CellaVision AB

STO:CEVI

Earnings Call Transcript 2018-Q1

[Operator]

Ladies and gentlemen, welcome to the CellaVision AB Q1 Report 2018. [Operator Instructions] Today, I'm pleased to present our host, CEO, Zlatko Rihter. Please begin.

[Zlatko Rihter, CEO & President]

Hi, good morning everybody. Zlatko Rihter here from cloudy Lund. I hope you're all doing well. So I'll go through the Q1 report with all of you and do my best to kind of be - explain all the numbers.So let's start with -- move to Slide 4 and that's kind of where we have the first real slide to speak. And of course jut to repeat a little bit about CellaVision, in short of course is that we are there to try to replace traditional microscopes in labs. We've spent the last 10 years to do that in large hematology labs, and now, step by step, preparing also to challenge traditional microscope in small and medium sized labs, and I'll come back to that a little bit later during this presentation. And of course, we are trying to introduce digital morphology or digitization within the hematology area. And I think we've done that pretty successfully in the last few years and will of course continue to try to do that.If we move to the next slide, Slide 5, for those of you who have followed us for a while have seen this before but just to repeat, there are roughly 4 billion blood samples taken every year. All of those are annualized in cell counters. Providers of those are also our key distributors worldwide and roughly 15% of all blood samples have to be further analyzed.And then of course there are 2 options. And why there have to be further analysis is that the cell counters have flagged them out and there is some suspicion of a critical disease, some kind of blood related critical disease. Examples of that are lymphoma, melanoma, and different [indiscernible]. 15% of all slides then have to be reviewed in a second step and either in a microscope, a traditional microscope, which still is the largest -- most of the samples go through that. And then the alternative to that is CellaVision or digital microscopy. And end of last year, CellaVision had roughly 18% of the total market. So roughly I would say around 100 million samples were annualized by CellaVision equipment worldwide and the rest is still analyzed in traditional microscopes. Of course, our aim is to transfer as many of those over to digital microscopy over time. We are here to kind of creating a global standard of how microscopy and hematology labs are performed. So if we then move to Slide 6, and also look a little bit at those lab segments. So all those samples are analyzed in different types of environments, and there are roughly 50,000 large labs worldwide. And that's of course, that's our current market. Since we are offering high capacity units, we usually end up in large labs where they need optimization and high capacity. And that's been our current market and that's where we have today penetration of 18%, the highest we have in Americas with 24%, 19% in EMEA, and 10% in APAC. Of course, APAC is our fastest growing market the last few years and reaching 10%, which is mainly China and Japan to this date has been a great achievement I think.Looking into the future, and I think the future is coming closer and closer. I think we talked about that for a while is that we are now moving into the final stages of developing a solution also for the medium and small labs. We believe that there are roughly 100,000 of those around the world that would benefit with our solution. Today, all analysis in those labs are done in a traditional microscope environment. If you look at the total hematology market, which is also interesting I think it's more than SEK 30 billion and around more than 30 billion, annual growth of 4% to 5%. And of course, we are a very small player in that prospectus. Our part of that market is around SEK 1 billion today and we'll go to a potential of maybe up to 3 billion once we launch the solution for the medium and small labs. And that's kind of where we have development right now.So if we then move to Slide 7, and I think here is one of the first news versus last quarter. As you all know, we had a commercial operation, we'll call them indirect business model. This means that we send for distribute first and the distributors are the key hematology players. And I'll come back to that a little bit later but we have now during Quarter 1 also signed a Chinese player called Mindray as our distributor. So now we have, I would say, access to all labs in the large segment through those distributors.We have an indirect model, as I said. We sell the units to distributors. They take them and install them together with their hematology products and by creating a complete hematology line. We are currently presently in 13 markets with what you call market support functions and that is people employed by CellaVision but that really support distributors and customers, and create awareness and knowledge about our this year. Again, all the invoicing is more or less is happening from Sweden versus our distributors. So they have a peer specialist role in the market and to drive the knowledge about digital hematology.That's proven to be quite successful because in these markets where we have these resources for the longest time, like the U.S., we have also been very, very successful and we see this pattern repeat itself after a while when we move into new markets. Manufacturing is outsourced to the third party [ Keytron ] here in Sweden and during the quarter, we also passed 100 employees for the first time. And of course, HQ is here in Lund. If we then move to Slide 8, just kind of highlighting what we see as core and where we see a need for partnerships. Innovation is core. Coming back to that later but this is where we invest a lot. We will continue to invest a lot and we strongly believe that with our competence, we can develop even more exciting offerings within IVD down the road.Market support is also key because we need to have some presence in all key markets. We know that today to be successful and create awareness around our type of technology, which is kind of transformational or game changing in many ways, you need to have people that speak up for that type of technology in each market. And then that's why we invest so much in what we call geographical expansion, and have done that for a few years.Manufacturing, we have a [ Free PM ] set up and also to save some distribution, we have partnerships and of course, at the end of the day, we all try to [indiscernible] customer. If you look globally in the hematology market as such, Sysmex, who is a Japanese company, is the leader and has been so for a while. Very strong market share with more than 50% of course. This is also our largest and in many ways most important distributors that we have signed up. So we are working very close to them.But with Mindray now, the latest addition to our portfolio of distributors, we have more or less 100% of all end customers -- we have access to more or less 100% of all customers. Then we still have to do the work to persuade them to move from traditional microscopes to digital morphology. Now, as a next step, which we have also started, is of course for the small and midsized labs. We have the same distributors as you see here, but there are also a few additional ones, and of course, a part of our strategy now is to sign up all relevant distributors that cover the small and midsized labs segments. And of course, a concrete example of that is Boule Diagnostics that only have their market in that segment, most of them having both. So that's how it looks like and then of course, we will continue to update you each quarter how that moves on. So if you're looking at the strategic agenda, finalized the first section here today, segment, and I think we've shown this a few times before where we're kind of executing five key what we call strategic themes and have done that for a while. And I think it feels still that this is the right strategy. Geographic expansion is the first one. We have tried to move into an average four new regions every year for the last few years and we will continue to do that also this year. We are coming back a little bit to this year's focus. But we have a more than 1-year plan here to roll out our presence, to make sure of our presence in key markets.Segment expansion. Historically, large labs, large human labs is our core. We have moved into the veterinary segment a few years ago. Still, I think you could say that we have some way to go there. The market is not fully there everywhere but we are working hard to try to step by step expand into that. And then of course, the next exciting segment will be addressed as of next year when we had the solution for small and midsized labs launched.Innovation of course key and we are spending a lot of time and efforts to continue to innovate. We are a technology company and we're supposed to make sure that we always are in the leadership when it comes to digital morphology within diagnostics and that's something we'll try to continue to do.Develop partnerships of course is another one. We work indirect and I think an example of that is the Mindray agreement that we signed this year. And then of course, the supply chain we have, as I usually say, very fast moving components in our portfolio. So strategic sourcing and managing end of life challenges over time is very important. And therefore, we have a lot of focus on supply chain all the time to make sure we have an efficiency in that part of the business as well. So that's where we put the efforts behind and we have a lot of activities in each one of these. If we then move to the 2018 Q1 highlights, we can start with Slide 11. As you all know, of course I will mention that once more is that we had a very strong Q1 2017 [indiscernible] at that time and of course, the numbers in Q1 2018 will be a little bit reflected in that perspective. And of course, at the end of the day, that's important to understand.So the total organic growth, 20% down, minus in the Q1. 3% of that was exchange rate effects. So the numbers you will see in the P&L later on is 17%. If we look into the regions, America is a tad extraordinary. Extraordinary high sales in Q1 2017 was of course down more than the other regions. It was 27% down. Still, you have to separate what is end customer orders versus what we are moving within between us and our distributors in a short period of time.So over time, I think we've shown a pretty stable development in Americas and this is still I would say the market where we have by far the highest acceptance of our technology. And in the U.S. and Canada today, I would say that CellaVision has become the standard when it comes to how to perform microscopy analysis, especially in those two markets.But quarterly volatility will continue to prevail because of the way we have the setup and that we are a capital equipment [ phase ] type of company. We have also further expanded into Latin America and now we have a team based in Mexico covering the Spanish speaking parts of Latin America. And by that, I would say that we have coverage now in more or less all of key relevant markets in America. We have Canada, U.S. covered. We have Brazil covered since last year and now with this investment, we also cover key Spanish speaking Latin American markets. And that will be interesting to see how it can develop from that over the coming years.APAC was down 18% with a lower base so it's not that much in money but in percent it looks quite high. Still, looking into the markets of China and Japan, we have a strong development. Again, also here, we have to differ between what we shipped to our distributors and what is happening in the market, at least in the short while. China is the number two country in sales revenue after U.S., I would say by far number two. And what we focus on there is again to, as I mentioned before, to create awareness around our technology.So what we have built up the last few years, to take China, for example, to the next step is to develop reference centers that we then can utilize and that are doing kind of best practice digital morphology. We have then of those now in China and then we further developed the market by a lot of morphology training sessions and other types to increase knowledge of digital imaging. And this is a very important kind of activity to drive the markets. And we're also currently looking into the next market in APAC, which is India, where we are looking to expand and establish market support function. EMEA ad a more solid performance this quarter or last quarter, 10% up, and I think although it's far too early to kind of conclude that we are not fully up and running here, we have our organizations up and running, and they are operational. And as you all might remember, we opened up market support functions in EMEA in Q3 last year, or during last year, but in the U.K. and DACH, which is the German speaking parts of Europe, was [indiscernible] of France was Q1 and Q2 you could say. So they're up to speed now. They've kind of created their relationships in the local markets and it seems they are really out in the market and now trying to promote and create awareness around digital morphology. The next step in EMEA will be to develop establishment in Iberia, in Portugal during the year. So we'll come back to that later. Other more general highlights, that's Slide 12, of 2018, is that we have as I mentioned before in Q1 signed a global distribution contract with Mindray, which is a key leading hematology player. They have their head office based in Shenzhen in China. It's I would say one of the largest med tech firms based in China to have almost $2 billion U.S. revenue just to understand the size of that company. Primarily in the APAC region, but they're present both in APAC and EMEA. And also present both in the large and small medium hematology lab segments. So they are kind of a relevant player from that perspective. We also expanded a distribution contract with Beckman Coulter. We worked together with Beckman for many, many years in the large lab segment and now, we also have an amendment to cover small and medium hematology lab segment, which means that once we launch that [indiscernible] solution. We can -- we'll have Beckman as a partner also in that segment. Then another already also a very important comment is that we are continuously investing in innovation. Our net sales ratio, if you look in the innovation investments versus net sales, has now increased to 17% step by step. Through the last years we increased that and this also means that we are able to develop more and more products and technology down the road within our key area. Right now, of course, most of the focus is to finalize development of the mid and small hematology lab segment platform where we again would like to traditional microscopes in that segment as of launch. And of course, we will also be able to integrate that in our total solution, which I'll come back to later. And that also means that we are today in Lund where we have our R&D center are actively investing into accelerating hiring of engineers. We need more people [indiscernible] to be able to realize all of our plans that we have put out. So then let's move a little bit into the product portfolio and a little bit to highlight how we see the next step here for us from a product offering perspective or a customer operations perspective. So if we move to Slide 13, and as you all might know, the way we have the structure of our portfolio is that we have hardware, we have applications, and we have what we call connectivity to be able to connect end users or BMAs, med techs where they are into the same solutions. And then we have what we call proficiency, which is more training and learning tools. So that's kind of the four clusters of products that we have.And in the past, or currently I would say, we have two type of hardware, one that we call the CellaVision branded products, which is the DM1200 and the DM9600, which is the low-high and high-high capacity products that we offer in the large lab segments.We also have an integrated solution together with Sysmex, which is an OM solution, which is based on the same platform as our own, but is branded Sysmex. And that's - there we have one more step of integration. So once the cell counter, Sysmex cell counters indicates that this sample needs to be further analyzed, there is an automatic transfer into our system. So there are like no hands.What we'll also add to the portfolio as of end of this year, early next year is the DC-1, the CellaVision DC-1, which will be the brand name of the new small unit. I'll show a little bit more about that on the next slide, but that will then address the small and medium lab segment. Now, as you can see on this slide, this will fit very well into our overall portfolio because the CellaVision DC-1 will use what we call the peripheral blood application, so that's the most important part of analysis that's done everywhere and then it will be able to link to connectivity and proficiency also. So this again means that we will continue to have an integrated offering. So if you have a lab chain where you have two, three core labs, large labs and then you have a number of satellite labs in the suburbs, you will be able to connect that into one solution. So that basically means that the DC-1 will kind of be integrated into the rest of our offering that we have. And thereby, we think we have sold another I would say -- addressed another need of the labs.And that's kind of how we're trying to run that. So if you would then move to Slide 14 and a little bit more into the specification of that, and what will that make - what will be different for that product then what we see with the problems we have today for the large labs is of course, first of all, there is a price point issue or discussion today. Because if you want to be in the small and medium sized labs, you have to have a lower cost basically than you have for the large labs because they will pay less for that type of solution.So we usually say that the end customer price for a large lab instrument like a DM-9600 is around SEK 1 million. And of course, to be able to address the small and medium sized labs then you need to have a price point that is a third of that roughly. So that's kind of where the starting point goes. So we believe that we have, from a cost perspective, managed to address that. And what the solution will do is to do the transfer of blood analysis, which the large lab's instruments also do. The customer can choose to have a standalone or a network solution. So that means either it's linked into a large lab chain needs or you can use the unit as a standalone if you prefer to do that. And if you have a small independent lab then that's alternative.What we also managed to do here is to embed the PC, because today, we had a separate PC for the large lab segment, into this unit. So it's extremely compact. It will run one slide at a time. So you have to feed it slide by slide. You feed it and then it automatically does the analysis and that's how it's set up.Now, of course, the volumes are much smaller in a small medium sized lab. So that will also mean that this will have a better fit there. They don't need optimization that we have for the large units. Small footprint, if you look at the current instrument, it's around 100 kilos of weight. This will have 10 kilos and almost be able to do the same things. Instead of having two objectives, which we have in the large ones, here we'll only have and that's also to keep the cost down. And I think very important to say that the challenge when you have that is that you end up -- you lose a little bit on speed of analysis because at the end of the day, we need to have pretty high speed. Otherwise, the customers would prefer to do analysis in microscopes. But the throughput, somewhere around 6 to 10 slides per hour. If you look at the large instruments, they have 20 and 30 slides per hour. So this is lower but is good enough for this segment. And then also one new feature that we will offer is what we call a digital scan. So you can basically scan the whole slide. Normally, we don't do that. So this is kind of what is the key I would say features that we will offer in this unit at the end of the day, all these 10 kilos. So it's a pretty compact, small device. So that's kind of what we plan out to start rollout as of next year in [indiscernible] and so on. Then if we move to financials on Slide 16, which is the last part of this presentation. A few comments on the numbers. We had again a very tough comparison. Q1 2017 we had 934 million sales was by far all-time high and we didn't manage fully to meet that. Still, Q1 2018 was the third best quarter we've ever had and that also I think that's important to remember over time.As you all know, we had very high volatility quarter-by-quarter and you can see that on these five last quarters only and it looks the same backwards over time. I think although that being said, I think the rest of the P&L looks pretty strong. Gross margin wise, we had I think the highest gross margin ever, more than 74%. I think partly due to product mix and a little bit around FX and I think that we are running efficient supply chain also plays a role here.OpEx versus sales is still, I would say very, very good. We are step by step improving that. And at the end of the day also it's important to remember that we ended up with a stable I would say operating profit, a little bit under 30% roughly, 29.9%. So that was I think the key high level numbers of the quarter. I think my proposal is then that we move to Slide 18. I will comment a little bit on further comments on the finance aspects. We had 3% positive currency exchange effect versus last year. Gross margin was 74.4%, which was the highest best ever. I think on the expenses side, we are pretty stable and that's kind of how it is.Last year, if you compare last year with the year before that, we increased capitalization pretty much. Now, it's more stable and of course, we are now in the final stages of developing the technology platform for small and midsized units. Cash flow was negative but that's a little bit we have a few customers and when they have that has a pretty high impact on the cash flow and you always have -- we always end quarters when we end them. So it's a little bit dependent on the pay. So this quarter, we ended up negatively but it's not for us that big thing at the end of the day because that will even out over time.And I think that's the main comments on the finance. If we then move to Slide 19, I would say that this is of course an important perspective from our part because what we would like to do is of course grow globally. And we know that most of the people in the world and also labs over time are in APAC. And of course, Asia-Pacific is a key growth area for us. And currently, we now reach 20% of our sales is in that region and step by step, I would expect that to increase over time and we'll see a better balance I think globally between the three regions. And I think step by step, we have improved that relationship and we'll continue to do that.So that's kind of my I would say last slide of the presentation and thereby, I open up for questions.

[Operator]

[Operator Instructions] And your first question comes from the line of Sten Gustafsson of ABG.

[Sten Gustafsson, Lead Analys]

First thing, if you could -- I'm sorry if I missed it earlier in the call, but could you remind me a little bit about the European market and penetration rates for various regions, like German speaking, French speaking, et cetera. That would be helpful. And also if you could us some sort of what the size of the Latin American, including Mexico, the size of that market, what that looks like. That would be helpful.

[Zlatko Rihter, CEO & President]

Yes, so the first was penetration rates in some Western European markets. Is that correct, if I understand the question correct?

[Sten Gustafsson, Lead Analys]

Yes. My impression is that you have a fairly high penetration rate in the Nordic region, for example, but less so in France and Spain.

[Zlatko Rihter, CEO & President]

I would say there are many markets in Europe. So we can pick the large ones. I think if you look at our home markets like Nordic, and also Benelux, which is kind of very I think early adopters from in terms of digitalization penetrations are 15% plus. Then in the big - in the large European markets, if you take France, Germany, the U.K., we are in the range of plus or minus 10% in those -- at this stage.

[Sten Gustafsson, Lead Analys]

In terms of size, is it possible to say that France, Germany, U.K. accounts for half the European market in terms of labs?

[Zlatko Rihter, CEO & President]

Yes, you could say so. There are roughly 5,000 labs in EMEA and I would say that Germany is the largest market. I think it's roughly 1,000 there and then France and -- France is just below 1,000 and the U.K. is somewhere 500ish, 600ish type of size.

[Sten Gustafsson, Lead Analys]

Okay. Thank you.

[Zlatko Rihter, CEO & President]

This [indiscernible] EMEA marketing.

[Sten Gustafsson, Lead Analys]

And regarding the Latin American market, how important is that?

[Zlatko Rihter, CEO & President]

I think there we have -- there is a market already today. It's a big region. You have -- and we have some penetration already there today, although it's a low. It's a little bit like we were in Asia a few years ago. So now, since half the year back, they're establishing Brazil and now with Mexico. I think we have two segments there, I think the small and medium sized labs because it's not so consolidated yet, that market will be very attractive there.And then there is I would say, all in all, more than 1,000 labs in South America that could [indiscernible] some customers. Then we have some way to go there. I think we need to have a long-term view on South America.

[Sten Gustafsson, Lead Analys]

One final question if I may and that's we have talked about the European approval of this new DC-1 product. But could you also remind me about your plans with regards to the U.S. market when you [indiscernible] with the FDA? What's the timeline for it, for the approval process?

[Zlatko Rihter, CEO & President]

We will work as fast as we can, but I think if you look back historically what timelines it takes, the big challenge is that we need to run additional clinical studies and those take some time. So we count about having additional one year roughly before we can launch it in the U.S. and then I would add a few more months to be able to launch it also in China because that's the two markets that are most challenging from a regulatory perspective.So somewhere 12 to 18 months. After [ C-Mark ] we should have a global kind of [indiscernible] key markets, at least, including the U.S. and China should be up and running.

[Sten Gustafsson, Lead Analys]

I assume you need to do clinical studies also in China for the FDA approval.

[Zlatko Rihter, CEO & President]

It's more -- yes, but it's more useful to have there, but it's more administrative time because the Chinese authorities have to go through to the concession and that takes a few more months. We tried to control that as much as possible, but that's kind of what you can expect.

[Operator]

Our next question comes from the line of [ Phillip Zenon ] of [ SFAR ].

[Unknown Analyst]

A couple of question please. The first one is on EMEA. In the quarterly report, you sound a bit more cautious there. You said that it takes a bit longer than initially estimated to penetrate the market. Has anything changed there? Why are you more cautious?

[Zlatko Rihter, CEO & President]

Which market?

[Unknown Analyst]

In Europe.

[Zlatko Rihter, CEO & President]

Europe. What I said is that I think we have a long history in Europe. What we've done is that last year we've accelerated b by investing into market support functions. And then for a team to get going in the market, and that is based on our experience on other markets is that takes some time before you build up relations. When you hire people, they have to build up relationships with distributors, with end customers, and all that. And that's kind of that -- so what we measure in the beginning is to make sure to have a lot of activities ongoing.And I would say that in Europe now after six months, it does make it faster than maybe in other markets, that team is now fully operational and they're really busy to be out there and really try to create the awareness, and knowledge, and training. They perform training, et cetera, to drive knowledge as next step penetration in those markets.So it was not my meaning to sound cautious.

[Unknown Analyst]

That's fine. And then in the revenues, in Q1, has there been any very large orders, any unusual, any veterinary orders, anything in there that you would call out?

[Zlatko Rihter, CEO & President]

No, I would say it's been normal business. Then we don't always, as you know, we don't always know that when we get the orders. We have a -- this is the part of the game, the volatility. Sometimes we get orders, we think they're normal but then the [indiscernible] extraordinary because they ended up in stock. Sometimes, we're not at [indiscernible] but we don't have any indications this quarter that anything strange was happening when we look at the order flow.

[Unknown Analyst]

Okay, perfect. Just to check. And then another question on the new small-midsized product. Have you already got any initial customer feedback on that? I remember in Q4, you said that you were producing the first prototypes. Have you been showing these around, doing a bit of training on this? Any feedback?

[Zlatko Rihter, CEO & President]

You always have to be a little bit cautious when you show prototypes. But of course, we've had interaction with both distributors and customers. And I think the feedback so far is positive. I think they see the value of the unit and there's a lot of new modern technology in the unit. It does the job [indiscernible] quality looks promising. So those things are things that they look at when they look at this type of solution. And also that we can integrate it into their workflow if you're a lab chain or a region.Then at the end of the day, it has to be in the lab every day for a few months before we can make any more in-depth conclusions. And that's of course the next steps for us.

[Unknown Analyst]

Okay. And then probably a last question before I go back in the queue and [indiscernible] to ask a couple more questions. I thought your EBIT performance was really solid in the quarter [indiscernible] gross margin really, really strong. And so I'm just surprised. Was gross margin strength due to mix as well? I remember that in Q4 you launched a software upgrade, advanced IVC appreciation, I think.So is that -- how did that start to sell or was there anything in terms of more software wins, hardware that you sold in the quarter or anything?

[Zlatko Rihter, CEO & President]

I think it's also driven on the quarter then you always have a little bit back and forth mix in that. I think we are learning step by step how to optimize our business and that's how we'll try to run that.We're kind of a small but try to be at least a very lean company in that way and with good cost control. And that's how we try to operate our business and I think that's I think the answer. Then there are also plusses and minuses when we go through the P&L. But we have a pretty efficient model and we invest when we can, so to speak. And that's why we've had fairly good control over the years and continue to do so.

[Operator]

[Operator Instructions] It's [ Phillip Zenon ] again.

[Unknown Analyst]

Let me ask two more questions please. You obviously signed the distribution partnership with Mindray in China. I think that you have been discussing or had talks with them in the past already and then you want to penetrate China with your existing partners. So now, you've obviously changed. Can you briefly elaborate why and how has that impacted or will it impact your distribution reach in China now with Mindray on board?

[Zlatko Rihter, CEO & President]

First of all, I think it's important to mention that with Mindray, it's not only China. It's a global company and I think you have to go back to our kind of strategy and mission. We have a mission that we would like to make sure that all labs have access to digital morphology and to be able to do that.Then of course you have to -- if you don't go [indiscernible], which we don't, then you have to partner up with all relevant distribution partners and Mindray is one of them. There are 5 or 6 players day currently in the large lab segment and Mindray is also present in the small and medium sized labs, which is important to remember as kind of the mix of that down the road.So our view has been that we would like to collaborate with all players in the morphology field. And I think yes, we have had discussions with all distributor partners for many years in many ways and Mindray of course being one of them. And I think now, we came to the conclusion in the previous quarter that now it's time to take the next step basically.And then we will be the same type of partner as we have partnership level, Beckman, and Abbott, and Siemens. Then with Sysmex, we have this that we're taking kind of the next step with the integration solution, the Sysmex DI-60. It's the same platform but it's slightly different hardware. So that's how it looks like right now. So Mindray is now part of the partnership structure we have. And they're a relevant player and we would like to be partners with the relevant players. Then it takes some time to build up relationship, and training, and resources. It's a long-term investment from both sides I think.

[Unknown Analyst]

And then two last question please. One, my usual question, has anything changed on the competitive environment either from the side of Roche or from probably Chinese competitors, or from Siemens now in their core Siemens [indiscernible]? Is there anything that's going on, changing?

[Zlatko Rihter, CEO & President]

No, I think Roche is, again, we don't see them fully as a competitor at this stage because we're addressing different segments. They're more into research and we're more into commercial labs. So we never -- so far, we have never been in competitive situations with them. But we know that Roche, they continue to launch their Bloodhound system in that segment where they're present. Last year, they had a [ C-Mark ]. Now, they have a [indiscernible] approval also since some months back.When it comes to the more direct competition, no, we don't see any movements there. I would say that what we've seen in the last few years is that the competitive [indiscernible] we had a few years ago, in many cases they have disappeared. We had [indiscernible] in Japan. They're not present anymore because they don't have new installation. We had [indiscernible]. I think their company will still see some, and then we had a few Chinese players that also seems to have backed out or disappeared.So what we still see some activities from is a company called [ West Medical International ] but that's kind of it at this stage.

[Unknown Analyst]

Very good, and then the last one, a financial question. On the cash flow statement, there is the [ 9 ] capitalized R&D expenses. How should we think about this line going into 2019 and when the new products, the smaller tech, midsized products are rolled out, on the market, are finally developed? Should that line increase, or decline, or remain stable? Not as a guidance but just as a better understanding of how the business models works.Because I assume that when you produce and develop the new equipment, I would expect this line to go down [indiscernible].

[Zlatko Rihter, CEO & President]

Yes, I think -- I didn't fully understand the question but I'll try to answer what I understood the question to be. I think, I mean, we plan to have the same level of investments we had the last year basically. So that's kind of [indiscernible] to targets.

[Unknown Analyst]

Yes, but my question was more return structurally when you have finished to develop the current product, the small, midsized. The capitalized R&D expenses will probably go down or will you probably develop a new product for the vet space or whatever and then you'll just remain on that level?

[Zlatko Rihter, CEO & President]

No, I think a little bit to be seen, but I don't expect investment rate to go down. I mean, we see a lot of opportunities to develop additional technology in our field. I think there are more applications that we should address than we're doing right now because still today, although we have a good solution, there is still some analysis, if we take a bone marrow analysis, for example, that has to be done in a traditional microscope.So there is more to do. And I think also what will happen once we launch the small unit in the small segment, we know that there are probably one or two more things we need to look into there and then investment into innovation to really take it -- [indiscernible] innovation or replacing the microscope completely then you have to make sure that you can cover all the analysis that can be done in that traditional microscope.So from that perspective, I see that we will continue to invest. I think our challenge right now is that it's very hard to find skilled engineers. So that's kind of a little bit what is a short-term challenge. I think you will see that it's -- the economic cycle is very hot right now and we see a good economy in many aspects. And people are really critical resources right now to find the right people.But I think from our strategic perspective, we have a lot of ideas that we would like to invest in too. We have to come back to exactly what those are but that's kind of what I can say here.

[Unknown Analyst]

Thank you very much and good luck with the current quarter.

[Operator]

[Operator Instructions] There seem to be no further questions so I'll hand back to Zlatko for the closing comment.

[Zlatko Rihter, CEO & President]

Okay. Thank you for listening today and I hope you all have a good day and talk to you if not before, next quarter report. Take care. Bye.

[Operator]

Thank you for joining today's conference. You may now disconnect your handset.