Boule Diagnostics AB (publ)

Good morning, everybody, and welcome to the third quarter's earnings call for Bull Diagnostics. I'm Holger Lambert, CFO for Bull Diagnostics, and with me, I have our CEO, Torben Nielsen. After our presentation of the third quarter's earnings, we will open up for questions. Please also feel free to type questions into the chat field. With that, I'm leaving over to you, Torben.

Thank you, Volker. Good morning and a warm welcome to everybody who has decided to join this Q3 earnings call. We'll begin by taking a look at the Q3 highlights. Overall, it was a stable quarter in which we delivered slightly below last year. Sales was negatively impacted by lower instrument and consumable sales. Consumable sales was as expected, impacted by the transition to licensed manufacturing model in India. And we should expect to see this impact increase as we ramp up production in India for both consumables and in the future also instruments. OEM compensated partly for the lower sales and once again delivered a strong quarter. 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. This quarter, we continued our extensive reorganization work, recognizing another 16 million in annual savings potential. Consequently, we incurred higher restructuring costs, which adversely impacted our cash flow. On the portfolio project front, our licensed instrument manufacturing side in India produced the first couple of instruments. And our team has been on site to validate the production line. We're on track to ramp up manufacturing in Q4 2024 as planned. As it relates to the BM900 project, the team is working hard to complete the BM950 for performance evaluation. which is scheduled to run in the first half of 2025. In Q3, we also reported two significant one-time costs related to the evolving market situation. We see a continued shift towards five-part technology in the market. And based on that analysis, we've made the decision to narrow the BM900 project scope to not include a premium three-part option, which was initially planned for. It is our assessment that our current BMA50 technology platform can meet the three-part demands in the market. This decision, together with the extensive delays that the project has suffered, have adversely impacted the valuation of the project, leading us to do an impairment and a one-off non-cash cost of 265 million Swedish kronos. The PM950 continues to play an important role in our portfolio strategy as we move forward. As it relates to Russia, we have continuously evaluated the geopolitical situation and have now concluded that to ensure the future sustainability of our business, we must divest our manufacturing plant in Russia. We have initiated the complex and lengthy process of divestiture in Russia, and consequently, we are reporting a write-down of assets in Russia to the tune of 27 million Swedish crowns. In summary, we reported Q3 sales of 130.4 million Swedish crowns, down 6.6%, where 4.6% is related to currency, leading to a decline of 2% organically. Adjusted gross profit improved by 6.1% to 61.3 million Swiss crowns, and adjusted gross margin improved to 47%, up from 41.4% as a consequence of favorable mix and efficiency gains. Adjusted EBIT significantly improved by 93.7% to reach 15.3 million as a result of the improved gross profit and lower operating expenses. And adjusted operating margin reached 11.8% up from 5.7%. Cash flow from operating activities was 5.2 million and available liquidity end of the quarter was 48 million set. If we look at overall sales year to date, we are flat. In more detail, we're declining 0.1% organically and currency was negative 1.6%. If we adjust for the license model impact in India, our year to date organic growth was slightly positive with approximately 1%. If we take a look at our sales growth by region in Q3, Asia and South America continue to be our weakest regions. In these two regions, we are continuously challenged by low-cost Chinese manufacture, a market that is gradually switching from three-part to five-part technology, and policies that are favoring local manufacturing. We did see growth in North America, Europe and Middle East. And if we look at how our business is constructed, our OEM and consumables revenue continue to outgrow our insurance revenue. Focusing in on our hematology business specifically, we did have a soft quarter. Sales declined by 17.7% for the quarter and year to date, we are 6% below last year. Instrument unit sales in Q3 totaled 716 units below last year by 29%, but this was largely driven by a strong comparison from a couple of one-off tender wins we had in North America and Latin America in Q3 of last year. Year-to-date instrument unit sales are 6% below last year. Our reagents and controls business is down 8% for the quarter and 5% year-to-date. The India license model impacted sales negatively approximately 1% year-to-date. And from Q4, we will begin switching our instrument sales in India to a license model, which will have a negative impact on our top line of estimated 30 million annually, but with a positive margin impact. On the OEM side, we see continued good performance. In Q3, sales grew 51%, and year-to-date, we are growing 17%, which is very encouraging. From Q1 2021 to present, OEM has grown 144%. We see future growth opportunity here, and our funnel continues to grow and mature.

Thank you Torben.

So taking a look then on the financial summary, we had a slight negative organic growth of 2%, while our cost of sold goods decreased significantly and giving us an adjusted gross margin that improved to 47% from the 41.8 last year as a combination of both mix with a favorable mix of having more sales of OEM and a bit lower of instruments. Operating expenses adjusted for one-time items decreased 6.6%, mainly due to restructuring activities we did in starting Q2, but also a bit less consultants work on the R&D side in the quarter. In Q3, we launched a second restructuring program that would give it an annual saving of about 16 million when it's fully implemented, which would be in about a year's time. Altogether, that resulted in a significant increase of operating Profit for the quarter leading to a margin of 11.8%. Cash flow from operating activities was a bit on the weaker side in the quarter, mainly due to high payments for our restructurings as well as tax penalties that was announced in Q2. Looking on the longer trend, we have seen our operating margin improving quarter over quarter for the last 10 consecutive quarters. And if we're now looking into the 12 months rolling margin, we see an improvement from 6.8% last year up to 9.7% end of Q3 2024, a full increase of 2.9 percentage points. And then in terms of profit in value, we see that the margin also transforming over to a value increase of our EBIT of 41% compared to last year on the rolling 12 months basis. Taking a look at our costs in relation to sales. Our cost of goods sold improved with 5.6%. Selling expenses was just below last year. And that's despite the salary inflation. And this is due to reductions of headcounts. And I can also add there that the restructuring activities we implemented in the third quarter with reduction of headcounts but is mainly related to selling expenses. Administrative expenses were slightly up compared to last year as a result of underlying inflation. R&D expenses decreased with 1.9% due to less consultants and also somewhat fewer headcounts in the R&D organization compared to last year. In total, our operational expenses were flat in terms of percent to sales. However, our expenses decreased with 6.6%. Our operating expenses and income was lower compared to last year, mainly due to less currency impacts. All in all together, an adjusted operating margin improvement of 6.1%. Looking then on the cash flow development in the quarter, we see a lower cash flow than in the previous quarter, as expected. The adjustments of non-cash items it's mainly related to depreciations in currencies, inventory levels was improved somewhat in the quarter. Account receivables were decreasing due to lower sales, positively impacting the cash flow. The major change in the cash flow was related to other liabilities, where we had payments for our restructuring activities, as well as the lost tax case in Sweden. related to the personnel options a few years back in time. Altogether, we reached a cash flow from operating activities of 5 million, down from the unusually high level last year. And if we're looking on the operating cash flow year to date, we have improved 9 million compared to last year, up to 41.5. If you're looking down the chart to the right, we see here a drop in a positive trend, which is mainly a result of working capital leveling off trend-wise from the supply constraints that was faced back in 2022 and bringing down the cash flow to a low level in 2022 and beginning of 2023. Longer term, it should, of course, correlate relatively well to EBITDA. Moving over to our liquidity situation, we ended the quarter with a cash position of 17 million SEK, including additional unused credit facilities of 31 million, giving us an available liquidity of 48 million SEK and a net cash EBIT of minus 0.1. The current guidance we have for our investments on the platform for 2024 in the fourth quarter is about 25 million. After the full year of 2025, we expect the investments to drop significantly down to 45 for a full year of 25. We know our cash position has decreased over the last quarters, but so has also our spend, and that will continue to decrease given the implemented restructuring activities, as well as a lower investment rate for the R&D side going into 2025. With that, I'm leaving back to you, Torben.

Thanks, Holger. As we look towards 2025, our vision remains unwavering. We want to drive innovation, we want to foster sustainable, profitable growth, and we want to create value for our stakeholders. The rapid pace of technology advancement and the evolving market dynamics require us to be much more agile and forward-thinking than ever before. During my first two quarters as CEO, we've taken a very detailed look at our business and reviewed the market in which we operate. And based on that market work, we have devised a strategic plan. We launched the first iteration of that plan in Q2. And now we're formalizing that into our strategy for 2024, based on three focus areas, which will direct our actions as we move forward into 2025. It's formalized around three elements. One, expand operating margins through disciplined execution and reductions in structural cost. Two, to accelerate growth through strategic organic investments. And three, to build a better, stronger growth-oriented portfolio. We will have a very tactical approach to this strategy with a strong focus on execution. So let's take a look at each of the three focus areas one by one. To achieve sustainable and profitable growth, we've begun a comprehensive restructuring of our organization. This will involve consolidating functions and sites to streamline operations and reduce overhead costs. Additionally, we will lean out our processes to enhance efficiency, improve productivity and foster innovation. We believe that implementing these strategic initiatives, we can create a more agile, responsive, and competitive organization. Right now, we have immediate focus on improving the profitability to create a solid foundation for future growth. We have established a new supply chain function to take a more comprehensive action around our supplier management and terms evaluation. And in addition, we have established an operational tiger team focusing exclusively on implementing COGS reduction initiatives. A significant reorganization has been initiated. It began in Q2 with the aim of both right-sizing the organization, but also setting up the teams to deliver more effectively. During the last couple of quarters, we've realized reductions of 21 headcounts and 24 million in annual savings. Finally, we aim to instill a culture of operational excellence throughout the organization, which will help us continuously improve our processes, eliminate waste, and deliver maximum value to our customers. By empowering our team members, fostering our culture of collaboration, and embracing innovation, we strive to achieve sustainable growth and operational efficiency. We've begun this journey by implementing continuous improvement boards in all functions as a way of putting lean thinking into practice. And already now the teams have identified significant improvements, opportunities of which many have been implemented and are beginning to contribute. We will expand and strengthen our channel reach in high growth markets with a primary focus on introducing our veterinary portfolio into new and emerging markets. Additionally, we will establish local presence in strategic locations when necessary in order to enhance our market penetration and customer engagement. Our current licensing setup in India is a successful example of how we, together with our partner, are managing local Made in India policies. In addition, we want to update our digital footprint to strengthen our brand recognition and support our channel partners with targeted campaign activities. We believe that these initiatives will position us to capitalize on emerging opportunities and deliver value to our customer base. Finally, we aim to develop a portfolio that is resilient and focused on high potential areas and precision for long-term growth. We need cost-effective solutions for the value segments as well as more differentiated solutions for the premium segments in hematology. In addition, we look to expand our offering beyond hematology to diversify our product range, build a more attractive portfolio for our channel partners, and drive incremental growth. And finally, very importantly, we will continue to invest in our OEM capacity and capabilities. OEM represents significant growth opportunities for us, which we want to capitalize on. In conclusion, and to sum up, I would say that our year-to-date performance has been stable. We continue our efforts to improve our profitability through process improvement and reductions in structural cost. Priority short-term is to complete the new five-part instrument to help fuel our growth. And finally, we will focus on relentless execution of our strategic priorities. With that, thank you for your attention, and let's open it up for Q&A.

Robert? The line is open for Q&A, and the first question comes from Christian Lee at Pareto. Please, Christian, unmute yourself and go ahead.

Yes, good morning. Thank you for taking my questions. I have a couple of them. Would it be possible to quantify the licensing fees in the quarter? Would that be the main reason for why the sales of regions decreased by almost 5 million in the quarter?

Thank you for that question. As we stated in the presentation, the impact of the licensing fee is approximately 1% year-to-date. I'm not sure we've done the calculation for the quarter, but I'll allow Holger to comment on that. If you look overall at the performance of our consumables business in the quarter, it was a contributing factor, but another factor that played in was timing. Timing of the orders coming in from our customers. So those two combined led to the performance we had in Q3.

And just adding that on the figure, regarding the India license, it's a lower part of the growth is coming from the India license fees. It's mainly from the reagents, but there is one or two millions related to the license fees from India.

And I guess that the licensing fees are included in the other product category?

Yes.

Okay, right. One question regarding your expansion of your offering beyond hematology. Would that be through acquisitions or do you plan to initiate new product development?

I think our intentions are to do it inorganically. We would look for partnership opportunities, distribution opportunities, and possibly M&A opportunities. But right now, our main focus is on partner and distribution. opportunities as it relates to our portfolio expansion. Okay, that's clear.

You mentioned that you're planning to make investments of 45 millions related to a new platform in next year. Would that be more tilted to the first half of the year or evenly distributed over the year? Olga, would you add some comments to that, please?

It will be a little bit more in the beginning of the year, just as a result of where we are in the project.

Okay, perfect. Thank you. That's all from me.

Thank you, Christian. Next question comes from Stan Gustafsson at ABG. Stan, please go ahead and unmute yourself.

Yes. Good morning. My first question relates to the write-down. You took down the capitalized development cost by 76%. You say it relates to the three-part system, but in all the communication throughout the years, it has always been about the five-part system. Is this correct, or am I missing something?

Thank you, Sven, for that question. The BM900 project, as it was initially launched, was a platform project consisting of several elements, five-part instrument, a three-part instrument, five-part variation for the veterinary space. And so that was designed from the beginning to include a three-part variation. I can only speak for the two quarters that I've been here in the company. And the write-down is linked specifically to the fact that we are changing the scope of the platform project But also, of course, as I'm sure you are aware, that we've had significantly delays in the development of the project. I don't know if you want to add some comments here.

No, but I mean, when you make an impairment test of development assets in the balance sheet, you're building it up, of course, based on the business cases you have. And since we've taken out the three parts from the business case, that, of course, has an impact on the overall valuation of projects. of the project as such. So it is definitely, yeah, it is as you say, Torben, and then as a combination as well of extended timing and costs when initially it was planned for a project. Okay.

Yeah, maybe it's just me. I've only thought about this project as a five-part project, but maybe I missed the other parts. But on that topic, when can we expect that to be launched, the new five-part system? Do you have an updated timeline on that?

What we have communicated and what we are maintaining is that we intend to commercialize the product in 2026. The next milestone in the development project is the initiation of the performance evaluation, which is scheduled for the first half of 2025. And we have not made any changes to that timeline since the last quarter. That's good.

Excellent. And then when it comes to, you talk about additional restructurings. Should we assume more restructuring charges going forward? I understand it could be too early to quantify them, but is that something we should be mindful about going into next year?

I cannot really comment on any future cost or initiatives, but what I can say is that we began this process In Q2, we have taken initial steps in Q3, and it is part of our long-term strategy. And we see continued potential to trim, reorganize the organization, but also consolidate both functions and functions. And we will continue that work.

Okay, excellent. My final question, and I know you don't like to make forward-looking statements, but still I have to ask. The cash flow generation, should we expect that to improve in Q4? I mean, I can see you have 17 million in cash, even though you do have some other assets, but you also have debt 19.9 million in net debt in total and I assume you will continue to capitalize R&D also in Q4 but should we assume release of working capital in Q4 to sort of boost the cash position which is running a bit

Hagen, would you add a comment to this?

There is some moving parts in it. One part that is related to restructuring, that is basically that we're booking the cost when they're happening, and then we have a cash payment to make over the coming months. And that is, of course, given the initiatives we took in Q3, that will also go into Q4 payments. But the spend will gradually come down from those activities. What we're planning for when we're coming into 2025 is, of course, have a positive cash flow by 2025. In the last quarter, given the high investment rate we are looking for on the project, as I said before, 25 million, it might be that the total cash flow might still be a bit negative in the Q4, all else equal. But when we're looking into 2025, we're planning for having a positive cash flow.

Okay, and in terms of working capital, is that going to be a build-up or release, you think, in Q4?

It's hard to predict, given it depending on the sales to a large extent, of course. You have, of course, payments to make for restructuring that will come as a negative factor into the cash flow. But then, I mean, inventory as well as accounts receivables will all be related to the sales development that I can't comment for the forecast perspective.

Okay, thank you.

I think that was the last question we had on the line. So with that, I'm thanking everybody for participating and wishing you a good day. Thank you all. Thank you.