BICO Group AB
STO:BICO
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BICO Group AB
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Hello, and thank you for taking the time today. I would like to give you a very warm welcome to BICO Group 2022 Q3 Earnings Call. My name is Erik Gatenholm, President and CEO, here at BICO. And today, I'm here with our interim CFO, Mikael Engblom.
The purpose of this call is to present our Q3 financial results and provide a business update for BICO Group. It's a pleasure working with everyone in our team and serving the continuous growing needs of the life science industry around the world and through persistence and resilience manage the conditions in this uncertain macro economy. 2022 has been a turbulent year for many growth companies, but I believe that we're making good progress aligning the business towards a more profitable and cash flow-oriented way of working.
And while many important products are still in progress, I'm proud to see us take the right steps in the right direction. BICO's mission is to enable the pharmaceutical and biopharma industries to develop new treatments faster and safer and more specificity and less need for animal testing. We're on an exciting journey to create the future of life-saving treatments together with our customers, and we look forward to serving their increasing laboratory tools, reagents and automation demands. Our ambitious goal is to create the future of health and requires us to instill a culture of organizational longevity within the company so that it can continue to perform with less dependency on the macroeconomical factors.
We will start today's session with a Q3 highlight describing the quarter in more detail, followed by a review of the financial performance by Mikael, followed by a business area performance update and finish with a general outlook for the business ahead.
BICO achieved a revenue of about SEK 550.6 million, resulting in a total revenue growth of 74% and organic revenue growth of 28%. Adjusted for constant currency, the organic growth was 12%. We're pleased to see continued strong double-digit organic growth, even given constant currency and from all 3 business areas. We're thankful for the team's excellent performance and our customers' business.
Worldwide demand for BICO products continues to be strong in the third quarter, reflected by higher order intake and continued interest specifically from our academic, pharmaceutical customers across all 3 business areas. The Bioprinting business area achieved 33% organic growth; the Biosciences business area achieved 27% organic growth and the Bioautomation business area achieved 25%. This is thanks to our continued success with our laboratory tools and sample preparation products, cell biology products and automation workflows. We continue to maintain a more cautious approach when it comes to smaller pre-revenue biotech firms, even though we're starting to see some new activity in the private fundraising space for these types of companies.
We're also pleased to report a continued strong gross margin amounting to 76.5%, slightly up from second quarter. The EBITDA amounted to about SEK 2 million in the third quarter, corresponding to a margin of 0.3%. And with an adjusted EBITDA of SEK 18.1 million corresponding to an adjusted EBITDA margin of 3.3%. The improvements in margin is mainly a result of the strong sales performance, positive currency effect and early effects from our recently launched cost control program.
While the EBITDA margin is still low, it is exciting to see the early results from the initiated activities to strengthen profitability in the group.
Given the turbulent macroeconomic environment, we have a firm focus on profitability and cash flow. And regarding cash flow, we did see a small improvement to the cash flow from operating activities this quarter compared to the second quarter, with cash flow from operating activities amounting to negative SEK 15.6 million.
To further elaborate on the measures we're working on to improve profitability and cash position, the following are some of the most important projects that we are currently conducting. The cost reduction program that was announced in July is targeting to save SEK 100 million on an annual basis. We anticipate full effect from the first quarter 2023, and the program is on track. Savings have been implemented in the group companies that have the weakest profitability as well as in the headquarter. We're improving working capital with stricter payment terms in some companies and the use of collection agencies to enforce timely payments.
We're working to establish factoring solutions for some companies anticipate to be up and running early next year. We estimate the effect from this to free up significant amount of capital tied in accounts receivables. We continue to work with inventory levels throughout the group and estimate the fourth quarter will result in reduced inventory levels following high seasonal volumes of deliveries to customers. Worth noting is that last year in Q3, we were faced with major supply chain issues and aligned all companies within the group to be more proactive when it comes to supply chain challenges.
Now that supply chain challenges have been milder, we can streamline and improve our working capital accordingly.
Lastly, we're progressing with facility financing for our buildings in Finland and in Germany, and we're currently in negotiations with several parties.
All in all, we're satisfied to see the steady progress and improvements from all companies within the group.
Now, Mikael will tell you more about our financial performance during Q3.
Thank you. So starting with the third quarter. As Erik mentioned, the organic growth in the quarter amounted to 28% and in constant currency to 12%. The gross margin was 6 -- 76.5% compared to 73% -- sorry, 76.5% compared to 73.1% and was, amongst others, positively impacted by currency effects of 1.3 percentage points.
The EBITDA amounted to SEK 1.8 million, corresponding to a margin of 0.3%. The EBITDA margin has strengthened primarily due to increased sales and positive currency effects. The personnel costs are in absolute terms at the same level as in the second quarter and in relation to sales lower. This is a result of continued recruitment to meet increased customer demand in the most profitable group companies, less onetime costs and the fact that the SEK 100 million cost savings program that we announced in the summer has had limited effect during the third quarter since it was announced in July.
A few comments on the period. Net sales amounted to SEK 1.565 billion compared to SEK 738 million during the same period last year, which corresponds to an increase of 112%. Organic growth for the period amounted to 24% and in constant currency to 10%. The gross margin amounted to 74.5% compared to 72.2% in the same period last year and was, amongst others, positively impacted by currency effects of 1.2 percentage points. EBITDA amounted to minus SEK 80.6 million, corresponding to a margin of minus 5.1%. The EBITDA was negatively impacted by one-off bad debt provision and restructuring costs and positively impacted by currency.
Coming back to some of the activities that we are doing to improve profitability and cash flow, we did see a significant improvement in operating cash flow this quarter compared to the second quarter and the operating cash flow amounted to minus SEK 16 million. The improvements in operating cash flow were primarily due to the improved EBITDA margin and less increase in working capital. Total cash flow, including changes in short-term investments amounted to minus SEK 303 million and was impacted by earn-out payments of SEK 115 million ongoing facility investments of SEK 55 million and investments in intangible fixed assets, primarily capitalized development cost of SEK 30 million.
A few words also on strengthening profitability and cash flow. The cost reduction program targeting saving SEK 100 million on an annual basis with full effect from the first quarter 2023 is on track. Savings have been implemented in the group companies that have the weakest profitability, as well as in the BICO Group.
At the same time, we have scaled up operations in some of our most profitable companies to support their increased number of customer orders. Another important area is working capital. Activities to improve working capital are in process with stricter payment terms in some companies and use of collection agencies to ensure timely payments. We are also, as Erik mentioned, establishing factoring solutions in some companies at the beginning of next year, which we estimate will free up large amount of capital tied up in accounts receivable. We expect the anticipated strong fourth quarter sales will result in reduced inventory levels following high volumes of deliveries to customers. And we are also reviewing safety stock levels for inventory.
And the last initiative, facility financing regarding our buildings in Finland and Germany is in process, and we are evaluating several options, including bank loans and sale leaseback alternatives.
With those words, I hand over to Erik for some comments on the business areas.
Thank you, Mikael. Starting with the business area Bioprinting. In the third quarter, the Bioprinting business area reported net sales of SEK 145.7 million, representing 26% of the total group sales. The organic growth was 33%, and the segment generated an adjusted EBITDA of SEK 1.3 million, representing a margin of 1%. Reported EBITDA was negative SEK 3 million, corresponding to a margin of negative 2%. In regards to our products, our flagship BIO X Bioprinting platform continues to make great strides in the regenerative medicine market with strong market adoption by academic institutions. The platform enables printing of human tissues for a wide range of applications and thanks to its unparalleled user friendliness, ability to maintain a clean printing environment and the expanding use case pipeline. We're also starting to see preclinical usage emerge from industrial actors, such as printing of human corneal implants to tackle global corneal blindness.
One of our industry customers has recently announced a path to initiate clinical trials specifically for this application as well, tackling corneal blindness that is affecting millions of patients worldwide. We also see strong demand for our laser and light-based printing platforms for industrial applications, driven by increased need for scale-up of microfabrication. Willingness in the pharma industry to invest in tissue models and improved methods for performing toxicology testing is driving demand for the entire Bioprinting products portfolio. And we're eagerly awaiting continued development in regards to the FDA Modernization Act that can come to shape the future of the entire drug discovery market.
In the third quarter, the Biosciences business area reported net sales of SEK 235.8 million, representing 43% of total group sales and organic growth was 27%. The segment generated an adjusted EBITDA of negative SEK 1.6 million, representing a margin of negative 0.7%. Reported EBITDA was negative SEK 9.6 million, corresponding to a margin of negative 4.1%.
During the quarter, we saw a differentiated picture where large pharma customers continues to invest, which has highly benefited Biosero by taking in several multimillion-dollar orders from first-tier global pharma players.
Discover Echo also continues to grow profitably, while organic growth was particularly strong, giving a slow quarter last year. This is in relation to the supply chain challenges we experienced last year that have now mostly been mitigated. Both Biosero and Discover Echo have continued their expansion to ensure that they can meet the increasing demand for their products offering for the end of the year and beyond.
On the same time, DISPENDIX and CYTENA continue to refine their strategy towards increased profitability and has recently made organizational adjustments according to our cost savings programs to better align with group-wide financial performance targets.
The products offered by both companies have strong impact on the sample preparation process for pharma and biotech and can significantly reduce cost and use of disposable plastics for laboratories, both being important agendas for pharma customers today.
Having secured many large long-term projects recently with major pharma players, Biosero is well positioned to continue to gain market share in the growing laboratory automation market. This continuous increase in demand for automation in clinical and pharma laboratories creates a very attractive opportunity for BICO Biosciences moving forward.
In the third quarter, the Bioautomation business area reported revenues of SEK 169 million, representing 31% of total group sales and the organic growth was 25%. The segment generated an adjusted EBITDA of SEK 32 million, representing a margin of 18.9%. The reported EBITDA was SEK 28.5 million, corresponding to a margin of 16.9%.
The Bioautomation business area is focusing on sample preparation for a wide range of life science industries with a major focus on diagnostics and pharma. We're pleased to see QInstruments is experiencing all-time high demand for their unique portfolio of BioShakers, and there continues to be strong uptake as well for single-cell handling products from SCIENION and Cellenion. We're still seeing some hesitation in the standard diagnostic segments, partly due to on steady demand from COVID-related diagnostics and as previously mentioned, larger capital expenditures.
With that being said, Cellenion with its single cell sorting and sample preparation technologies is on its way to a record year, expecting to quadruple its user base. This is mainly driven by the increased demand for single-cell omics and the rapidly growing field of single-cell proteomics.
Single-cell proteomics is a cutting-edge research field as proteins are the main drivers for cellular functions. Mass spectrometry proteomics leads to new discoveries about biological processes and allows better understanding of the disease mechanism.
And in September, Cellenion released proteoCHIP Label Free 48, which allows fully automated sample preparation for label-free single-cell proteomic analysis.
Looking ahead, there are a few significant trends that we are pursuing. The first is our entry into well-being and lifestyle segment, involving biosensors for human medical applications. Lifestyle sensors will be an important offering for our customers in the coming years, and we're well positioned to cater both R&D and scale-up applications for these customers.
Another trend is the opportunity within single-cell multiomics analysis, working both with genomics, so analysis of both DNA and RNA and proteomics and analysis of the proteins encoded within the DNA. Our portfolio of single cell sorting instruments are very well positioned to assist our customers with the ever-growing needs in terms of sample preparation within the multiomic segment.
Looking ahead, we have a great foundation of growth-oriented and market-leading companies within the group that will contribute to our financial goals, and we will continue our ongoing cost control projects to ensure that these initiatives improve both profitability and cash flow going forward. We're well positioned to capture further long-term market opportunities within the pharma and academic segments as demand for automation laboratory tools continues to be strong, even though we may experience challenges in the increasingly turbulent markets.
Our technology and IP assets ensure that they're -- ensure that we keep high entry bearers for newcomers, which keeps competitors at bay and promotes our market leadership position. We're catering into an extremely important part of the global market for laboratory tools and reagents and it's essential that we continue to focus all our attention on providing unique value-adding products to our customers around the world. The measures we're focusing on in the short term are necessary for the continued long-term success of the company.
With that, I would like to, once again, take the time to thank the entire team for the tremendous efforts in Q3. It has truly been a great pleasure working with everyone, expanding our global market reach and continuing our growth story.
We're also thankful for all the shareholders and investors who continue to support us on our journey. We're committed to our vision and mission, which is to create the future of life-saving treatments by reducing the organ shortage and speed up the drug development by providing accessible life science solutions that combine biology and technology.
With that, we would like to welcome any questions or comments you may have. Thank you.
[Operator Instructions]
Your first question comes from Ulrik Trattner at Carnegie.
Great. And congratulations on a good quarter and quite happy to see an improvement here in the operational cash flow, and I think I'll start off there in terms of what sort of expectations here going forward. We're now approaching more or less sort of breakeven operational cash flow. And by all comments during this Q&A session or during your presentation, as well as your report, by the sound of it, it sounds like inventory levels are to come down sequentially here in Q4? And do you see it as sort of possibility that we should see breakeven cash flow already in Q4? That would be my first question.
Thank you, Ulrik. Maybe I can start answering that question. Yes, I mean we have been building inventory during this year. And we estimate that the fourth quarter will, as normal -- follow the normal seasonal pattern for BICO to be the strongest quarter during the year. And for that reason, we expect high volume of deliveries in the fourth quarter, which should have a positive impact on the inventory level.
At the same time, of course, if we are successful with sales, we will see higher accounts receivable as a consequence of that. So it's too difficult -- too early to say if what the net effect on working capital will be as a consequence of that.
Okay. Great. And you also mentioned these efforts being put into place in factoring for what you're calling more problematic companies, just how much of receivables or how much of sales are being included into this new sort of factoring solution for next year?
Yes, so it is something we will evaluate during the year. Factoring of course, comes with a cost. So we will evaluate the size of factoring during the year, but we estimate that it can free up a large amount of accounts receivable in the group, which are an extensive item in our balance sheet.
Great. And on to CapEx and your facility investments in Finland and Germany, and you're stating that you're out there looking at evaluating several options how to sort of finance these properties. And I'm guessing we're referring to a sale leaseback. Could you just give us some more information where we are in that process? And does these sort of facilities need to be fully sort of finalized in order for you to do sort of the sale leaseback? And where are we at in terms of finalizing production of these facilities?
I can answer that question, and thanks for that, Ulrik. I would say, I mean, first of all, as a company, our intention is not to own facilities and buildings. Our focus is to finance the development and ongoing progress of our business around the world.
But with that being said, now in this situation with these facilities. We have a few options to look at when it comes to financing them, one being a sale and leaseback of the facilities, the second one being standard facility financing from banks or a combination thereof. And I would say the facility in Finland is currently being marketed. I believe that we have a very good facility, and we have, of course, a long-term commitment to it. So we're quite confident that we will be able to find favorable outcomes with the facility in Oulu, Finland.
As for the -- and that's, of course, in the next coming months. I don't want to give an exact time line, of course, because it could be quite dependent on the macroeconomical factors and effects. In terms of Berlin, same thing. Again, we're building a great facility in almost Central Berlin, and I believe that both facilities have a great potential for any potential buyer or financier. So we're quite enthusiastic and our ambition is, of course, to have these financing processes in place in the next quarters.
Great. And just a follow-up there on CapEx. What is sort of expected maintenance CapEx over the next few years, if we were to exclude earn-out payments as well as sort of facility expansion that you've already made. So what would be a maintenance CapEx level going into 2023?
Yes. I think we'll come back on that. This is a bit early to give those forecast for 2023, given all the changes that are ongoing on the CapEx side.
Okay. Great. And then on to just a few questions on the business segment. Quite intriguing to see Bioautomation delivering very strong margins here in Q3. Shall we say that is it QInstruments that is driving this? You're explaining that has extremely high demand for their solution and we know from the acquisition that it has very, very high margins? Or is it a combination that we're seeing a rebound of SCIENION and Ginoli as well, given that Q3 is generally a good quarter Q4 generally better. But where are we seeing the improvements in Bioautomation?
I can start from a commercial side and then Mikael, you can add on. I think from the bioautomation's perspective, I mean, as you know as well, it's a project-based business area mainly. And these are long-term projects that have lead times from anywhere from 6 months to even 12 months and beyond. So I think the nature of the business itself, the commercial nature of it, means that it's a bit more uneven than the other companies within the group and their ways of conducting their commercial activities, which means that in certain quarters, these could have a larger effect than others.
With that being said, I think we're continuing to see quite strong demand both from Cellenion and the single-cell technologies field, from SCIENION and some of their sample preparation products. Of course, QInstruments continues to perform strongly. And we're seeing alternative applications for some of the Ginolis automation as well.
So I believe that the business area is doing great progress commercially speaking, and I know that also there's been adjustments made in terms of the cost savings programs that will further enhance the picture for the next coming quarters.
Yes. So I think that's the summary. Yes.
Great. And on Bioprinting, it looks like quite a lot is happening both internally as well as in the industry. Is there -- are you seeing any sort of slowdown in demand for these products? And I note there are several products ongoing, richer products, in both drug development but also in the implantation field. Is sort of the demand still there? And is it still very, very high? What's your perspective -- view on current trading for Bioprinting?
I mean, if you look at the field of pharmaceutical development and academic research, those are typically historically speaking, what people say are a little bit more recession-proof industry segments. With that being said, the macroeconomical effects that we are experiencing we don't know where that will land in the next coming quarters. So I want to be a little bit cautious there in terms of how our future outlook is. But again, these are typically quite steady industry segments and customer segments. And from our perspective at least, we still see the indications of strong demand for these types of products for drug discovery development, laboratory automation and specifically for pharma and academic customers.
So what we're going to do, we're going to continue to focus on those customer segments and ensure that we have a good value-adding product portfolio that will ensure that they can in turn save time and money with their development projects. And I think that, that will be a positive impact from our perspective. So again, as I mentioned in the earnings call a little bit, the more uncertain biotech or the small biotechs and typically, the pre-revenue biotech companies are the ones that we will focus a little bit less on at this time. Again, just from a more cautious perspective and being proactive.
Fair enough. And just a follow-up question on Bioprinting. I know today short documentary on BBC, where you were mentioned, mainly referring to implants. Are we to see any sort of big developments in that field over the next 12 months?
I think this is a really exciting field. I mean, again, we started this company with Bioprinting as a legacy and a core business, and then we've built basically the group around that business. Cellink is a fantastic company, and it's making great strides in the Bioprinting and medical personalized implants and basically the field of tissue, engineering or regenerative medicine.
What fascinates me the most is that we anticipated the implant field to take 20, 30 years before we would start seeing Bioprinted implants in humans. The reality is that we're seeing it today. And I think that drives a lot of excitement. But I want to be cautious about that as well because we haven't seen any regulatory approvals. We haven't seen any regulatory pathways to ensure that Bioprinting can continue to thrive in clinical applications yet.
And I believe that, that will be a hurdle for the industry to ensure proper implementation of that technology. But again, we're seeing a lot of customers are preparing both for preclinical and clinical trials using our technologies. It's fascinating to see. And we're really excited about being able to deliver really good technologies that can impact this industry and provide good benefits for patients.
Great. Thank you, very intriguing. Last question on my end. And that would be what are the sort of price increases that are being implemented? I've heard from industry colleagues of yours that they are raising prices by around 6% to 10% to mitigate sort of higher input costs from various components. Where are you in that process?
Yes, we have increased the prices in the companies during this year. And of course, that is something that we will investigate going forward as well, as we are seeing increased cost for our components like amongst other players in the industry.
[Operator Instructions] Your next question comes from Rickard Anderkrans from Handelsbanken.
So first of all, a little bit on the outlook here. So in conjunction with Q2, you painted a rather cautious picture heading into H2 and potentially into 2023. But as I understand it from the report today, things have been improving. It appears on sort of end market demand and the cautiousness from clients is not really as bad as it was in late Q2. Can you explain the dynamics a little bit here? I understand your increased focus on academic and pharma customers, but you have investments sort of accelerated from Q2? Or have you won 1 or 2 really large accounts or large orders? So just would be interesting to understand the dynamics a bit there on what's going on in the market and with the customers.
Rickard, thanks for the question. I can start and then if you want to add something, Mikael, please do. I mean, I would say, we are still cautious. I have to really emphasize on that, we're saying no to certain business. We are scrutinizing certain segments much more in relation to our focus on cash flow and profitability. And I think that this is exactly the right way to go.
As a company, we have built a fantastic foundation of -- it's a group of multiple different businesses contributing and catering to drug discovery basically in pharmaceutical companies. And I think that since Q2, our focus has really been on the pharma industry and academic segment, which, in my view and also with the view from our business area directors and our other colleagues in the company, is really to focus on the segments, which we believe are established by stronger players and more established companies that can ensure to get through these more turbulent or challenging times. So again, we are more cautious in that there are certain customer segments that we're staying away from and just ensuring that we prioritize on our core business.
Okay. So you still -- so -- but the outlook for Q4 is good, but then visibility into 2023 a bit more uncertain then maybe?
Yes, I would say, I mean, we're taking our time to build a long-term business, and we're making adjustments to organization. We're making adjustment to structures. We're putting the right processes, internal control in place to ensure that the business can operate for the coming decades. This is nothing that gets done overnight. So I would say, we're building a sustainable, still growing, profitable company and the demand out there dependent on macroeconomical effects might shift up and down, but with that being said, we will, of course, continue to ensure that we deliver good solutions and value-driving products to our customers. That's really our priority.
Right. Fair enough. And looking at the Biosciences segment, profitability on the weak side there and in terms of contribution, but as far as I can tell all of the businesses acquired in that area had rather good profitability at time of acquisition. Can you elaborate a bit more on sort of the development of profitability there, what are the pieces that still need to be left for really scaling that business area?
Yes. So we have a mixed situation in the Bioscience business area, where we have a few companies that are very profitable and growing profitably and they have been expanding their cost base to support more customer orders. And then we have a couple of companies that are not profitable in the business area. And for them, we are working with adjustments to the organization to turn the companies into profitable companies.
Okay. And can you quantify types of margins you see in the companies which have -- that you described as very profitable, just so we can get a sense of the profitability levels of the sort of strong performing subsidiaries.
Yes, we are -- we don't go into details on individual companies. But as you know, we're having some really profitable companies in that segment.
Okay, okay. So -- all right. Fair enough. Yes. So just on the mix a little bit, consumables was a relatively low percentage of sales this quarter. Anything in particular you'd like to highlight on the dynamics there?
I mean it is, to a large extent, a consequence of the product mix that comes from the acquisitions that we have done that has changed the share between consumables and equipment.
I agree. I agree. It's again continued strong efforts from the commercial organization on the right customer segments that can provide us a steady stream of orders and of course, also have quite strong liquidities that we can get paid.
Fair enough. And I'm trying to put the puzzle here together. So you have roughly SEK 115 million left for facility investments, SEK 106 million potential earn-outs in the next 12 months. And net debt expanding quarter-over-quarter. Should we have any sort of thoughts about potential need for capital raise? Or how should we think about the liquidity and the capitalization of the company here in the next 12 months or so?
Yes. I mean we have identified a range of different measures to strengthen the cash flow. And those include, as we mentioned, working capital improvements and the introduction of factoring to reduce capital amount tied up in working capital.
Also, we are looking into the inventory levels that has grown substantially over the year and the external financing to -- of the facilities to offset the cash drain that these investments has caused during this year. So we have a plan in order to strengthen cash flow and profitability in the group.
Okay. And you believe that could bridge over to positive free cash flow within -- in the next year or 2?
I mean we have a goal to be -- to have a positive cash flow in the group. And of course, we are on a journey, but we don't provide any forecast.
Right. Fair enough. And a final one from my end. You had SEK 100 million plus contingent considerations paid in the quarter to Nanoscribe and Biosero. Can you comment on the performance behind these payments and sort of the -- what triggered them that?
The largest payment was to the former owners of Nanoscribe, and it was related to performance during 2021.
As we are showing no further questions, I'd like to hand the call back for closing remarks.
Wonderful. Once again, thank you so much for taking the time, everyone today, and we wish you a great day.