CellaVision AB

STO:CEVI

Earnings Call Transcript 2020-Q1

[Operator]

Ladies and gentlemen, welcome to the CellaVision AB Q1 Report for 2020. Today, I am pleased to present CEO, Zlatko Rihter. [Operator Instructions] I'll now hand the floor to Zlatko. Please begin your meeting.

[Zlatko Rihter, President & CEO]

So good morning or -- and good day, everybody. My name is Zlatko Rihter, CEO of CellaVision. And with me today also have Magnus Blixt, the CFO of CellaVision; and Maria Morin, that is also heading HR and corporate communications. So we are free here around the telephone here in sunny Lund.So basically, what I'll do, as usual, is go through the quarter reports, and I hope that you can all see the slide presentation. So please move to Slide #3. And I'll just give you a little bit of a highlights on the CellaVision business, and then we'll move into financials later on.As you as you all understand, since before, I mean, the vision that CellaVision have is to become a global leader within digitalization and automated blood analysis for human and veterinary segments. We believe that we have a strong value proposition, combining patient diagnostics, streamlining workflows and then also reducing health care costs. And basically, I mean, our vision, at the end of the day, is to replace traditional microscopes in laboratories. And I mean, that vision has been part of our life for the last few years, and we will continue on that road. And I think a lot of the activities we've done in the last few years has been to kind of support that vision. Moving to Slide 4. We are operating in a market, participating in a few segments, one of them being large labs, large hematology labs. There are 17,000 of those, and we define our market as labs that have more than 130 blood samples per day. In that segment, we see around 2.5 billion blood samples taken every year that needs to be analyzed, and they are done in kind of in a workflow that consists of first cell counter, where -- and this is also provided by our partners, basically. So the cell counter looks into abnormality -- looks for abnormalities. And of course, what we try to do is to analyze blood-related diseases. And there are kind of 3 clusters of those. One is all the cancer -- blood cancer: lymphoma, myeloma, leukemia, et cetera. We have different types of anemias, which is the second blood cluster. And the third cluster is more severe infections. And basically, what the cell counters looks for are abnormalities that indicates that 1 of those 3 clusters are present in the sample, and roughly 15% of our samples are seen as abnormal.So then it moves into the next stage, the second step of analysis, which is the microscopy, because somebody wants to look at the cells and at the blood samples more thoroughly and look at the morphology of those to kind of be able to provide the right diagnosis at the end of the day. And here, since 6 months now, CellaVision offers also slide preparation offering. So basically, as soon as there is a need for -- to make a slide that will be put under a microscope, we're involved through reagents and also smearing and staining procedures. At the end of the day, the customer can choose 2 ways to analyze the slide. And there are 380 million slides annually that needs to be analyzed, either in the microscope, traditional microscopes, supported by DNA or med tech or in CellaVision. And then you do it digitally, basically, where we automatize that process. So we basically replace the hands, the eyes and the brain of the -- of a med tech. The hands being precise mechanics or a robot that picks up the slide. The eyes is, of course, our digital camera, and the brain is the people learning artificial intelligence algorithms that can recognize different types of cells in the analysis. And by end of last year, CellaVision has reached 21% penetration, meaning that more than 3,500 labs today worldwide are using CellaVision. And we are -- we have spent enormous efforts from our side to try to transform this market more and more into digital morphology. So -- and CellaVision basically has one of top market share in that segment. If we then move to the next slide, which is the small and medium lab segment, where CellaVision kind of entered with the DC-1 last year that we launched early last year. We had a market share of 1.5 billion blood samples. So the total market, I would say, blood samples are roughly 4 billion per year. Also here, we have cell counters that are a little bit more, I would say, basic. And they also look for abnormalities. And if there is abnormality, just as before, you also have to go through a microscope -- microscopy analysis as a second step. And it looks basically the same as for large labs, but it's much more manual steps. But also here, we provide stains, but we also provide smearing devices and staining instruments to support that. This is, of course, a segment that historically is completely performed by traditional microscopy or that the slide is transported from a satellite lab to a core lab where they have more capabilities. We, of course, think that, together with the DC-1, we can connect those labs into more networking environments. And of course, since we just launched the CellaVision DC-1, the market share or the penetration we have right now is quite low. It's more than 0%, but less than 1% at this stage. And of course, we're ramping that up currently. So that's kind of the 2 main segments that we participate in. Then we move to the next slide. That means that the total markets that we operate within is 100,000 small and midsized labs, and then it's roughly 17,000 large labs. And in the large lab segment, they would have -- where we have a lot of traction and history, we now have a global penetration that was up 21%, especially in the Americas, where we need a stronger position with 32%. And if you look to North America, which is U.S. and Canada, I think we have very high attachment rates there because we become the golden standard there. And also more than, I would say, 50% penetration. Though South America is less, in EMEA, primarily in Western Europe, where there are high penetration rates, and in Asia Pacific, it's still low, but it's increasing quite fast. And focus there -- or where we've been most successful there so far, is we see Japan -- China, Japan, Australia. And I think also Korea is coming up as a more and more of a success case for us in the coming years. We have invested quite a lot to open up those markets lately.So basically, the total hematology market is around SEK 40 billion, and we are addressing around 15% of that with our solutions today, which basically means that the addressable market is around SEK 6 billion per year. So that's a little bit of market.As you also know, just to repeat, but also emphasize, is that the business model that we are using -- so please turn to Slide #7, is an indirect business model where we are working together with distribution partners. And we have non -- global nonexclusive agreements with all key players. Hematology is a pretty consolidated market. There are 6 players, more or less, that owns the global market. And they are the companies that have a direct access and installation, people to basically to do the market, that consist the market -- of the market. So Sysmex, which is a Japanese company, has 65% market share. And then you have Beckman and Mindray there's the 2 runner-ups, an American and Chinese companies. Sysmex is Japanese. So that's basically the key players.So our model is that we provide the second step of this process, as I showed before, and basically are integrated into the -- our partners' hematology lives, which is the cell counters normally, and all reagents needed for that. So it basically means that we ship our systems. They integrate them, they do the installation, and they also take care of aftersales service. What we have done though is that we have established ourselves in 18 markets with our own people to kind of support the penetration in each market. Key focus there is, of course, a little bit dependent on how mature the market is, but it's primarily to start to create awareness around digital hematology, to build up key opinion leaders, to train both end customers and also our partners' sales forces and installation forces and also be part of the business, basically, to be part of pitches, et cetera, to make sure that we drive penetration. We need to do that a little bit ourselves because we are the only player in this [ oncology ] niche today. So that's kind of important. And you see the list of all the countries where we have personnel today, and we just established ourselves in Russia since April this year, which is the latest markets. We're operational there as well. So we have an interesting journey in front of us also there. When it comes to equipment or system manufacturing, it's outsourced. It's a third party. We do all the design. But basically, the manufacturer or assembly is done by third party. When it comes to stains or reagents, the company acquired RAL Diagnostics in October last year. They have in-house. So we have in-house production in Bordeaux in France there. All in all, we are more than 180 employees worldwide, and most of them are based here in Lund, especially the global R&D team. So that's basically kind of the business model. The strategic agenda that we discussed many times also in the past, I'll just go through that very briefly on Slide 8, next slide. It's basically that we're focused on geographic expansion. I think I just mentioned Russia as an example of that, where we now have presence in 18 markets. Another focus is segment expansion to move into new segments. Historically, we're only present in large labs, then we developed the DC-1. So we are now present in small and mid-sized labs. We also acquired RAL to become part of the slide preparation segment. And we are also right now -- I'll come back to that later -- we're launching a completely new and upgraded veterinary offerings so that were also present in the veterinary segment. So we move from 1 to 4 segments in a few years' time, where we have, I would say, very competitive offerings in all 4 segments today.Innovation is key. We are spending a lot of investments into innovation. We know that our future success is so much based upon that we have a strong innovation pipeline. And of course, then we need to have the highly skilled people and also highly skilled total team to be able to do that. And we invested a lot into that. So we can see that our OpEx is increasing. It's usually very much related to geographic expansion and innovation. Streamline supply chain. Under normal circumstances, it's a lot of focus to make sure that we can manage that. We have a very high-tech product in a very conservative market with low product life cycle. So that basically means that we always have a challenge on making sure that we source the right components and up-to-date components. So we face quite a lot of -- the last time by our end-of-life components issues. And I think one of those I will mention a bit later today as well. And then of course, since we are selling in an indirect model, developing partnerships is key. And then, of course, historically, it's been a lot of focus on developing partnerships in the large labs segments, but we're now also step by step developing partnerships in the small lab segments, adding to what we already have within the slide preparation area. And also within the veterinary area to make sure that we have good partners that can sell our technology and install it into the markets. So that's kind of the key areas. I think those -- the strategy has been the same basically for a few years, but I think what we do step by step is to let up in more and more activities to make sure that we deliver from this strategy.And then the sixth element, of course, is the business development where the acquisition of RAL Diagnostics is another concrete example that took place end of last year, i.e., [indiscernible] in that field as well. So that's a little bit about the market business model. And so if we then just took a -- take a short brief look into -- update you a little bit on RAL and the integration around that and also our portfolio, so let's move to Slide #10. If you look at the strategic fits then, which is the key, I would say, rationale, why we went -- ended up acquiring RAL Diagnostics end of last year is basically that they are seen as a key or core leading provider within stains. I mean that's the RAL core competence. CellaVision brings in optics competence, precision mechanics and also the whole software and deep learning algorithms competence. So when you combine those 3, I would say, competencies, we can really bring outcome to the next level. And that's, of course, our overall goal because the key thing for CellaVision to be successful is to make sure that we have the best-ever possible image quality. It has to be as good as, if not better, than what you see in a microscope. But of course, staining plays a very important role in that, just as optics and deep learning does. So good image quality also means that you can improve cell classification, which is, of course, extremely important to make sure that the cells that we classify are done in that -- in a good way. And then if you bring the 3 components or the components of that together, you can also improve the lab workflow. And this is the core of the whole integration that we are kind of taking on now with RAL and CellaVision coming together and rolling that out globally. So we're spending a lot of time right now on that to execute that plan that we -- that's why we acquired RAL a few months ago. So if you take the next slide, Slide 11, to put a little bit more like mix to the ground or meat to this -- meat to the bone, is the right expression. Just an overview of the hematology workflow that we participate now in that Slide 11. So we see the different steps on that slide. So the first step is the cell counter, which is provided by our partners. And if you look at the large labs workflow, we have a slide smearing and staining device, which is automated for high volumes, which is then provided by our partners. I mentioned a few of them on the slide. Then we have stains, we have the same protocol, and we have digital morphology that is then offered by CellaVision and RAL together.In the small and midsized labs workflow. Again, you have the cell counter provided by our partners. And then we step in and CellaVision and RAL together, offers the rest of that workflow with a semi-automatic slide smearing devices. We have 2 in our portfolio. All the type of stains or reagents needed to prepare the slide. Then you have a staining device that also stains the slide and then a staining protocol to make sure that it's optimized. And of course, you need to have a staining protocol for -- that's important to remember for each partner that we have because their staining devices look slightly different. So there are many different staining protocols. And then on the small and midsized labs segment, of course, it ends up with an analysis in the DC-1. So this is basically what we will now try to step by step roll out globally and, of course, together with our partners in the different markets and with our different devices so that we optimize the workflow for each partner. If you just look back a little bit, I mean, CellaVision has offered digital morphology, I would say, globally in the last few years. We have a good presence in all key markets in different ways, still, but still present, while I'll say RAL historically has been a little bit more present on or very much present in some Western European markets. And of course, what we will try to do is that what you see on this slide should basically be rolled out globally the coming years. So it's a lot of work around -- an emphasis around that and to execute that strategy.So that's a little bit about CellaVision and also the RAL and the workflow and all that. And I think, as of now, let's then move into the financials -- the 2020 financials. And if you then move to Slide 13. And of course, we, as everybody else, spent a lot of time trying to understand a little what COVID-19 or corona means for us now and in the future. And I'll try a little bit to highlight a little bit how we see our role being affected by COVID-19. And I kind of split it into 2 or divided it into 2 areas. One is, I would say, during the COVID-19 outbreak, what's kind of the actions and what happens then. And then a little bit post COVID-19, because we have -- since we are being a global company, we have a few experiences like in China, what kind of happens, if I may say, post COVID-19. So during a COVID-19 outbreak, whether it was China a few months ago or where we are in the middle of Europe and U.S. right now, we see a scenario where the number of blood samples are reduced, which is, of course, a base for our business during that time. Reasons for that are many, but people are in quarantine, so it's very hard to get to a lab and give blood basically. It's reduced access to hospitals. People are not allowed into hospitals. We see less screening. We see fewer planned operations where usually we need to leave a blood sample for operation. Fewer organ transplantations, which is also part of that. And when it comes to the daily life, COVID-19 patients are prioritized. We have to remember that COVID-19 is a virus and cannot be detected in our systems. You have to have an electronic microscope for that if you want to do that microscopy part. So that means that we see, during these 1, 2, 3 months when the outbreak takes part, a reduction of blood samples. Then of course, we, as you remember, as I showed before, we are like in the second step of the hematology analysis. So it comes to microscopy reduced samples, which is the 15% we talked about, that shouldn't be considerably affected at this stage. Because normally, it's the most critical blood samples that we see. Blood cancer patient samples, for example, are analyzed in microscope and still have to do. So if you have a leukemia, whether or not there is a COVID-19 outbreak, you're still a very critical patient at the end of the day. So that should be less affected. Then when it comes to large labs installations, which is our core business, of course, during a corona outbreak, the access to labs for installation personnel is limited because it's not prioritized at that stage. So we will see, what I would call, a short-term negative effect on installations during the 1, 2 months when the outbreak stays. Because at that point of time, not that many people are allowed to go into the labs. And that, of course, also affects our partners. So if you take a market like in U.S., where we have more or less 100% attachment rate, so every time there is a hematology installation done, primarily by Sysmex or Beckman in that market, there is also CellaVision installation. So we are in the same boat together with our partners in these cases. Of course, right now, we are in the middle of the Europe -- European and U.S. outbreaks. So right now, you see effects, but it's extremely hard, of course, to give an exact prediction of where this will take -- where this will go. If we then take small labs, which is the DC-1 market, they, I would say, are at this stage, due to quarantine, not always that prioritized. And we see kind of limited operations in that type of labs in many markets, especially during the outbreak. And this will also have a short-term negative impact on DC-1 sales basically. So that's kind of -- when you're in the middle of something. Then when the look -- we had a few markets that, I would say, that are a little bit post -- at least on the first wave of COVID-19 outbreak. And there we see a return to a more normal situation. Two major markets like China and Korea have kind of passed the peak. And what we see there is a step as we return to more normal blood sample and system installation volumes. And of course, one of the big benefits that we can provide is that we have a digitalized offering. So you can sit remotely and analyze labs. So if you want to have as few people as possible, including pathologists and med techs in the hospital, we can offer an alternative. And I think many people think that this digitalization and virtual type of work environment will be one of the things that will be changed a little bit post corona. Of course, we have a very strong offering in that. If we then just take a short look at the supply status, both on instrumental reagent side here in Sweden and also in France. They are currently fully operational and we work very hard to keep them that way, and we believe that we can. But of course, should there be an outbreak for many, many, many months, we will have an issue as everybody else. But so far, our production is fully operational, which is great, I think. So that's a little bit about COVID-19 and how we see that. And of course, it's extremely hard to predict where this will go in the coming months. I think, long term, things will normalize, at least for us, and we'll go back to normal business. But right now, we are like in the middle of the storm, so to speak. If we then look at Q1, more region by region, we ended up with an organic growth of 1% on kind of the CellaVision business and then a structural growth that was -- that was higher basically -- sorry, Slide 14, please also. Americas grew by 3%. I think, as said many times, we have very high attachment rates in U.S. and Canada. They're above 90%. And of course, this means also that as soon as the market goes back to normal and then people start to installing hematology lines again, CellaVision would follow there. And it's the golden standard, especially in U.S. and Canada. We also have launched the DC-1 now in Canada properly, and several, several South American markets as well. I think one important milestone that passed -- that we passed during Q1 was that we submitted 510(k) -- made the 510(k) submission for DC-1 on March 6. And under normal circumstances, we should have response 90 days after this from FDA, whether they have more questions or if they -- if it's cleared. But we also know that, under these circumstances, also FDA has announced that they are -- they will -- might be a little bit late in responses. So we'll see a little bit what happens, but we still hope for -- to be able to prepare launch during 2020. But we have submitted formally now, which is, of course, a big milestone. And then, of course, we have this negative impact that I just explained due to COVID-19 in the Americas. If we then look into APAC, we see continuous increased penetration in China and Japan, in general. And as I said, China bounced back a little bit after a few tough months. And also, of course, we have in general, a kind of high activities in other APAC markets. But of course, again, a negative impact due to COVID-19 in China and South Korea. You see very high growth in this quarter, but you have to understand that we are -- the logistic chain is quite long, and we normally supply to our partners' safety stocks, basically, and then they use those when they install. And we also had a very weak Q1 last year, so that's why the growth is so high. But we see an installation impact that was slightly negative in both China and South Korea during Q1. But we also saw that situation improving end of the quarter, going back to just as I said before, a more normalized situation. EMEA, of course, RAL comes in there. The majority of the RAL sales is in EMEA and received 42% growth. We have, at least until mid-March, really focused on commercialize the DC-1 and try to ramp up with a lot of road shows, workshops, training, et cetera, et cetera. And of course, this is a little bit on hold right now. But of course, as soon as we're back to a more normalized situation, we'll continue to push DC-1. And the response from those customers that have received the DC-1 installed, it is very positive. We opened up Russia, as I mentioned before. And of course, right now, we see a negative impact due to COVID-19 also in EMEA. Moving to Slide 15. Just a few other highlights on business. Of course, RAL Diagnostics that we acquired October 1, '19, continue to work on the same -- according to the same strategy we set at that time, focusing a lot to co-promote CellaVision and RAL offering in our markets. And we're just now -- it will have to take place virtually since we cannot travel that much, but we're focusing very much now on launching the RAL offering in all key markets where we are present with CellaVision in the past. And in parallel with that, we're also working to train our market support organization to be able to sell and promote reagents, also to combine that with digital morphology. And we're also, at the same time, looking into what can be done outside hematology since half of our sales is in other segments. And of course, this is an interesting area that we need to look into further, but the focus right now is to commercialize RAL in all markets that -- globally that we have. Other key events, of course, in the last few quarters, there's been a lot of focus on DC-1. We have continuously step by step developed our procedures there. And we are now, I would say, final stages in industrialization. And we can now meet customer expectations when it comes to lead times. So that basically means that we are fully up and running there. And of course, right now, short term, we'll have a little bit of impact on COVID-19. But as soon as things are back to normal, we can push that sales or -- because the production is up and running now fully.As I said, we submitted 510(k) application for U.S., which basically means that we take -- took a major step forward there to -- once we get commercial clearance by FDA to be able to launch it, then we'll prepare for that during 2020. Hopefully, also, we will be able to launch it end of this year. And we are also preparing for China launch next year. So that means that, once that's done, we basically have a full globally -- global availability for the DC-1 in all key markets. And right now, we're also launching a new completely upgraded portfolio for the vet market. So all the 4 major systems we have, which is the DI-60, DM1200, DM9600 and DC-1, will all be able to also have a veterinary application. And it's dogs and cats when it comes to the large systems, but DC-1 have dogs, cats and also avian, birds analysis possible. So that also means that we have a commercial offering fully up to date in the vet segment as of now. If we then look a bit at the numbers, Slide 16. Yes, the quarter ended up with SEK 134.4 million sales. Growth for us, almost 30%, including RAL, of course. We improved the gross margins versus Q4. You have to see that -- them in a little bit different light now. Because now until Q3, we only have CellaVision after -- as of Q4, we also have a combined CellaVision and RAL. And RAL has slightly lower gross margins than CellaVision. But as you see now, we also -- and of course, DC-1 is also part of those numbers. And initially, we see lower gross margins there until we ramp up production there as well. So we had a good improvement between Q3 and Q4. And of course, we long-term target to come back to the same levels as we had in the past. That's, of course, a key activity. EBITDA ended up with a 31% margin and again slightly higher than we had in Q4. So I think if you want -- we can only compare Q4 and Q1 basically because the rest was pre-CellaVision. A little bit more comment to the numbers on Slide 17. 1% organic growth from the kind of the CellaVision historical sales, 4% FX effect, the Swedish kroner was weakened, and then 24% structural effect from the acquisition. We have an increased expense. Mainly, I would say -- or a big part is, of course, the structural effect from the acquisition. And of course, we're also comparing our numbers now with a year ago Q1 '19. And of course, there, we had a -- an expense -- operating expense increase. But we have also taken certain measures when it comes to the COVID-19 pandemic. And then of course, right now, we are focusing very much to make sure that we have a good cost base that is sound and solid going forward. So that's very important for us as well. So we're focusing a lot on that. Development projects. Now capitalized project R&D has increased again. As you remember, we launched DC-1. And then for a while, we are more in type of pre-study phases, and now we're again moving back into more development stages where we can capitalize. And we see now that increasing versus Q1 last year. And of course -- and that will continue to be so in the coming years. So we're now moving into more next generation-type of developments here. Cash flow was negative in the quarter. And one major effect is that, as I mentioned in the beginning, one challenge we always said is last-time buy or end-of-life components, and we have to invest in one of those during the quarter, and that has some effect here on the cash flow. If you look operational-wise, the cash flow was better, of course. And basically, of course, as you all have seen in the press release, I think it was issued March 26, we proposed that the dividend should be 0 due to COVID-19 effects and make sure that we protect our liquidity as much as we can, so we can run operations as much as we can no matter what. I think a few questions has popped up whether or not there will be a dividend later this year. And of course, we need to come back with that. It's extremely hard to predict the future right now with the situation in U.S. and Europe. So summarizing the whole financial development. We see a situation where we have the last 5 years, step by step increased the growth and built up a company is -- that's been in a growth mode. And we, of course, continue to target that. And I think there might be a short pickup in the long perspective with the COVID-19 effects. But I think long term, of course, we will target to continue to perform in the good way we have performed the last 5 years. And then that's, of course, the targets. So it's not much more than that to comment on that slide. So by that, that's kind of what I had today as an update. And by that, I will leave -- I will open up for questions.

[Operator]

[Operator Instructions] And our first question comes from the line of Ulrik Trattner of Carnegie.

[Ulrik Trattner, Research Analyst]

So the first one is just on sort of the sales developing, since it's quite obvious that you are a bit behind the sort of the curve in terms of the uptick and what we've seen in sort of the growth in APAC. Is that to be sort of seen as more negative impact sequentially for next quarter? And also, where do you see the APAC market right now in terms of samples tested? Are you seeing any rebound short term, based on the discussions with your distributors?

[Zlatko Rihter, President & CEO]

Yes. I think it's very good questions and very relevant questions. And it's extremely hard to answer your questions because, although China maybe had peaked, they're through the peak of corona, and Korea, which is another good example, is in the same situation, it's still very early days. We talked about a few weeks since they kind of started up to open up their society again. What we see in China and Korea is, it's kind of going back to normal step by step. I don't think we're back yet. And then, of course, Europe and the U.S. has been going in the other direction, maybe where China was in January this year. So when you're in the middle of something, it's extremely hard to give a clear indication where it's to -- but I think we see -- I mean, China, we see more activities again. And we see our partners' installation teams are allowed to go back to labs and they start to install again. And then, of course, the question is, will this be a few last months for us? Or will they install double as many installations in the coming 6 months, and then we're back where we plan to be? So -- and that, I cannot say today because it's too early. And in Europe and U.S., it's impossible to say because right now we're in the middle of a big corona situation.

[Ulrik Trattner, Research Analyst]

Okay. And then just based on the comments made by Abbott Laboratory last week in their Q1 numbers regarding their core laboratory diagnostics division. And they are essentially stating they have quite 0 negative effects for their Q1, which would essentially push for your part for Q2 and then expecting quite a deep downturn in the market for the next few quarters, even with China stabilizing. But is that sort of a reasonable way to see sort of the effects of your business as well going forward, since you're essentially in the same value chain?

[Zlatko Rihter, President & CEO]

Yes, I think they had a point. The Abbott is 1 billion times bigger than us, and they are in many, many, many more segments than we are. So we need to kind of focus on what will happen in the hematology segment. And the question is, of course, how high will that be prioritized post corona? And I think, if you look at China, we were reasonably high prioritized, which is, in that sense, a kind of a good sign. But we'll see how it looks in different markets. But Abbott is covering much more ground than us, so it depends on what part of Abbott you would ask. There are also many parts of diagnostics.

[Ulrik Trattner, Research Analyst]

Yes. I think that was actually a comment from their core diagnostic labs division, which is essentially they had the complete blood cell counters included in that segment.

[Zlatko Rihter, President & CEO]

Yes. But they're extremely small in hematology. I think their business is more in other parts of the lab.

[Ulrik Trattner, Research Analyst]

And then just on the DC-1. Do you see sequential growth compared to Q4 in terms of number of units sold? Because if I sort of adjust the gross margin of the core business, I would assume actually that it would be less systems sold in Q1 compared to Q4.

[Zlatko Rihter, President & CEO]

Yes, I cannot compare to exact numbers, but it's not what you say, a lot less sold. I will agree to that.

[Ulrik Trattner, Research Analyst]

No, because then sort of -- you still -- you mentioned that you can't really compare current numbers with last year's numbers. But sort of if you just take the numbers that you stated in your report regarding organic sort of cost growth, the margin is still down by 400 -- 590 basis points year-on-year organically for the base business. And just in terms of then sort of the cost expansion, is that set to continue? Are you sort of short term looking at short-term layoffs?

[Zlatko Rihter, President & CEO]

Just a comment -- because you have to remember that it's a little bit more complex than that because if you compare Q1 this year with Q1 last year, we also have to add RAL, which is a big, big thing for us.

[Ulrik Trattner, Research Analyst]

Yes, but just sort of excluding RAL, the gross margin was 590 basis points below. If you just sort of take out the gross margin that you have mentioned, sales that you have mentioned and sort of exclude everything that's not organic cost growth, OpEx growth. Can you drive at a EBIT margin that is 590 basis points below last year? That should be organically impacted there.

[Zlatko Rihter, President & CEO]

Yes, that's maybe your analysis. We don't separate that way so it's a little bit hard to comment on that from my side. What was the other question [ other than that? ]

[Ulrik Trattner, Research Analyst]

No, it's just regarding sort of the OpEx trend or if you're sort of seeing the same trend...

[Zlatko Rihter, President & CEO]

Yes, Ulrik. Yes.

[Ulrik Trattner, Research Analyst]

As you have seen the last few quarters and if you're doing any short-term layoffs?

[Zlatko Rihter, President & CEO]

What you have to remember when it comes to our cost base is that we have been in an extreme, let's say, growth mode. I mean we've been focusing very much on expansion the last 2 years. Our focus has always been to add a lot of people basically to be able to do more. And when we look at our cost measures now, it's a little bit to be a little bit more cautious on expanding OpEx. So that's the main focus now, to make sure that we can bridge this situation. But our main focus is maybe to be a little bit more --- be a little bit less aggressive on growth -- on growing the team, basically, at this stage. So that's the main focus from our side. Otherwise, we fully execute our R&D commitment projects, also now, just as we did before. And our market support organization has moved more into a virtual environment, but they still work full-time because right now, I mean, we're focusing on -- for example, launching the whole RAL portfolio globally in all key markets, not only a few European. So that's where the focus is right now. And that can be done in a good way also now. But maybe we're not as aggressive on expanding the team or we're not as aggressive at expanding [ short while ] compared to before. So that's where we've taken our measures. And then, of course, we go through all key unnecessary cost impact to trim as much as we can.

[Ulrik Trattner, Research Analyst]

Okay. Great. And then just one last question before I go back to the queue. So you mentioned that on an operational level, the cash flow was okay or decent -- or actually, I think you actually said good. But it's down 70% year-over-year. So an explanation provided the cash flow is so poor on an operational level?

[Zlatko Rihter, President & CEO]

Yes. I think it's always -- first of all, it's always sort of just isolate 1 quarter and compare because there could have been a big order last year and then Sysmex or Beckman paid January 4 instead of December 28, and that makes a big difference there. One thing that is specific for this quarter is that we -- as I said, we have a -- an always ongoing end-of-life discussion. So we had to acquire a number of components for the large lab systems that we put in stock, and they will then be used for some years. And since this type of things happens -- this happened before COVID-19, of course. And of course, we have to take a consequence here. But we try to bridge end-of-life by sometimes building stock, basically. So this was part of that. And that had a major impact -- the onetime impact on the cash flow in the quarter.

[Operator]

Our next question comes from the line of [ Erik Sinan ] of SFO.

[Unknown Analyst]

Thank you very much for the update here again and the opportunity to ask questions. Just a couple, please. And I fully understand you can't really comment, but some of those would be interesting. The first one on the sales trends towards the end of the quarter. Some companies in other sectors have been commenting on that, whether it's gotten worse or you're seeing some stabilization. And you also see early April. But again, I fully understand if you don't want to comment.

[Zlatko Rihter, President & CEO]

I think it's extremely hard to comment on week-by-week sales in our case. We have an indirect business model. Most of the sales that we do ends up in our partner safety stock. So you have to consider whether they are full or not. And that's part of our life. I think they have -- what we tried to figure out now is, as I said before, it's the number of installations. And of course, during the peak COVID, we see that, in each country, they cannot go out and install at that time -- point of time. And then, as I said in China and Korea, kind of bounces back a little bit afterwards. And then always, the question is, can they do more? Or will they -- is it lost months? Or will they do the double amount of the installations for a few quarters later on? That's to be seen. And then I don't think anybody could answer that question today.

[Unknown Analyst]

Okay. Fantastic. Also on inventory levels at distributors, can you comment anything about that? Probably also regionally? It sounded like in Asia, inventory levels are now relatively high. I don't know whether you can comment on Europe and the U.S. as well.

[Zlatko Rihter, President & CEO]

No. I think our partners are professional global companies that have very skilled logistics people. So in general, they are quite good to manage their safety stocks. They have their own strategies in there. It might differ a little bit from partner to partner. But they have safety stock strategy, all of them in different ways, and usually they manage them extremely well. Now COVID-19, of course, opens up a little bit of uncertainty in that area, but I cannot comment on their kind of logistic strategies.

[Unknown Analyst]

Okay. Absolutely fine.

[Zlatko Rihter, President & CEO]

Normally, [indiscernible].

[Unknown Analyst]

Yes. And the last question on corona would be in terms of any input material supply chain challenges that you had. Or is everything okay? And if you want, you can produce the volumes that you intended?

[Zlatko Rihter, President & CEO]

I think we were very nervous initially, of course, because we, as everybody else, have components from Asia, China and other markets. So of course, when the corona outbreak initially kind of was communicated, that was in China, and that was early January. We're extremely nervous at that time because we couldn't fully understand the implications like we do now. But then as always, you find new ways. And I think we have components from all over the world, and we managed to supply so far. So I would say, I mean, for now, we could supply whatever order comes in, more or less. But of course, if this lasts for a year or so, then we will have problems probably, as everybody else. But right now, as I said, we are fully operational.

[Unknown Analyst]

Okay. And the components of slides from China, have they ramped up deliveries again in recent weeks?

[Zlatko Rihter, President & CEO]

Yes, absolutely. Otherwise -- I mean we managed to source and keep production up and going despite that. So we found ways. But you have to remember that we also have components in a DM or DC-1, you could have -- you have 600, 700 components of project component suppliers from 20, 30 countries. It's not only China. So we have to manage a global [ supply ] here.

[Unknown Analyst]

Yes. Okay. On the balance sheet and the liquidity. My view is that it's very strong. I mean, we've got a strong cash position, also very stable quarter-on-quarter. The leverage is not high. Can you confirm that? Or did you have any difficult discussions with banks or with anybody? So just a question, how comfortable are you with the -- or are you comfortable with the balance sheet and the liquidity position as I am?

[Zlatko Rihter, President & CEO]

Yes, I mean we're comfortable to be able to run the business for quite a long time in that sense. But of course, I mean, we have taken measures like we discussed the dividend, for example, but also other measures to make sure that we protect our cash right now so that we can stay operational. Because we strongly believe that we should try to execute our plans as much as possible whether we have COVID-19 or not. Then we need to find other ways to do it. For example, more a virtual environment -- that we're working in a more virtual environment. But I think it's my and my management team's task to try to find other ways to execute, but I think it's extremely good plans. And of course, then we have to also take into account that it's a special situation. And of course, a part of that is to protect and look into the cash flow, how can we optimize that. So we have adjusted a little bit to that, but the base plan is to try to execute the plans we have because we think they are really good.

[Unknown Analyst]

Yes. Okay. And then just 2 more questions, and then I move back into the line. The first one is on the RAL revenue contribution in the quarter. From what I thought about earlier, I thought it would generate about SEK 22 million a quarter. And now it looks more like SEK 25 million. And is that because the revenues are particularly strong in Q1 seasonally? Or is it just -- was my estimate of SEK 22 million just old? Or we have -- we see a good growth?

[Zlatko Rihter, President & CEO]

It's always hard to comment on one quarter, actually, it's also for RAL, just as for CellaVision. But I think we're off to a good start. I think it's a good match between our products. So I would say, the historical CellaVision offering. And that means that we already now can go together. And I think we are very, I would say, call it, aggressive expansion plans taking RAL into new markets and also continues to work close with Sysmex, Beckman and make sure that we have a good cooperation. And I think we have contributed a little bit to that, and most of it, of course, is being built up by the RAL team themselves. So there is a good, I would say, good operations there, good momentum that was where I was looking for.

[Unknown Analyst]

Very good. That's clear. So last question on veterinary opportunity and the road map. Anything you want to share about ramp-up plans or when we should expect revenue to come in or to contribute to a certain extent to the group?

[Zlatko Rihter, President & CEO]

Yes. I think if you look at the other 3 segments we're operating within, which is the large lab, small labs and slide preparation, which is based on our business, there we have very solid strong plans. We have worked through it very well. We have good contents, and I think very, very good agenda. When it comes to vet, we take that a little bit more as an opportunistic segment. So we know -- I mean, we've been trying in that segment before. Now of course, adding the DI-60, which is key and also the -- I would say, the DC-1 vet, but also working much closer with our partners, especially Sysmex, in this case. We strongly believe that we should be able to grow that business. At the same time, with experience we have, vet is a little bit more fragmented. It's an immature market. It's -- I would say there are -- there is a good structure in North America, so that's where we're most likely to be successful. There are a few big players like IDEXX, Antech that are on the [ north ] we face that have -- that has kind of their laboratory network that would require our type of solutions. So we'll work with them. I think the good thing now is that we have a fully up-to-date offering, and we also can structure the offering that it's the same hardware platform that is for humans. So basically, we can sell any system and then we just configure it into vet, which makes it very, I would say, seamless and efficient from a delivery perspective. So it's kind of more or less only upside if we manage to sell a few vets and very few extra costs at this stage. But the market is fragmented and we have to kind of prove our case. Now with DC-1 having a lower price point and attacking, I would say, a few of the big accounts like Antech and IDEXX, maybe we can be slightly more successful. But the proof is in the pudding here, I would say, and we need to prove our case. And we've not been able to do that.

[Operator]

The next question comes from the line Chris Lee of Pareto Securities.

[Christian Lee, Analyst]

I have a couple of questions. The first one is regarding the sales in EMEA, excluding the contribution from RAL, seems like the sales decreased by 24% year-over-year. Could you say that this is mainly due to tough comparable quarter, given that the impact from COVID-19 has been limited in the first quarter?

[Zlatko Rihter, President & CEO]

Yes, I think it's always a -- I'm going to repeat myself a little bit, it's very hard to give good answers on the isolated quarters. It's always challenging to do that because sometimes, we had a good quarter the year before because we sold a little bit more, and it goes down. It's up and down. And it's always the absolute at the long-term trend. I think we had a good long-term trend in EMEA in the last few years. Then there might be, I think, the quarter 1 last year was probably -- was kind of strong in EMEA. And then, of course -- and it's sometimes hard to match and evaluate the quarter. I think we have a good overall trend. I think -- I mean corona started to impact also EMEA and Americas already in quarter 1, partially, because I think the challenges came up at least in March. So -- but it's extremely hard to say that -- comment on specifics here. You have to look at the long-term trend. And there I think we've been quite solid in EMEA.

[Christian Lee, Analyst]

Right. And look at RAL, sales increased by 19% in Q1. Could you please give us some color on how resilient this business is? Do you foresee a significant negative impact for RAL as well in Q2 due to the corona virus?

[Zlatko Rihter, President & CEO]

Yes, it's hard to give a good answer on that. I think what we focus on right now is to combine -- every time a CellaVision instrument or system is integrated into a hematology line that we will also like to have the RAL part of that. That's where we focus on. And we strongly believe that we will have a good future, especially in hematology side there, where we can connect Sysmex, RAL and CellaVision, basically. Or Sysmex, RAL and Beckman or anybody else in the deals and provide this kind of optimized workflow, as I talked about before, and also high image quality and all that. And that's where we focus. I mean we strongly believe that, that's how we will win the deals. And we spend a lot of focus on those activities and making sure that we are part of the game in every market. And you have to open up new markets in RAL. Historically, has been very strong in France then expanded to a few other European markets, and now we're trying to take that into basically every market, and that's kind of the big role. If we're successful in that the same way as stable in France, we will see a good growth for RAL in the coming years.

[Operator]

[Operator Instructions] And we have one final question coming from the line. That's from [ Erik Sinen ] of SFO.

[Unknown Analyst]

Just again one detailed question. In Asia, APAC, I see that the service sales were particularly strong in the quarter. And I don't want to focus on one quarter here. But then just in terms of the trend, I remember that you've been in this market selling the instruments now and it would just be logical if you can then sell more upgrades and more new software or probably spare parts there. Just checking whether that makes sense and -- or whether we should expect some normalization in the next couple of quarters?

[Zlatko Rihter, President & CEO]

No. I think what you'll see now, of course, also in China, is if you look in China and Japan, which is Korea and APAC, just to comment on both, historically, we sold kind of more the base offering there. And in Europe and U.S., we sold more applications and also other softwares and parts. I think a trend now in China, of course, with the corona, and here is maybe why we can have a strong future, of course, that things like our remote review offering where we can sit remotely and do analysis becomes more of an interest then. And I think that's -- we've seen some interest in that. And then I think Japan is growing quite nice. And Japan is a little bit more, I would say, a market where you see more networks, more software applications being sold and attached to the instruments. So I think that's the 2 trends we see there. We're working really, really hard to transfer of to China more into a Chinese offering or Chinese sales into the same structure as in EMEA and in Americas. Still, those labs in China today are more stand-alone projects. If you go to Chinese hospital and install a CellaVision instrument, it's more like a stand-alone installation. In U.S. and Europe, it's more part of the network. But I think China will go that way over time as well. And then of course, working remotely is the first step. So then we don't have to sit in the lab, for example, because you can imagine, building or maybe in another room and that's what we're trying to push. So that could be part of that. But then it's extremely hard to tell -- say whether this is a very small trend or we're just lucky in the quarter.

[Operator]

And as there are no further questions at this time, I'll hand back to our speakers for the closing comments.

[Zlatko Rihter, President & CEO]

Yes, excellent. Thank you for listening in. There was a lot of questions today. And of course, it's special times for everybody. And there are a number of more unknowns than we're used to, so we have to handle those as well, and that's part of life. But by that, I thank you so much for listening in, and see you next quarter -- or talk to you next quarter, if not before. Take care. Bye-bye.