BICO Group AB

STO:BICO

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Welcome to BICO Q2 2024 Report Presentation. [Operator Instructions] Now I will hand the conference over to CEO, Maria Forss; and CFO, Jacob Thordenberg. Please go ahead.

[Maria Forss, executive]

Hello, and a warm welcome to everyone for joining BICO's earnings call for quarter 2 2024. My name is Maria Forss, and I'm the President and CEO of BICO, and together with our CFO, Jacob Thordenberg, I will present our report. And let's begin with today's agenda. Our agenda today is divided into 5 sections before the Q&A. We will give you a summary of the quarter and highlight significant events. We will also comment on the market developments and thereafter present BICO's financial performance for the quarter as well as deep dives into the business areas' performance. I will also comment upon the development of our strategic priorities. These sections will be in listening-only mode. After the presentation, we will invite you to our Q&A session, where you are welcome to participate. The financial hearing host will be back with further instructions.

Let's begin with summarizing the quarter. In quarter 2, we delivered stable sales levels in line with our peers despite a volatile market environment. We delivered sales of SEK 534 million and an organic growth of negative 2%. Jacob will give you more details on the financials later in this presentation. All business areas were profitable in quarter 2, reporting a total adjusted EBITDA for the group of SEK 46 million, generating a margin of 9%. And as I mentioned during our earnings call for quarter 1, we had some additions in the executive management team as well. Both Catharina Nordlund and Anders Fogelberg have joined us during the past quarter, Catharina as our Chief HR Officer and Anders as our Chief Commercial Officer. After the quarter, we have also announced that Andreas Joersjo has been recruited as General Counsel. He will succeed Lotta Bus and will be joining us latest mid-October. Andreas' previous experience and the commercial mindset will contribute to further developing our legal function. All in all, we are continuing to build an organization suited for the next phase for BICO. Later in this presentation, I will also comment upon the work done with our strategic priorities and how that has developed since they were launched earlier this year. I will now move on to the second section for today and comment on the market development. This section was introduced last quarter and gives more flavor to the market development, and I will also comment on sales per geography. Indications of a slower business for BICO in the Academia and Diagnostic segments continued during quarter 2 2024. And as you can see on the map, the sales in North America increased, mainly driven by Biosciences whereas Europe was flat. Asia and foremost China experienced a significant drop in sales levels due to lower demand compared to quarter 2 2023. And I believe that we see the same trends and patterns as many of our peers have reported in quarter 2. And as mentioned during my previous slide, BICO is performing in line with peers in unpredictable market conditions. And it's time for me to hand over to Jacob for a summary of our financial performance.

[Jacob Thordenberg, executive]

Thank you, Maria. And yes, I will now comment on the second quarter of 2024. Please note that all numbers presented is in Swedish crowns. Also, I would like to remind you that from the first quarter of this year, BICO reports in functional reporting and comparable numbers have been adjusted. Furthermore, all organic growth figures are in constant currency. BICO delivered sales of SEK 534 million with an organic growth of negative 2%. And I will comment more on sales on the next slide. Adjusted EBITDA amounted to SEK 46 million and EBITDA was SEK 36 million for the quarter, which is an improvement compared with the first quarter of 2024. I also have a separate slide where I will present EBITDA development during Q2. The gross margin for the quarter amounted to 52% compared to 46% for the corresponding quarter last year. This can be explained by the product mix and the extraordinary write-offs made in Q2 2023. This is the second quarter we report with functional reporting structure. The reason why we changed is to increase comparability in the company's cost structure and adapt to the most common market practice.

As mentioned also in the Q1 report, this change has affected the reported gross margin negatively as more costs than before. For example, production staff, depreciation of production equipment, et cetera, have been included in the reported cost goods of sold instead of OpEx. The net loss for the quarter amounted to negative SEK 79 million. And if we look into sales for the group for the second quarter, the second quarter generated sales of SEK 534 million and a flat total sales growth of negative 0.6% and a negative organic growth of 2% compared with Q2 2023. Q2 showed mixed sales performance among our companies following the same pattern as in Q1 where Biosciences showed good sales levels, especially in the lab automation part of our business and a positive organic growth. Bioprinting continued to show weaker sales due to the dependency on the Academia & Research segment as well as softer sales in Asia and foremost China compared with Q2 2023. For Bioautomation, Scienion showed improved sales levels compared with Q1 2024. However, Scienion was negatively impacted by the dependency on the Diagnostic segment.

And if we move on to profitability. Adjusted EBITDA for Q2 amounted to SEK 46 million, corresponding to a margin of 9%. EBITDA amounted to SEK 36 million, corresponding to a margin of 7%. All business areas were EBITDA positive in Q2. The improvement compared with the corresponding quarter last year can be explained by lower cost levels primarily related to personnel. EBITDA trended positively compared with Q1, partially due to seasonality, but mainly due to cost measures and product mix. As always, staying on course with cost control has been in focus in the quarter and will continue to be during the quarters to come. And if we move on to the next slide and our cash flow. The cash flow from operating activities for the quarter amounted to negative SEK 51 million. This includes a negative effect from changes in net working capital of SEK 54 million. Out of this, SEK 20 million was related to increases in operating receivables. Inventories decreased by SEK 32 million, continuing the trend of decreased inventory levels as also seen by the end of last year and which followed in Q1 this year. Cash flow from changes in operating liabilities decreased by SEK 66 million, which was driven by contract liabilities in Biosciences converted to revenue as well as a decrease in accounts payable. Investments in intangible CapEx amounted to SEK 6 million. Several R&D projects have been completed in the second half of 2023 with a reduction in capitalized R&D as a result. Investments in tangible CapEx amounted to SEK 15 million. We didn't pay out any earn-outs during the quarter and total estimated remaining earnout payments amount to SEK 20 million. Total cash flow during Q2 amounted to negative SEK 101 million and cash reserves by end of June amounted to SEK 688 million. Activities to further strengthen cash flow will continue to be a priority for the group. On the next slide, I will further comment on the development of net working capital.

This slide shows the development in net working capital between Q2 2023 and Q2 2024. During this period, net working capital has decreased from SEK 527 million to SEK 519 million and has been stable around the level of 20% to 25%. Hence, to conclude, BICO has, for the past quarters now showed that the action is implemented in 2023 to improve working capital were successful and resulted in BICO now having levels of net working capital in line with industry peers. Maria will now comment on our 3 business areas' performance.

[Maria Forss, executive]

Thank you, Jacob. I will guide you through our business areas performance for the second quarter, starting with Bioprinting. That area reported net sales of SEK 156 million in quarter 2. The organic growth in the segment was negative 12%, and the adjusted EBITDA at SEK 23 million, corresponding to a margin of 15%. Bioprinting generated weaker sales of negative 12% compared to the corresponding quarter last year, and this can be explained by a softer market, primarily for the instrument-oriented companies within bioprinting business area. Adjusted EBITDA was in line with the corresponding quarter last year with a margin of 15% and trended positively compared to quarter 1 due to continued cost control. Moving on to Biosciences. In quarter 2, the business area net sales amounted to SEK 280 million. The organic growth was 7%, and the adjusted EBITDA was million, corresponding to a margin of 8%. The business area showed stable sales levels in the quarter compared with the corresponding quarter last year as well as an organic growth of 7%. The growth in sales for the quarter and general cost consciousness generated an adjusted EBITDA margin of 8%.

The Bioautomation business area reported net sales of SEK 99 million in quarter 2. The organic growth for the quarter was negative 6% and adjusted EBITDA amounted to SEK 18 million, corresponding to a margin of 18%. Bioautomation's organic sales growth was negative 6% compared to the corresponding quarter last year and still hampered by continued weak demand from the diagnostic industry. The business area of Bioautomation showed improved sales levels compared to quarter 1 and delivered an adjusted EBITDA margin of 18%, thanks to improved sales during the quarter and cost-cutting measures. Before we move into the Q&A, I would like to comment on the development of our strategic priorities. These were launched earlier this year, [indiscernible] joined BICO, and we have worked with them to keep momentum while working with the updated strategy.

So if we move on to the next slide, I will here give you a brief update about the development in the strategic areas. If we start with the first area, driving commercial excellence. This has been strengthened by the recruitment of our Chief Commercial Officer, Anders Fogelberg, who joined us in June this year. He has taken the lead on strengthening the commercial excellence as well as several commercial group initiatives, such as ensuring collaboration both within the group as well as with external parties. And I'm very much looking forward to see the results of Anders' work. This will be a key area also in our updated strategy. For strategic review, I gave an update in the quarter 1 report about the extensive review being made of our R&D road map and also product portfolio. This has provided us with additional insights about what to focus on and also how we should scale and align our businesses. We have also invested more in people and culture and Catharina Nordlund, Chief HR Officer, joined us in April. During quarter 2, she has set a global HR organization in place, implemented that as well as putting in HR strategy. And these are important cornerstones when building a people and high-performance culture. In addition, strategic recruitment and appointments have been made in our operating companies during the quarter. At last but not least, we have continued to work with initiatives related to operational excellence for a sound cost structure and increased efficiency. We have worked with preferred supplier portfolio, consolidated the number of suppliers and standardized our agreements with them as well as lowering our inventory levels to mention some examples. All in all, these 4 areas are paving the way for the updated strategy BICO 2.0, which will be presented during our Capital Markets Day on September 17. In addition, a deep dive within lab automation will be presented during the Capital Markets Day, and you can choose to either participate by attending physically at BICO's head office in Gothenburg or digitally. If you intend to participate in Gothenburg, please send an e-mail to [e-mail], no later than September 12. For digital participation, please visit bico.com or use the QR code that you see on the screen. We look forward to welcoming you now. Now let's turn for the Q&A. Please follow the instructions from the financial hearing host.

[Operator]

[Operator Instructions] The next question comes from Rickard Anderkrans from Handelsbanken.

[Rickard Anderkrans, analyst]

So starting off, maybe you could comment a little bit on what trends you were picking up in the quarter as we come quite far into Q3 and maybe comment a little bit on what trends you're seeing in underlying investment appetite in -- for CapEx for instrumentation or general customer activity. I know in Q1, you called out some positive signals in North America and Europe? So maybe you could comment a little bit on the trends and direction on demand and customer activity here.

[Maria Forss, executive]

Thanks, Rickard, for that question. As we saw quarter 2 now was continuing on what we saw in quarter 1, and that is also what we see moving forward. When it comes to trends in the market, we can see that there is still some hesitance in capital equipment investments in especially academia as well as the diagnostic sector while companies that are more focused on consumables or lab automation is paving the way in a different way. And that's in line with what we also see that peers are reporting. So when it comes to the different geographies, I would say that since we have sales in 65 countries and also our presence in many different segments, we are not as dependent on China as others might be. But there's still a slow market in Asia, especially China, where some of the structural support coming from the Chinese government have not yet seen the results. But sales for Europe and North America, we are present in both of those markets. So -- and nothing different compared to quarter 1 and quarter 2. Jacob, do you want to add anything?

[Jacob Thordenberg, executive]

I think that's a fair summary.

[Rickard Anderkrans, analyst]

All right. But to put a bit more fine point to it, do you expect to deliver organic growth above the sort of 1% level we see in further staff as we move into the second half? Or do you see momentum pretty much similar to what we've seen in H1 in the second half?

[Jacob Thordenberg, executive]

Well, Like, as you know, we don't give any financial guidance, so it's very difficult to comment that without giving financial guidance.

[Rickard Anderkrans, analyst]

Okay. And just a question on CELLINK and Scienion. Can you confirm that this -- both these subsidiaries had sort of a negative impact on both growth and earnings in the quarter? And when do you expect we should start seeing positive earnings contribution from these 2 subsidiaries?

[Jacob Thordenberg, executive]

Yes. That again then is going into sort of giving specific financial guidance for specific operating companies within BICO. But I confirm that they were both loss-making in the quarter and loss making in the first half of 2024. However, we will not give any guidance to when we think -- when or what amounts we can expect in terms of profitability.

[Rickard Anderkrans, analyst]

Okay. And the final question on the cash flow. So even though there's some positive development on inventory, still quite negative net working capital development here on -- weighing on the cash flow. So maybe you could elaborate a little bit on the -- a bit more on the moving parts and when we should start to expect seeing some significant improvement in free cash flow with -- on the positive side of things?

[Jacob Thordenberg, executive]

Yes. So it's 2 questions in one, right? It's the cash flow from some of the business and the cash flow from working capital. Let me start with the cash flow from the business. As you know, we have full focus on delivering on all the strategic priorities that Maria mentioned, including sales and sort of doing all the measures within our operational excellence program to strengthen profitability. So that's something that we do which is related to P&L. But then when it comes to working capital, as I mentioned also in the presentation, we have now reached stable levels in our working capital of around 20%, 25%. However, in our Biosciences segment, especially related to lab automation then, which is a project-based business, there is a dynamic where working capital, to some extent, jumps a little bit up and down when we finish or start larger projects. But all in all, we are very satisfied with the development in net working capital.

[Rickard Anderkrans, analyst]

All right. So I guess then we should expect continued improvements on that front in the coming quarters?

[Jacob Thordenberg, executive]

Not material, not the way that we have seen sort of from the levels -- the very high levels in 2023 to now the levels of around 20%, 25%. So the major improvements in working capital were down sort of at the end of 2023 and onwards. But of course, we continue to work with working capital and try to improve it even further, but most of the improvements have now been implemented. And we are now at acceptable levels of working capital.

[Operator]

The next question comes from Ulrik Trattner from Carnegie.

[Ulrik Trattner, analyst]

And a few questions online. Obviously, this is the first quarter in company history where all segments report a positive EBITDA contribution to the group and you talk about the cost savings that have run through the last year and some additional savings for Scienion and for CELLINK. But can you help us, beside here the sort of improvement in margins versus Q1, is it purely volume or additional cost savings? And you hint here in the report that we should expect more financial impacts in the second half of the year? And if you can help us give us some directional, what that should entail for the second half of the year? That would be my first question, please.

[Jacob Thordenberg, executive]

As I said, to Rickard, we don't give any financial guidance, but I can, of course, talk a little bit about the dynamics in our business, and that is that H1 for BICO and Q1 and Q2 are the softest quarters in terms of demand. And then that growth during the year, so Q3, Q4 is by far the seasonally the strongest quarters in terms of top line. Hence, the savings that we have now implemented in Scienion and CELLINK and also in other group companies. The results from these savings will be more sort of transparent when we see top line increasing in Q3, Q4 if we follow the same seasonal pattern.

[Ulrik Trattner, analyst]

And is it just possible to give some indication on how many companies currently in the group are loss-making -- and we can do it by sort of rolling 12 or currently if you're able to provide that type of information.

[Jacob Thordenberg, executive]

We will not provide that type of information. But of course, we have sort of explicitly mentioned Scienion and CELLINK as companies where we have had profitability issues, but we won't go into sort of details -- in more details than that.

[Ulrik Trattner, analyst]

And I guess you would not provide what sort of the top-tier companies within the group, at what margin they are operating at? I mean we previously have discussed that Biosero is operating above 20% and rolling 12...

[Jacob Thordenberg, executive]

We won't provide those details.

[Ulrik Trattner, analyst]

Okay. And next question would be on Biosciences segment and -- which obviously includes Biosero and there is some volatility if we were to call it that between quarters in both organic sales as well as on the margin side. And I guess, that mainly relates to the project-based business, which would have been Biosero -- is Biosero. Are there any big deliveries expected in the second half of the year? And were there a normalized quarter here in Q2? And just for the transparency reason, were there any sort of exceptional deliveries in Q1 of this year?

[Jacob Thordenberg, executive]

Well, yes, I mean, Q1, as I believe we mentioned in the Q1 report, we had an exceptional delivery in Biosero related to the project that we won at the end of last year, which was worth $28 million. So that was the effect that we saw in Q1 in our lab automation business. Q2, we did not have sort of the same positive impact from 1 larger project. But with that said, we expect the lab automation business to continue to trend in a positive direction. However, perhaps not in line with what we saw in Q1.

[Ulrik Trattner, analyst]

Fair enough. And just on the general market demand, and you mentioned and I guess, obviously, you have very close ties to the rest of the life science tool industry. But did you feel that like lab automation divert from this underlying muted trends or communication that we have seen from your peers?

[Maria Forss, executive]

I would say, Ulrik, that given that we are a market leader within lab automation with Biosero on our software, Green Button Go with enabling and orchestrating lab flows. With Biosero, we are addressing the cost efficiencies and the improvements that are needed in the life science industry, especially for pharma. So with Biosero we are a solution for some of the life science businesses' challenges. So yes, we are going out from that with something positive for something which where the market overall is negative. So that's correct. And to your previous question as well, yes, there is a volatility because of the project type of business that this is, and that will be continued to be seen. When you win large projects, those are -- when instruments are being bought, you will see those effects in the quarter, and then there will be continuous work. And then when Factory Acceptance Test and -- FATs are done, then you will see the next revenue generation. So it's a lumpiness of a project business and has nothing to do with the shape of the business.

[Ulrik Trattner, analyst]

Great. And last question on my end would bill a little bit into Rickard's previous question here on cash flow, operational cash flow is looking like it does, like it's flat year-on-year. Those are big improvement CapEx, down quite substantially. You're now with a net debt of slightly above [ SEK 700 million ]. Just sort of how reassured are you that you are able to refinance your convertible debt throughout sort of, I guess, timing wise would be in 2025. And in addition, I couldn't find any comments on factoring used in Q2. And if you would see factoring as an instrument to decrease your leverage from current levels?

[Jacob Thordenberg, executive]

Yes. So let me -- I can comment on that. I mean when it comes to the convertible bond, we are -- as you know, we are focusing a lot on delivering on all our strategic priorities, including the top line and improving profitability. And we will continue to focus on that. We will also talk more about our updated strategy in our upcoming Capital Markets Day. And to answer your question, we are very confident that we will be able to refinance the convertible bond. Your second question around factoring, we haven't used factoring -- any [indiscernible] factoring in the quarter, and we are [indiscernible] options to find sources to refinance the convertible bond, including our credit facilities, et cetera -- related to working capital.

[Operator]

The next question comes from [ Holger Ikof ] from [ Private ].

[Unknown Analyst]

Thank you, Jacob and Maria for the presentation. I was just curious that besides all the ongoing work that we are doing on kind of cost savings, if there's any activities of divestments of the companies which are not performing right now?

[Jacob Thordenberg, executive]

There have been no decisions on divesting any of the companies within the group.

[Unknown Analyst]

So you will continue to kind of restructure the companies. And can we expect as a part of the ongoing work that might be a new structuring that companies like Scienion and Biosero will interact more in the future?

[Jacob Thordenberg, executive]

That's definitely a potential part of the future is something that we will address even further in our upcoming Capital Markets Day, where we will talk about the BICO 2.0 and our updated strategy.

[Maria Forss, executive]

I might add to that as well, given that we now are integrating some of the things that were not possible to be done during the pandemic. There is a very positive momentum in terms of the opportunities and the collaboration spirit between the companies where we have, together with our new CCO, Anders Fogelberg, identified both internal collaboration opportunities as well as external collaboration opportunities, and that will continue also moving forward.

[Operator]

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

[Maria Forss, executive]

Thank you, everyone, for joining our earnings call, and thank you for all the questions. And together with Jacob, I would like you to wish everyone a great Tuesday. Thank you, and goodbye.