through the group financials.

Thank you, Torben. Starting with the financial summary of the quarter. We returned to organic growth sales -- organic sales growth of 1.7%, cost of sold goods increased despite lower sales, and diluted our gross margin to 41.2%. This was driven mainly by currency headwind from the stronger Swedish krona and the weaker U.S. dollars. To some extent, also sales mix and more instrument sales was impacting the margin. Given that about 75% of our sales is in U.S. dollars, the lower U.S. dollar will unfortunately continue to be some headwinds to our business and gross margin. Operating expenses decreased significantly compared to last year with 30%. We have seen a significant impact from the restructuring work we did in last year. And in total, we have reduced our full-time employees and consultants of 63 FTEs. This is, of course, also a result of the closure of our development project, BM 900, in the beginning of this year. We know we have more cost reductions to work on. And one example is a current ongoing site consolidation in Spånga, Stockholm, Sweden. If excluding the capitalization last year, we increased EBIT to SEK 12 million. And now we are not capitalizing any R&D. But if you're comparing to the capitalized R&D last year, EBIT decreased slightly, mainly as a result of the lower gross profit and gross margin. Operational cash flow was positive for the quarter. Cost of goods sales increased with 5.6%, with headwind as -- headwind from currency as is the main driver. Selling expenses compared to last year decreased to 19.9%. This is the result of structural changes in sales and marketing as well as the service organization in the last year. Administration costs were slightly up, mainly as a result of inflation, and to some extent, in investments in IT systems. R&D and Q&R decreased significantly as a result of the closure of BM 950 in the first quarter '25. Last year, we report a one-off cost restructuring. And if we adjust comparables year-over-year, excluding capitalization, operating margin improved from 1.7% to 9.4%. Adjusted operating margin, including capitalization, was still down, mainly as a result of the lower gross margin. If you look into -- going forward, we are working on compensating the weaker U.S. dollars by implementing selective price increases, and we have done some, and we're planning to do more going forward. Looking at operating cash flow. Our trend is positive, and we had ambition to get back to positive in 2025. We had some headwind from collection in the quarter that is taking longer time than usual. We don't see any significant risk, and we partly collected some of the due invoices already. In the quarter, we had about SEK 1 million in payments restructuring related to what was done in the last 12 months. Inventory was decreasing in the quarter, but we have more work to do when it comes to optimizing our inventory going forward. It was partly impacted by the buildup of inventory for the Vital business in the U.S., but we need to have a base level of consumable inventories. Moving over to liquidity and credit. We ended the quarter with a cash position of SEK 21 million and unused facility of SEK 16 million. In total, liquidity decreased slightly from last quarter. With that, I'm leaving it back to you, Torben.

Thank you, Holger. To summarize, our 3 strategic priorities are clear, and we are making progress. Gross margin improved 2.5 points quarter-over-quarter. We have realized 30% operating spend reduction year-over-year. We delivered positive operating cash flow for the second quarter running. We're back to organic growth in the quarter. We delivered 16% instrument sales growth year-over-year. We've signed a supply agreement for a new veterinary instrument that we plan to launch in 2026. And we have a new CDS OEM generic blood control products planned for 2027. With that, I thank you for your attention. And now, we'll open up for questions.

Please feel free to raise your hand if you have any questions. It looks like we currently have no questions on the line. We will give another few seconds for the opportunity to ask questions in the chat field or by raising the hand. Seems like there are no questions on the line. So with that, I'm handing over to Torben.

Yes. Thank you for your attention. This concludes our Q3 earnings call. Wish you all a very nice day.