BICO Group AB

STO:BICO

Earnings Call Transcript 2023-Q2

[Operator]

Welcome to BICO Q1 Report for 2023. [Operator Instructions]. Now I will hand the conference over to CEO, Erik Gatenholm; and CFO, Jacob Thordenberg. Please go ahead.

[Erik Gatenholm, executive]

Hello, and thank you for taking the time today. I would like to give you a very warm welcome to this earnings call for BICO, where we will be presenting our Q1 interim report for the months covering January through March 2023. My name is Erik Gatenholm, and I'm the President and CEO for BICO. By my side, I have BICO CFO, Jacob Thordenberg.

I would like to start by thanking the entire team for the great performance that we're kicking off the new year with the right priorities. We're all serving the continuously evolving needs of the exciting life science industry around the world and through persistence and resilience focused on delivering great products and services to our customers that they can create the future of medicine.

The products we offer enable the pharmaceutical and biopharma industries to develop new treatments, faster and safer with more specificity and less need for animal testing. We're on an exciting journey to create the future of lifesaving treatments together with our customers, and we look forward to serving their increasing laboratory tools and reagents and automation demands.

Today, we'll start this earnings call with a brief summary of the quarter, followed by more background on the numbers and financial performance as well as a deeper dive into the individual business areas before finishing off with the Q&A session.

Moving on to the next slide. I'll start by summarizing the quarter. To start off, we're proud and excited to present a stable first quarter with strong proof points on cost and cash flow initiatives. And while Jacob will tell you more about this shortly, I'm very happy to present that during the quarter, BICO achieved an all-time high cash flow from operating activities of SEK 60 million.

We started as a transformational journey in 2022, and the entire team has been dedicated to achieving our improved way of working with dedication to improved cash flow. Another proof point for us this quarter is that we delivered relatively strong organic growth when compared to our industry peers. This is also in comparison to the extraordinary and somewhat COVID-related performance that we had last year in Q1. This shows the strength in our underlying core business.

The postpandemic rightsizing of Ginolis has been a high priority for us, and I would like to highlight that this means that the main purpose of this has been to give the company the necessities to accept new orders while minimizing the cost base as well as achieve profitability over time. We have also seen progress in our truly exciting partnership with Sartorius, which I'll tell you more about. Naturally, it's very pleasing to see that the cost savings program that we launched in Q3 2022 has developed according to plan.

I will now hand over the word to Jacob, who will present the financial performance for the quarter of 2023.

[Jacob Thordenberg, executive]

Thank you, Erik, and I will give you an update on our key financials in the quarter. Net sales amounted to SEK 500.7 million compared to SEK 477.2 million in the first quarter last year, which corresponds to an increase of 4.9%. Do keep in mind that Q1 in last year was an extraordinarily strong quarter with continued COVID-related business. Organic revenue growth for the quarter amounted to 3.7% and 10.1%, excluding COVID-related sales in Ginolis and compared to an exceptionally strong corresponding quarter last year.

In general, sales and organic growth were affected by the postpandemic normalization, serving customer slowdown and in line with seasonal effects. The significant decline in COVID-19-related sales was, as expected, mainly reflected in the sales of the business area of bioautomation. Players in bioprinting and biosciences primarily impacted by normalized seasonal effects and in line or better than industry peers. We are pleased to report that the focus on improving profitability continued and 3 of the 4 loss-making companies from 2022 have turned profitable this quarter.

Adjusted EBITDA in the quarter amounted to negative SEK 9.3 million compared to SEK 6 million in Q1 2022. The effect of the cost-saving programs is observed when excluding the COVID-19 related business in Ginolis, resulting in an adjusted EBITDA amounting to SEK 28.7 million compared with SEK 14.3 million for the first quarter 2022.

Reported EBITDA in the quarter amounted to a negative SEK 22.5 million compared with negative SEK 19.4 million in Q1 2022. The improved profitability when excluding Ginolis, was in the quarter driven by healthy sales levels, cost control and some currency tailwinds. Gross margin in the quarter amounted to 70.4% compared to 73.9% in the first quarter last year. This decline in margin is mainly explained by the [indiscernible].

And some additional comments on the financial impact of Ginolis in Q1 as well as new orders while minimizing the cost base as well as achieve profitability over time. In addition, we are also closely monitoring the order intake development. The company's ability to ensure solid support and deliveries as well as being able to honor current service obligations to customers has been important factors.

Looking at the financial for Ginolis, it was a weak first quarter with SEK 12 million in sales and adjusted EBITDA amounted to negative SEK 38 million. This was due to a lower level of sales, cost savings being gradually implemented during the quarter and write-downs in inventory. As I already mentioned, this had an impact on both growth and especially total profitability for the group.

However, as also observed in Q4, you can see that the group performed well, excluding Ginolis, with an organic growth of 10% and EBITDA of SEK 28.7 million, corresponding to an EBITDA margin of 5.9%. In summary, excluding Ginolis, BICO showed all in all a healthy quarter.

And as we move on to the next slide, I will give some more comments on the cash flow in the quarter. Cash flow has been a priority for the group, and we are very pleased to report positive cash flow from operations of SEK 60.4 million in the quarter, compared to negative SEK 69.2 million in Q1 2022.

Of this, SEK 97 million consisted of positive effects from working capital, of which operating receivables contributed with SEK 181.9 million. Driven by good collection from fourth quarter sales and lower sales Q1 2023 compared with Q4 2022 and thanks to the important net working capital improvement activities started in 2022.

Inventories increased by SEK 18.6 million, in line with seasonal business planning after large outbound deliveries in the fourth quarter. Cash flow from changes in operating liabilities amounted to negative SEK 66.2 million and was mainly impacted by decreased contract liabilities converted to revenues.

Investments in tangible CapEx amounted to SEK 65 million in the quarter, of which investments into our facilities in Oulu, Finland and Berlin, Germany comprised SEK 46 million. Investments in product development amounted to SEK 43.3 million. Total cash flow during Q1 amounted to negative SEK 66.8 million decrease in total cash reserves to SEK 859.5 million by March 31, 2023. And some more comments on how to strengthen profitability and cash flow.

In Q3 last year, we presented 5 action points on how we were to strengthen profitability and cash flow. And on this slide, we have highlighted the development over the last 2 quarters. And in Q3 2022, we launched a cost savings program of SEK 100 million on a 12-month basis, and it's developing according to plan.

In addition, we are closely monitoring the external macro environment and customer demands and is working continuously with cost control in all business areas to reach profitability.

Regarding working capital. In Q1, we achieved successful collection of operating receivables, which amounted to SEK 181.9 million distributed across all business areas. Working capital management, including operating receivables is and will be a top priority for us.

We have also entered into an agreement with a factoring provider. The company has initiated factoring in several of the European group companies during the first quarter. However, this only had a minor effect of SEK 5 million in the approved collection in Q1 2023. Reducing inventory has also been on our priority. However, inventory increased after large outbound deliveries in Q4. And we are actively working to reduce inventory levels across all business areas.

As mentioned on previous slides for our 2 construction projects in Berlin, Germany and Oulu, Finland, they continued and amounted to SEK 46 million in the quarter. To reiterate the message from our Q4 call in February for Berlin, the plan is to sell the facility when it's complete and the market is deemed attractive. And for our facility in Oulu, we are evaluating selling or leasing the facility.

And with that, I hand over to Erik for a brief overview of the performance of our business areas in Q1.

[Erik Gatenholm, executive]

Thank you, Jacob. We will now continue with the business areas in more depth. The bioprinting business are reported net sales of SEK 144.3 million, representing 29% of the total group sales. The organic growth in this segment was 12.6% and the adjusted EBITDA was SEK 11.8 million, responding to a margin of 8.2%. The business area delivered healthy sales levels this quarter, especially in relation to the first quarter usually seasonally being the weakest.

Cost control and the cost savings program contributed to the profitability for the quarter. We continue to see steady demand worldwide in our core business with our plan for these 3D printing platforms. But what's even more exciting is the applications and customers seek innovative systems cater to.

The field of 3D cell culturing and tissue engineering continued to be strong drivers for our bioprinting products, where customers are developing new types of tissue models for drug discovery applications and for the development of new types of implants, such as corneal tissue replacement, cartilage implants and even critical heart failure treatment devices, such as the work ongoing at the University of Technology Sydney where Dr. Carmine Gentile is leading groundbreaking work in the field of cardiac tissue repair. Dr. Gentile leads together with his team bioprinting patient-specific heart tissue patches made with stem cells that have the potential to help patients recover from damage caused by heart attacks.

In conjunction with the recent FDA Modernization Act, we have taken proactive steps to strengthen synergies between Visicol and Motec, consolidating the commercial functions for these companies to better address the pharmaceutical industry with our tissue models. It's an exciting time for our bioprinting business, and we look forward to further expanding this important core area.

Moving on to Biosciences, where the business area's net sales amounted to SEK 230.2 million representing 46% of the total group sales. The organic growth was 8.5% and the adjusted EBITDA was SEK 18.9 million, corresponding to a margin of 8.2%. The business area sales was hampered by normalized seasonal effects. However, currency tailwinds down from the effect. The improved profitability during the quarter was a result of cost control in general and implementation of the 2022 cost savings program.

And while we continue to see a solid demand for our laboratory automation products from the pharmaceutical customer segment, the biotech customer segment is still experiencing slowdowns due to lack of funding and slower financial markets. Small and pre-revenue biotech companies are mainly dependent on external investors for capital to further develop their new treatments or products.

What we have seen around us is the reduced inflow of such investments in line with the general financial market slowdown, resulting in smaller biotech companies continuing to delay purchases. While looking at our microscopy and cell analysis division, it has continued to grow profitably and generated a strong cash flow for the area.

Our CELLCYTE X, live cell imaging product has continued to gain market traction as a strong contender in the field of live cell analysis, a rapidly growing market where we primarily target academic institutions. Thanks to the accessibility of the CELLCYTE X system, we can cater into a relatively untapped niche market and establish a good position. This strategy has been successful with our bioprinting products, and we have already now built up a solid user base.

In addition, we also launched the first 3D cell analysis system in the group during the quarter. The All-New Discover Echo Confocal is an important puzzle piece in our efforts to become a one-stop shop in the field of bioprinting, spheroid research and 3D cell culture. I will come back to tell you a bit more about the All-New Discover Echo Confocal shortly.

Our third business area bioautomation reported net sales of SEK 126.2 million, representing 25% of the total group sales. The organic growth for the quarter was negative 11.2% and adjusted EBITDA amounts to negative SEK 24.6 million, corresponding to a margin of minus 19.5%. The heavy decline in COVID-19-related sales was, as expected, clearly reflected in the sales of the business area and resulted in Ginolis having yet another challenging quarter. The latter has resulted in excessive cost reductions during the quarter and an action plan.

The decline in COVID-19-related sales as well as the challenges in Ginolis resulted in a negative EBITDA for the quarter. When excluding Ginolis, the business area reported an adjusted EBITDA of SEK 13.3 million, corresponding to a margin of 11.6%. The liquid handling and laboratory tools business within bioautomation area had a good start of the year, especially for our single cell products and diagnostics contract development services.

We're well positioned as a full solution provider from contract development to instrument sales and support our customers along the way as they scale their business. Our cellenONE and spheroONE platforms are our cutting-edge technologies, so the image-based cell selection and acoustics vesting from R&D to high throughput isolation with seamless offer downstream screening and cultivation workflows for applications such as proteomics, transcriptomics and spheroid applications.

On instrument sales, the single-cell business in Q1 represent a large portion of the new orders and is particularly very strong for high-throughput selling development in big pharma and proteomics and academic research.

Lastly, as we have seen diminishing demand for COVID-related diagnostics and as previously mentioned, slower large capital goods orders, we are rightsizing our organization catering to these areas and focus all our attention on the areas that will contribute to profitable growth for BICO moving forward, such as proteomics, single-cell sample preparation and spheroid printing.

From bioautomation, I will move on to the next section. During the first quarter, we took a major step to formalize our partnership by signing agreements, which cover the commercial and an R&D avenue.

Let's begin with the commercial avenue. A solid sales and distribution frame agreement is in place, and our joint focus is on the Asia Pacific region. Sartorius will contribute a range of micro products such as 3D bioprinting and liquid handling platforms as well as reagents with the first order placed during the quarter. With this, we will expand BICO's presence and accelerate our growth in Asia Pacific, where we have considerable market position as a young and upcoming tools and reagents company.

BICO is also getting an R&D boost from value-adding complementary technologies and products that will enhance current customer offering within bioprinting and laboratory automation. In addition to explore those opportunities, BICO and Sartorius have entered into a master R&D agreement. Those projects are managed in collaboration with BICO CTO, participating companies in all the 3 business areas and Sartorius.

The project targets spheroids and 3D tissue models, 3D bioprinting and digital solutions for workflows in laboratory automation. From our partnership with Sartorius to another important platform for us, trade shows and conferences.

The SLAS conference took place during the first quarter, and it was an was exciting to see such large attendance, speaking for a healthy laboratory automation industry, now that the pandemic period is put behind us. The SLAS conference is one of BICO's main events where we exhibited and showcased the majority of BICO's portfolio companies and with heavy focus on pharmaceutical customers looking to automize their workflows and gain efficiencies. We rely heavily on the leads generated during this conference, and it's promising to see such high lead generation this year.

It's quite exciting also to look back at the SLAS conference over the years as it has been such a vital venue for BICO. We came to our first SLAS conference back in 2018 with a tiny start-up booth exhibiting our new bioprinters. Today, we're one of the largest exhibitors.

As I mentioned earlier, during the first quarter, we launched our Discover Echo confocal microscope, the first 3D cell analysis tools into lead BICO and a great complement to our bioprinting platforms.

The beauty of the Echo Confocal system is its accessibility and ease of use, allowing novel microscopy users and researchers to easily get started with quite complex 3-dimensional analysis of living tissues and cells. We're excited about expanding our 3D printing and analysis capabilities for this product and look forward to delivering the first systems in June this year with a ramp-up throughout the year and many years ahead.

The fact is that many of our bioprinting customers have been asking for this type of system for many years now, and it's a key component of the entire bioprinting workflow. Going from printing of the tissues with our BioAg system to analyzing the printed structure using a confocal microscope. We're now moving on to the last session before the Q&A, and we'll give you a brief outlook.

The focus on our coming quarter had boasted up to 3 main areas: the first one is to repeat what we said in H2 2022. We will continue sales expansion in all companies driven by market growth in certain customer segments, such as pharma and academic institutions, while closely monitoring the slowdown of the biotech industry.

The second one is working proactively with cost control and net working capital improvements in all business areas to further strengthen the balance sheet. The third and last aspect is to continue to support the right-sized Ginolis and their customer work and make sure that they have the right prerequisites to work on their current and new orders.

All in all, full focus on catering to our customers as well as strengthening internal processes cautiously monitoring and proactively acting on changes in the industry, taking action to further improve profitability and ensure that we maintain our lean cost structure. This balance enables us to meet the potentially higher demand from customers while at the same time having a room to maneuver a potentially weaker economy, global tensions and external disturbances that all our industry peers are battling with as well.

I'll have to end this call where I began by truly thanking the entire BICO team for your commitment to our vision and mission, which is to create the future of life saving treatments by aiming to reduce the organ shortage and speed up drug development by providing accessible life science solutions that combine biology and technology. We have come a long way on our transformation, and I'm extremely thankful for all the persistent and passionate work everyone has put into to make this a reality.

With that, we would now like to welcome any questions and comments that you may have.

[Operator]

[Operator Instructions] The next question comes from Ulrik Trattner from Carnegie.

[Ulrik Trattner, analyst]

A few questions on my end. Starting out with the outlook per segment. And it sounds like you are fairly optimistic regarding the pharma and academic customer group. But perhaps a bit more muted when it comes to the biotech segment, and it all sounds like you're more dependent in that segment on their ability to refinance themselves to purchase capital equipment. I'm just wondering how big is your exposure towards this segment? That will be my first question.

[Erik Gatenholm, executive]

Thank you, Ulrik. As you mentioned, yes the pharmaceutical and academic customer segment continues to be a strong focus for us where we see relatively decent purchasing lead times. We see budgets. We see that projects are ongoing and also that there is still significant capital in the pharmaceutical segment.

We do, as you mentioned, see the slowdown in biotech industries and especially, as previously mentioned also during H2 last year, the slowdown of capital injections into these biotech and pre-revenue biotech companies primarily. And that means that these companies, of course, they don't have funding to make purchases. They have to delay decisions that all in all, takes a toll on our business as well.

With that being said, our exposure to biotech specifically is somewhere around 10%. So we're continuously monitoring this customer segment. We are looking to transition more of this business to the pharmaceutical and academic segments. And hopefully, we'll see that the biotech industry will also do a pickup later this year or next year, depending on the capital markets.

[Ulrik Trattner, analyst]

Okay. Great. My second question is relating to Ginolis. It sounds like you're slowly getting it under control in terms of its cost. So should we then expect that the SEK 41 million negative EBITDA contribution in the quarter at a low point, and you're gradually seeing a step-up in this, but should not expect fully normalized in Q2 rather seeing that in Q3?

[Jacob Thordenberg, executive]

I mean going forward, we rightsized Ginolis to a lower level of sales, and that includes then that we have reduced staff, and we have brought costs down and we have also co-located operations to a fewer locations. And we expect a full run rate impact of these savings in Q3.

[Ulrik Trattner, analyst]

Okay. Great. And third question, I want to be seeing 2 quarters now with both bioprinting and biosciences presenting some decent underlying margins. Are you now in a position where you find yourself that these are the sales numbers needed to be hit in order for that segment to break even? Or are these on the OpEx side expected to be ramped up here in the forthcoming quarters?

[Jacob Thordenberg, executive]

I'm not sure I followed the question, Ulrik. If you could rephrase it or repeat it.

[Ulrik Trattner, analyst]

Sure, absolutely. Yes. So seeing that bioprinting and biosciences, they have now reached on an EBITDA level breakeven dynamic? And is that something that we should expect going forward as well? Or is there planned ramp-up in operational activities and costs for those segments that would affect those assumptions?

[Jacob Thordenberg, executive]

Okay. Now the effect you see in bioprinting and biosciences is really the results from the cost saving programs implemented mid-2022. And these have been successful, and that is also reflected in the bioprinting and biosciences. With that said, we will continuously have a very tight cost control in all our business areas.

[Ulrik Trattner, analyst]

Okay. Great. And last question on my end. Looking at the cash flow and looking at the historical dynamic of your cash flow with late orders in Q4 and rather poor cash flow in Q4 and then released into Q1 and consequently, boosting to some extent the Q1 operational cash flow has this then the case in Q1? Or is it some larger improvements that we're seeing?

[Jacob Thordenberg, executive]

Well, the cash flow effect from working capital in Q1 is twofold. It's -- firstly, as you said, it's due to the fact that we had a very strong Q4 with very high sales levels. And in Q1, we collect from these high sales levels in Q4 to -- for us that are seasonally smaller Q1. So that's one effect of working capital. But the second effect from working capital that we have managed to decrease it as in relation to sales. But Q1 is indeed our strongest cash flow perspective -- cash flow -- strongest cash flow quarter from a working capital perspective.

[Ulrik Trattner, analyst]

Great. Just a quick follow-up on that. And given that what we've seen in the quarter in terms of improved collection and now you have entered some sort of factoring agreement. Do you still believe that -- or have you changed your view on how much are to be sold as factoring versus kept in-house given that you've seen this improvement in collection throughout the Q1?

[Jacob Thordenberg, executive]

Yes. I think the way we view factoring is that it's a tool in our working capital management box really. And factoring is something that we will continue to implement, but it will be a tool that is used if needed, where we deem it to be attractive and a good solution for BICO.

[Operator]

The next question comes from Rickard Anderkrans from Handelsbanken.

[Rickard Anderkrans, analyst]

So first one, could you please elaborate a little bit on the impact from customer destocking, if you could add any quantification or commentary around that and the impact in the quarter and perhaps how we should think about that dynamic in the quarters ahead?

[Erik Gatenholm, executive]

Thank you, Rickard. So in terms of the customers, specifically in the biotech and bioprocessing and biopharma industry, we do see normalization when compared to other industry peers, where basically customer segment have stocked up quite significantly during 2022 on consumables and certain reagents to ensure that they can mitigate supply chain risks and challenges. This was a big ramp-up during 2022. We do see that some of these bioprocessing and biopharma customers are normalizing their inventory levels this year.

With that being said, we don't have a number specifically on the exact exposure to this customer segment. But there are a few companies in the group that are catering to this customer segment as well, of which we categorize somewhat in the biotech. So it is in relation to the slowdown that we've mentioned previously.

For that reason, our focus will continue to be the pharmaceutical companies and academic institutions. And I think that we are quite well in line with industry peers even a little bit better on the organic growth, as you can see in the first quarter. But this is an industry-specific occurrence, it's not something just specific to BICO.

[Rickard Anderkrans, analyst]

All right. Would you say it's reasonable to assume that biotech customers is about 10% of the customer base at the moment? Or can you add any...

[Erik Gatenholm, executive]

Correct. Roughly.

[Rickard Anderkrans, analyst]

All right. Thank you. Super helpful. And a little bit on the financial targets. So late 2022, you announced new financial targets for the midterm valid from 2023, targeting double-digit organic growth adjusting for FX and EBITDA adjusted for capitalized R&D above 10%. How should we think about the outlook for these targets in 2023? Do you feel more or less comfortable with them given the current trading into Q2 and the performance in Q1. Thank you.

[Jacob Thordenberg, executive]

Maybe I can start with commenting on the EBITDA development. I believe Rickard that we, in this quarter, showed traction towards this target by -- when you look at the underlying performance of the group. So we are still working hard. And the way we will address these targets is by tight cost control and also, as we said, improving working capital. And I don't know Erik if you want to comment a bit more on the organic growth targets.

[Erik Gatenholm, executive]

Yes, I think that's a good transition there. So in terms of the organic growth and the commercial stride that we're doing this year and onwards, I think it's fair to say, first of all, that these financial targets are on a midterm basis. So it's from day 1 in 2023, we are working towards these targets and towards these goals. And we have as an ambition to reach these targets and goals, again, as mentioned, over a midterm basis.

And I know it doesn't give you the specificity of the answer that you want. From our perspective, what we're doing right now, again, is prioritizing our cash flow and profitability agenda and strategy, and of course, continuing to expand our commercial channels, commercial strides so that we can continue to build market position and expand the business.

[Rickard Anderkrans, analyst]

All right. And just a final one for me, please. On the Sartorius collaboration, can you quantify what share of the product portfolio is currently covered by the collaboration agreement? And can you comment anything on what you believe that the share of the product portfolio will be covered over time with Sartorius? I mean will it be like 5%, 10% of the portfolio or even higher? Just anything there would be super helpful for us to understand.

[Erik Gatenholm, executive]

Unfortunately, we don't have that segmentation or that split up today, so I won't be able to share that. It's really too early to say. But what we can say is that the relationship continues to develop. We're excited to have these agreements in place. Sartorius is a super partner to -- for BICO and for our commercial agenda, especially in APAC.

We couldn't be happier with the collaboration and partnership that we have in place, and I look forward to continue to extend it. So with that being said, first order was received in Q1. We anticipate now with the ramp-up of the commercial activities to occur over the next coming months and quarters. Let's continue to monitor it and push for the best possible partnership and outcome.

[Operator]

[Operator Instructions] There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

[Erik Gatenholm, executive]

We would like to once again warmly thank you for attending today's session, and we wish you a great day.