Biotage AB (publ)

Thank you very much. Good afternoon, everyone, and thank you for joining us on our interim report Q1 call. I'm Thomas Lundqvist, president and CEO of Bytosh, and I'm here with Maja Nilsson, our CFO. Here you can see the agenda for today's call. But before Maja dives into the Q1 results, I will give you an overview of the quarter. We will also answer your questions at the end of the call. So let's start with our executive summary on slide five. Overall, our core business is developing well in most areas and regions, and two out of our three customer focus areas are growing. Looking at the regions, we had a double-digit growth in ASEAN and in the Americas, where we even had an all-time high record month in March. Also, Korea and our distribution business in all three geographies were growing. Going into our product focus areas, we saw a double-digit growth within diagnostics, analytical testing, and water and environmental testing. Also, the biologics and advanced therapeutics product grew in the mid single-digit range. For the first quarter since the ATD bioacquisition, we can now appropriately follow up on our oligonucleotide business and its performance. Most of this business is found in our diagnostics area. We work with a decentralized direct sales model, and during the past year, we've now got to know our new service business market, our customers, and new team members. And we're happy that our integration model works. We have won many new customers, and the Oligo business has achieved double-digit growth. But there are some bumps on the road, and we're not pleased with the results. What is impacting our results negatively is the decreased small molecules and synthetic therapeutics and scale-up sales due to a weakened CRO segment in China and significantly reduced COVID-19 business in Europe. During Q4 2022, we experienced a rapid slowdown at our biggest CRO customer, but we've also seen this issue becoming broader, now covering the entire CRO market segment in China. which is our largest end market in the country. We're now working together with leadership in China to allocate resources appropriately and steer the business in the right direction. We're focusing strongly on increasing the aftermarket sales, which is also part of our recurring revenue strategy. In Q1, the after sales share was 59%, which has closed our long-term target of 60-40. We're pleased with our service area driven by the oligo service with a triple digit growth in America and saw positive development in the Apex service core business. Naturally, the ratio was impacted by the significant decline of system sales that went down 19% from last year. This is again driven by the reduction of flash system sales in China and more cautious global customer behavior when it comes to system ordering. In line with our focus on digital transformation, we have launched new connectivity solutions supporting our world leading biotouch select flash purification systems. These solutions allow remote monitoring and integration of systems into any laboratory packages, supporting improved flexibility, control, throughput and efficiency in laboratories. In the next phase, we will focus on safety and data integrity. Our global research and development has developed the solutions at the rapid pace in close collaboration with our customers. The solutions have been developed in line with our sustainability goals as our customers will be able to monitor solvent usage and waste consumption to give some examples. Speaking about sustainability, we managed to achieve two important milestones during Q1. Our Morningstar Sustainalytics ESG risk rating has gone from medium to low, and our gender equality index in Sweden has increased from 97.3 to 101.0, while the Swedish average is 95.8. With that, I will now hand over to Maja to present our Q1 results.

Thank you so much. So let's go to slide number seven. to take a look at our sales per customer focus area. So we are happy to see that two out of our three customer focus areas are showing strong reported growth in this quarter. Red tech with the strongest reported growth of 24%, followed by blue and green tech growing with 8%. In white tech with the mentioned current challenges, we see a reported decline of 17%. Let's go to the next slide to look at the breakdown of our sales from a product area perspective. Our product area scale-up is significantly impacted by the reduced COVID-19 vaccine development business, also in this quarter. Still, we see the underlying business of scale-up when excluding the COVID-19 business at a healthy growth. The other big impact on net sales in this quarter is within our product area of small molecules and synthetic therapeutics, where the CRO market in China has had a negative impact. When looking at the rest of the business, I'm happy to share that a different picture Here we see healthy reported growth in four out of our six product areas. The highest growth this quarter comes from analytical testing and water and environmental testing. In analytical testing, it is great to see that we are reporting a strong growth in EMEA as well as in Americas. And that is also the case for water and environmental testing, where EMEA shows a positive trend. We're also glad to see our oligo business in our product area diagnostics reporting double-digit growth in the quarter, where Americas is driving the growth with successful customer base expansion. Let's go to slide number nine to take a look at our aftermarket sales. The decline in system sales is mainly related to the reduced COVID-19 and China zero business. The flat development of our consumable sales is reflecting the reduced COVID-19 business and scale-up, but the consumable sales have grown in all other product areas. It's offset by the scale-up business decline. We're glad to see our service business showing strong double-digit growth coming from the oligo business, but also a good growth within our product area, small molecules and synthetic therapeutics in APAC. Let's go to slide number 10. to look at the regional sales. Again, when we look at the sales development from a geography perspective, we can see the impact from the reduced sales in the Chinese CRO segment in APAC. And in EMEA, we see the impact from the reduced COVID-19 business in scale up. Aside from that, the other segments of the business are showing a healthy development. In EMEA, we're glad to see the growth of analytical testing and water and environmental testing. And in APAC, we're glad to see the strong growth in the ASEAN region and in Korea especially. In America, we still see double-digit growth, mainly coming from analytical testing, but also we are very glad to see that the Oligo business is really showing a nice growth with new customers coming in. Let's go to slide number 11 to see our profitability performance. We're glad to see a strong improvement of our gross margin in Q1 compared to Q4 last year, coming back to a level above 60%. mainly driven by a favorable aftermarket ratio in combination with sales price increases that we have implemented that are now showing in the P&L. We did not manage to defend the gross margins of Q1 last year though, which was a really strong quarter as it had high volumes of high margin products coming from the COVID-19 sales and scale-up. But it's great to see a positive trend as a Q1 compared to year-end 2022. OPEX is negatively impacted by currency impacts from the weak Swedish krona and the acquisition-related expenses from the Astraea acquisition. In the first quarter, there are transaction costs of $12.5 million related to the acquisition of Astraea included in OPEX. When adjusting for these costs, the adjusted EBITDA margin improves 3.5 percentage points in the quarter. To mitigate the short-term impact on our profitability, we are keeping a very stringent cost control as well. We can go to slide number 12, showing our financial overview. So I want to give you a brief comment on the cash flow, which has declined in Q1-23 versus Q1-22. The main driver is the lower operating results, where the acquisition-related costs are heavily influencing the results. but also that we in the first quarter this year also have made bigger tax payments in Sweden and in the UK, whereas in the past we have been able to utilize losses carried forward. Cash flow from working capital changes have had a favorable development from accounts payable as well as inventory, however not mitigating the reduced operating results and the tax payments. Still, the cash flow from operating activities is positive and it is contributing to building the future success of Bytash.

back to you tom thank you maya now we're ready to answer your questions if you wish to ask a question please dial star 5 on your telephone keypad to enter the queue if you wish to withdraw your question please dial star 5 again on your telephone keypad The next question comes from Ricard Anderkrans from Handelsbanken. Please go ahead.

Good afternoon and thank you for taking my questions. Two from my side, please. First question. In 2018, China represented around 9% of biotage sales and throughout the pandemic, it grew up to almost 15% of sales in 2022. With broad-based challenges here in China, is the pre-pandemic level as a percentage of sales the right way to think about it for the medium term? Or how should we think about the share and contribution of China here? It would be super helpful. Thank you.

Well, Rikard, as you know, we don't provide those granular details. We see this as a bump in the road and we're now reallocating resources and steering the organization in the right direction where we can benefit from compensating additional sales. So still to be logic, it will take us some time to get to the same flows. And what you can see there, what we can share with you, though, is that the analytical testing is, for instance, growing at a very rapid and positive shape and manner. Any other part apart from the CRO related business area is at a good pace.

All right, thank you. And second question, coming back to Estrella Bridge for sales in EBITDA 2025, there was a lot of discussion on the previous call, but I want to come back to it. Is the 2025 your forecast or is it a forecast provided by by Astrea and its owners or is it possibly they may be the same? Would be interesting with anything you could comment on that bridge would be super helpful. Thank you.

Well, basically what we can say, I mean, of course, in any acquisition, the forecast and the outlook is developed by the business that you acquire. Naturally, it's their assessment that they have made, and we have scrutinized it and really assessed it carefully in the due diligence process. So it's a forecast from the selling company, of course, but with our assessment.

Thank you. That's very helpful. I'll get back into the queue. Thank you for taking my question. Thank you, Rickard.

The next question comes from Jacob Lemka from SEB. Please go ahead.

Hi and good afternoon. I have a few questions. I'll take them one by one. First of all, can you comment anything on the demand from customers more towards the end of the quarter and maybe also into April?

Well, normally we don't provide that guidance, Jakob, but I mean, there is, as we have mentioned in the call, there is a healthy growth of the underlying business when you exclude those temporary short-term impacts that we've seen in the Chinese zero market and scale up.

Okay, yeah, and you said that the consumables, I think, excluding scale-up that actually grew here in the quarter, is it reasonable to assume this kind of activity level to continue throughout the year?

I'm sorry to disappoint you, Jakob, with not providing guidance again, but what we can say is that March, we ended the quarter with the strongest month in quite some time, so we are carefully optimistic from that month.

Okay, I understand. And then I'm also wondering a bit on pricing increases, if there are any in Q1 here, and how would you think about that more in general?

Well, I mean, we start to see some impacts of, we've had a few programs, and yeah, we start to see

attractions on on that which is uh also impacting uh the gross profit margin which is by the way the strongest we've had since q1 2022. okay great and and then i'm wondering a bit on the sort of operational costs i believe they're down quite a bit from q1 and i know there might be some seasonality here but can you maybe talk more about the drivers here

Well, if you look at the OPEX in Q1 this year, it's heavily influenced by the acquisition-related expenses regarding the S3 acquisition. So you have to keep that in mind. It's representing 12.5 million SEK in the quarter. And on top of that, we have still some negative impacts from currency in OPEX. But we have to keep in mind also that when the OPEX is hit negatively by FX movements, it's a net positive for the company on top line cross margin. I think that's the main driver.

I think maybe you misunderstood me. It's like the cost has gone, the cost has shrunk from last quarter.

Yeah. So, of course, when we started to see, well, the decline in our scale-up business and as well the zero market in China, we have taken measures, of course, to keep a very stringent cost control. And that is something that we continue to drive during this year, of course. So that is what we have done.

Okay. Sorry, Jakob. You can see that we're moving in the right direction from a Q4 perspective, both on OPEX and gross profit margins, to give two examples.

Okay. Sounds good. That was all the questions in mind. Thank you.

Okay. Thank you.

The next question comes from Jose Fine Persson from Nordia. Please go ahead.

Hello, can you hear me? Hi, thank you very much for taking my question. So, first of all, a bit on the gross margin and aftermarket sales. Can this be explained by the slowdown in China? which I know that you had a lot of instrument sales in.

Yeah, that's correct. You see a drop there on 19% significantly, of course, impacting. But on the other hand side, we have a tremendous service model also driven a bit by the Oligo business and an underlying great organization dealing with the core service business, especially in APAC, it's standing out.

Okay, thank you. You mentioned also that you want to steer the Chinese business in a new direction. Don't you think that these customers will have the same approach to a Swedish brand as the CROs?

What we're trying to say is that if there will be a bump in the road or a more cautious approach, which we see in the CRO market, we're just trying to steer it towards where we don't see the same kind of patterns.

so um so that is why for instance we're focusing more on the analytical testing which is doing really well um at the minute okay thank you um and listening to to the q1 results from your peers they've also been mentioning the inventor destocking trends and from some of the peers We should see a turnaround here by the second half of 2023. Do you think it can start to normalize soon?

Well, again, I think Maja tried to respond to that question. We don't obviously have the crystal ball. However, we've seen some signs with the strongest quarter in a few months in March. And of course, we also read the trends and the data picked up by others. But it's clear that it's a cautious focus from the market, focus really on cash flow and working capital. And of course, we are in the same boat there.

Okay, thank you. I can get back to the queue. Thanks.

Thank you, Josephine.

As a reminder, if you wish to ask a question, please dial star 5 on your telephone keypad. There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

Okay, thank you. So to sum it up, we're not satisfied with the Q1 results, largely impacted by the declining sales in our small molecules and synthetic therapeutics and scale-up. But we're pleased to see that our business is doing well in most business areas and regions. We're also happy to see that we have developed positively sequentially with our OPEX, gross margins and EBIT ratios since Q4 2022, and that March was the best-performing month in the quarter. We want to strengthen our wide tech workflow, consumable and service offering, moving us towards commercial phases, especially within biomolecules and advanced therapeutics. These segments grow faster, and it has a larger addressable market, accelerating our recurring revenue strategy. This is where the acquisition of a three by separations would play a key role. I'm excited to soon welcome our new colleagues to bypass and to start our leading photography powerhouse collaboration together. This is all we have to share today. Thank you for interesting questions and take care.