CellaVision AB

STO:CEVI

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Welcome to CellaVision Q2 Report 2024.

[Operator Instructions]

Now I will hand the conference over to CEO, Simon Ostergaard. Please go ahead.

[Simon Østergaard, executive]

Thank you very much. So I'm Simon Ostergaard, President and CEO of CellaVision and I have Magnus Blixt, our CFO, with me today. We appreciate you listening in, in this summer season to hear about our Q2 results that we are halfway through 2024 results. So we're pleased to share the outcome.

Let's just jump right into it. So what we call the quarter in brief, yes, we landed the quarter at 11% growth so organically that was 10%. So hardly any FX impact on our results of SEK 188 million in revenues. The EBITDA for the quarter, we landed at SEK 60 million EBITDA, corresponding to 32% so just over our financial ambition of having 30 or more percentage in EBITDA.

And I'd say the highlights, if we talk about the quarter here, there was stability, however, with some fluctuations. Top level, I would say, we were very pleased to what we've seen in APAC across multiple countries. We see consistent performance out of EMEA. So that is positive. And then we saw this quarter somewhat of a temporary slowdown in Americas.

In terms of progressing on our strategic direction, our strategic pillars, here, we highlight that we have successfully concluded on the internal clinical -- preclinical studies for our bone marrow applications. So we are now sort of ready to entertain the external clinical validation throughout autumn. So that is an exciting place to be.

We have spent a lot of calories and efforts in interacting with new Sysmex colleagues across the regional organizations to implement and really adopt the strategic alliance agreement that we closed and signed with Sysmex in the beginning of February this year.

All right. But let me unpack the numbers a little bit more. I know this is a busy format, but nevertheless, very informative. And here, we have all the compares we want. So talk to about the top line. So on the very left-hand side, that's the new numbers we report today. And then in the middle column, we have the year-to-date for the year.

So we are now at SEK 188 million for this quarter, which brings us to SEK 358 million this half year. So that represents an organic growth of 16% year-to-date. Gross margin, we are still also this quarter reporting 66%. That's a little bit sort of low given both levers around product mix. We also have had, throughout the year, increased material and product costs. However, we have not a significant effect on the price increases that we implemented this year.

So we should see them influence our gross margin when we get to Q3. Operating expenses, we have spent SEK 75 million versus SEK 73 million in the comparable quarter last year. So I think we've been very successful in maintaining our cost base in sales despite some inflational increases. That is due to some restructuring we did in autumn last year, the full impact of that.

On the admin, we are also pretty much in control, increasing a little bit. We are spending -- we're building a muscle for some of the regulatory requirements. So here, we are spending a little bit more on consultants to be prepared and built to support our business. On R&D, it goes a little bit down.

We are capitalizing a little bit more from SEK 14 million to, this quarter, SEK 16 million. So that is really a sign of the maturity in our development programs. So that's good to see. I mentioned the EBITDA of SEK 60 million, which translated into 32%. So despite the -- somewhat a little lower gross margin still, we have a healthy EBITDA margin of 32%. And cash flow-wise, we had a cash flow before adjustment for working capital of SEK 54 million. So given the overarching a good quarter -- a solid quarter as we say. However, given the growth we have, then we have some outstanding accounts receivable, and that brings our operating cash flow down to SEK 40 million.

And then if we deduct the investment activities, especially capitalized R&D of SEK 16 million, but also on the financial activities that in, for instance, the cash flow, then we have both dividends payout of SEK 54 million, and we also have the amortization and leasing of around SEK 11 million. So that brings us down to a total cash flow of negative SEK 44 million.

So that's really sort of the brief run-through of the P&L. Let's try and then just give a little bit of regional highlights. So as I said, on the top line side, we're a little bit low on -- or soft on the Americas, and that is primarily on the large instrument side. So here, we did have some -- we were noticed that there were some operational matters that actually impacted the installation pace.

So there has been a little bit of a drag in Americas this quarter. We don't believe it's [indiscernible] systemic with regards to market demand. We have seen continued interest and double-digit growth in our smaller instruments. And that is actually an interest that goes across the entire Americas. So that's still super promising and really, really emphasizes the opportunities we have to serve the IHN networks in that part of the world, but also in South America, in fact.

Looking at EMEA. Sales increased to SEK 83 million versus SEK 76 million, again, a quarter where we see growth in Americas. So that is promising. 10% growth in this quarter and 15% year-over-year. I think, here, it's really also good to see how we have started to work and establish joint action plans across the multiple markets, getting a better understanding on how we support it, also how we leverage our system and our materials to really convert and adopt digital cell morphology across this region.

We also have very, very positive feedback from our participation at the ISLH show in in Nantes, in France in May. So that was rewarding and also very motivating for giving the firsthand customer feedback also on some of the innovation pieces we're working on. In APAC, we had a -- yes, it's pretty much a record high. So 198% growth, SEK 37 million versus SEK 13 million. I think that's obviously a very high growth number.

Again, it fluctuates quite a bit also in that region because we're very dependent on when we ship to that part of the world where we sometimes ship quite a lot of instruments and sometimes there is hardly any for certain jurisdictions. What I'm very pleased about with this number is actually that it's spread across multiple jurisdictions.

So it's really -- we are seeing we are coming back on track in Japan. We've been suffering -- we pretty much had a year with inventory sort of issues in Japan, but we are out of the woods. So there's a healthy demand from Japan, also from China again. And we're actually also starting to see really, really interesting things happening in Australia.

So it is not just a high revenue number, but it's also a very positive outlook also given the more collaborative approach that we are starting to implement with our distribution partners or distribution partner across that region. If we slide the numbers for product group, as you see here, so again 16% growth on the instrument side, taken together, so SEK 107 million.

And that is really a significant increase from -- to comparable. If we take the 6-month period, SEK 199 million versus SEK 158 million. So that's a healthy number. And again, I really, really see instrument sales in APAC, as I just alluded to, but also I would highlight here the DIFF-Line, which is our smear box, the stain box and the DC-1 that goes for the small laboratory segment.

That is starting to get a lot of traction and attention in Canada and Latin America. So here, we are really working on getting ready for that and having the registrations there, but the premarketing and the conversations with the labs are ongoing, and that seems to really resonate the value proposition of this DIFF-Line, really resonates with the labs in those markets.

On the reagent side, 1%, it's a bit soft at face value. So it's definitely lower than -- when we take quarter-by-quarter than usual. I think here, actually, our full year or year-to-date -- sorry, our year-to-date number of 10% really demonstrates that we had a strong Q1. So there's a little bit of phasing here.

But -- and then I also want to say that our compare here is actually relatively high when we talk about growth because we also had some production issues which means that -- in last year, which meant that we shipped quite a bit in the Q2. So the compare is also a little bit tough against us in this very quarter.

Still momentum across the business. We are really pushing out the reagent, especially hematology reagents that where we see growth across EMEA. So we are really starting to also get the benefits of the capacity expansion that we implemented with the new factory completing at the end of the last calendar year. On the software side, we increased a few millions to SEK 44 million versus the compare.

And here, I think the highlight is definitely that we are starting to see not only the EMEA growth in general, but the software sales is picking up. It's really good. It is a sign of them also adopting our remote review. So that is very healthy. Yes, I think that is probably the relevant comment for that.

So now I have to sort of summarize the key takeaways for what we define as a solid quarter. And of course, in this business, it's a consumable business, then we do have some soft things here that we actually don't believe are systemic, but we definitely saw the appetite and the orders coming from APAC as a highlight.

And as a soft light, we saw a little bit on the installation pace in Americas that we believe will be recovered. Again, very [indiscernible] to see the software in EMEA, good progress today. I chose to report a little bit on the bone marrow as just to follow through, given our previous communication, and we expect to commercialize our bone marrow module during 2025. That is the plan we are pursuing.

And then again, really collaborative efforts with Sysmex in particular, are really progressing and I really highly appreciate the way we've started to work at multiple levels within the organizations. So that gives also a very energizing impact within our organization here at CellaVision.

And with that, I will open for questions.

[Operator]

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

[Ulrik Trattner, analyst]

A few, perhaps you could start off with Americas and the things that you are seeing as temporarily sort of declining. And you talk about operational matters impacting installation. If you can allude a little bit more to that? And if there is any chance of that sort of picking up in Q3, that is lagging or what these operational matters include? That would be my first question, please.

[Simon Østergaard, executive]

Yes. No, thanks Ulrik, I totally get the question. And then -- and this is where I should probably not overstep my -- the situation in elaborating on things that are happening with our partners. But it is operational matters where we were probably expected a little bit more on the large hand side -- or on the large instrument side in terms of orders.

And given some focus on actually getting all hands on deck and installing what they had, then they didn't expand the order pattern in that. So the actual operational matters is not related to activities within CellaVision, but it's really on the partnering side.

So it is a little bit tricky for me to elaborate on that and just guess here. So I will leave it for our partners to be open on whatever challenges that may be, but we get the full impression that is a temporary piece that -- and I think we also sit in our report that we actually believe it's over and out by now, but we have been impacted. So I'm sorry, I can't give the fully fledged internal insights on this one.

[Ulrik Trattner, analyst]

Fair enough. If we were to switch markets and APAC, it looks like a blowout quarter, instruments growing 4.5x year-over-year. And it would be sort of a 2-part question. You talked about sort of broad-based growth out of Japan, Australia and even China.

So the first question would be, are you seeing any sort of materially impact on the competition side from Mindray. And secondly, as we have seen historically, is there any risk of inventory being built up here in Q2, and we should expect this trend to potentially not continue into the second half? Or how should we interpretate this sort of very, very strong sales number.

[Simon Østergaard, executive]

Yes. No, I think it's definitely positive on -- if we start with Japan. It's very positive since we've been impacted with -- we know that there has been inventory levels. They've now been consumed, which demonstrates the demand. And we also know that there are some relatively big labs in Japan, who are really digitalizing and replacing lines.

So I think Japan, it's really true consumption. I wouldn't look at that as a potential inventory matter. For China, I think it's extremely healthy that we quarter-after-quarter have seen shipments going to China. That has really lifted our APAC numbers over the last remaining quarters.

And here, we also see it as a sign of sort of demand. Of course, the market is also dominated on the cell counting side with the Mindray, but there's a healthy -- there's definitely placements out there. The tricky thing is from our chair and even our partner Sysmex, it's very difficult to look at the layer of distributors that are actually meeting the hospitals because that's not the manufacturing vendors, who is doing that.

So of course, there can be some inventory. But since we've seen the supply of instruments consistently, then I truly believe that we are doing a pretty good job out there together with, especially, Sysmex. For APAC -- sorry, for Australia, I think that's a promising jurisdiction.

There are really an appetite to digitalize labs, and it resembles the Canadian markets where we know that our value proposition is attractive and that's actually what we start to see. So we find the Australian and also smaller instruments going to Australia as a super, super interesting and really supporting our ecosystem adoption. So that would be the highlight from APAC, Ulrik.

[Ulrik Trattner, analyst]

Great. And Switching to EMEA. The first would be if you're experiencing, as we have seen for a lot of other companies in the diagnostic space and general CapEx-based limitation around markets resetting post-pandemic and sort of budget restrictions as well as I also note software revenues increasing in EMEA, and you touched upon this and would you call sort of software adoption more tilted towards certain countries or a general trend in Europe to go more in the direction where U.S. has been developing for the last few years?

[Simon Østergaard, executive]

That's a good point, Ulrik. I think also -- I think that is probably also a function of -- that we are starting to see DC-1. So we've seen a consistent flow of DC-1. But there are -- the fraction of connected labs across Europe is a little bit less than the U.S.

However, there are still significant amount of labs where they really benefit from the remote review. So I think that is part of the explanation that they really tie together the DC-1 with the large instruments. I totally hear you in terms of there could be some reservation on the budgeting side for health care, if you look sort of high level.

But we must say that that is -- that pressure is when we also read and we listen to the community, then that is probably the situation. However, we have actually for a couple of quarters now seeing sort of okay growth on our side. So if we just come down to our operational level, we're actually seeing traction, which is a healthy thing.

So we are also trying to interpret what happens in macro and what is the time delay between anything on the budgeting challenges and the health care system, how does that translate in with the timing of tenders and so forth towards our business. But right now, in our little world, it's actually a really healthy confirmation of our value proposition.

[Ulrik Trattner, analyst]

Great. And last question on my end would be on the gross margin. And you say quite clearly that you expect the gross margins to be more favored by the recent price increases heading into the second half of the year? Generally, and if I'm not mistaken, it usually comes into Q2, the effect of the price increases? And is there any reason for a delay in price effect on the gross margin?

And secondly, you have increased your production capacity of RAL reagents. I'm guessing it's related to the build-out facility in Bordeaux. If there's something that can be done in terms of the gross margin of the reagents as well or something that is impacted by these sort of recent investments?

[Simon Østergaard, executive]

It's good questions. And you demonstrate you've been following us for quite some years because you are right that typically, we -- or historically, we've certainly seen impact in Q2. There is a change. So we have -- with a significant contract there, we have changed the timing of implementation of the pricing adjustments for Q2, which was previous to Q1.

So that is really the main, main driver for the situation here when we talk about pricing. And all orders that has been placed before Q2 is old prices. And then what we report here is actually the orders a significant part were placed before. So that is the reason why we have this phase change just this year. I don't believe there's a material impact coming from the new factory that translate into the gross margin on the reagent side. I think that would be my -- I'm looking at Magnus here, and he's confirming my statement.

[Magnus Blixt, executive]

There could be some improvements coming later on, but it takes longer time before you see that in the gross margin. So those projects are ongoing, but it's a gradual improvement that we will be seeing in the coming quarters and years, I would say.

[Ulrik Trattner, analyst]

Just a clarification, but do you expect that there is opportunity to increase gross margins for reagents in the coming years in towards what the medium term?

[Magnus Blixt, executive]

Yes. There is some opportunity to do gradual changes.

[Simon Østergaard, executive]

Definitely, but the question around the current states, that's not specifically on the reagents. That was my point.

[Ulrik Trattner, analyst]

Yes, yes absolutely.

[Simon Østergaard, executive]

But definitely, we're working on that agenda as well.

[Operator]

The next question comes from [ Ludvig Landgren ] from Nordea.

[Unknown Analyst]

So maybe continuing a bit on this last question from Ulrik. So maybe if you can elaborate a bit on the magnitude of these price hikes and what price effect we could expect here in Q3 than when the full effect is seen on sales and margin -- gross margin?

[Simon Østergaard, executive]

Yes, I think it's -- so it isn't -- so there's both components around product mix. And then there is the pricing I would highlight. So it's a mixed balance. I probably steer out of the specific quantitative component in your question because I think that would be borderline confidential as to how much we get from the price increases, but we are very certain that we will see a difference.

And then there's also a little bit of fluctuation quarter-by-quarter also on the depreciation of things. So that's another thing. And then the final thing I would comment upon is, of course, the FX piece, which sits in the gross margin as well. And Magnus, then you can comment whether I actually went around the circle here where I got everything influencing the gross margin.

[Magnus Blixt, executive]

No, I think you got it perfectly. And I think a valid comment would also be that the effect this year compared to last year is less visible. We had stronger price increases related to compensation for cost pricing increases last year.

[Simon Østergaard, executive]

That's a very good point. Yes. So last year, we were, I shouldn't say, aggressive but we are really compensating also from higher material cost prices, which have, by the end of the day, sort of everything else being equal, they have been less, which has also translated into us being less, let's say, pushing on increasing our prices because we also want to remain competitive.

[Unknown Analyst]

Got it. So then -- as I understand it, the gross margin is then more related to product mix than from actually the price or like cost of goods sold increases in the recent 2 quarters?

[Simon Østergaard, executive]

It is definitely -- it is influenced by product mix, definitely, but I'd say it's not non-neglectable the price rise. We do expect a lift from that.

[Unknown Analyst]

Okay. Great. And then also in the report you mentioned the collaboration efforts with Sysmex in the quarter. And I've seen Sysmex' market decline quite actively in multiple markets. Could you maybe elaborate a bit on this and maybe other efforts that I haven't seen.

[Simon Østergaard, executive]

Yes, a lot of it has been, you can say, internal that is not exposed. We expect us to be able to expose more and more things we do together in the market -- it will be visible for the market. But we have really gotten on the sales side. And the way we work with the organization, we're getting much more exposed at the country level, not just at the regional, you can almost say headquarter level, but also at the country level so that we can work specifically on training plans and really pushing the digital cell morphology.

We're looking at how to deploy our systems. So that can be both to train our colleagues in sales, the whole Sysmex organization, but it's, of course, also the end users. So how do we leverage our system, our e-learning platforms and all our materials. So that is an exciting thing that goes on.

Then we have exposure at conferences. In a week, we will be at the ADLM in Chicago. So that is always a very rewarding show, both to talk with partners, some end customers. And here, we are also very close in the way we present and the way we work together on the booth, et cetera.

[Unknown Analyst]

All right. And maybe continue a bit on this, so you state that the small laboratory instruments continue to show double-digit growth in Q2. Could you elaborate a bit on like the sales share of large versus small instruments?

[Simon Østergaard, executive]

Sorry, the sales...

[Unknown Analyst]

Yes, the share of sales for small versus large because I'm guessing now with large being down quite a bit year-over-year and small still growing. It's becoming more of a significant share of sales there.

[Simon Østergaard, executive]

Yes, it is actually -- I think we haven't reported the split between small and large. So I'll probably defer for that. And that's really just for competitive reasons. But we are continuing to see this double-digit growth of the small instruments.

It's fueled in particular in what we see in Americas, but what is good is that we actually expect uptake in Canada. So when I said Americas just before, I alluded to North America, the U.S., but also in Canada and now the appetite for sort of a decent amount of DC-1s going to, especially, Brazil is really, really taking off.

And then we know there is an untapped potential also across EMEA. And this is why this is for the small lab segment, peripheral blood. But as I alluded to, remember the bone marrow, the specialty agenda that we are driving development wise, they will be hosted by the DC-1 and the prime market for that will be the large lab segment.

So eventually, we really believe that there will be an uptake of DC-1 also as we get into 2025 with bone marrow and 2026. We will see uptake of DC-1 also in the large lab segment. So it is -- it's proven as a super, super stable and a very good unit because it doesn't take up a lot of bench place and it really endorses and enables us to build this ecosystem across labs.

[Unknown Analyst]

All right. Great. And the final one, if I may. So on the bone marrow, which you just mentioned, I saw that scope you got their FDA clearance, I think, for their application. Maybe could you comment a bit how does your product compared to theirs? And do you have -- do you see that you have like better synergies since you have a larger installed base of your instruments that -- so yes, like are they able to sell their applications to your instruments? Or do you have an advantage there?

[Simon Østergaard, executive]

Yes. First of all, I mean -- I think on behalf of the patients, I congrats Scopio for pushing the industry boundaries and getting the registration for bone marrow. I still think it's good. Then I think it's tricky for me to comment on our product until we actually have the registration because that's what we are chasing.

Having said that, not just to be biased, but I do believe we have a better workflow solution that we will come out with that. We will be able to cater for a broader perspective of slides going into the way and feeding into the workflow also with a remote review because of the installed base we have because of the setup that we currently have.

So -- but I think it's still good that the de novo application for bone marrow was done by Scopio. So again, I congratulate them on that. That pushes the boundaries for how you can digitalize. But again, I remain to understand what is the adoption of their system, which is unknown to me.

[Operator]

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

[Simon Østergaard, executive]

Yes, thank you very much. And again, thanks to all for taking the time to listen in on our Q1 (sic) [ Q2 ] and half year results. Just a few reflections before we can all go on a bit of -- at least a very tiny vacation. Then I just want to emphasize that, of course, we are proud of what the team has accomplished with our partners. It's been a solid quarter.

Of course, in this industry and with our business, there will always be a little bit of fluctuations that we are working on, both across quarters and regions and so forth. This is also what we see. Having said that, I'm very proud that we've started the year -- the first half of the year with a very robust quarters, giving us an organic growth of 16%. And I also want to emphasize that the focus we've had in this quarter, not the least the last quarter, we closed the 15 years alliance agreement with Sysmex and that has really endorsed and demonstrated, say, a mutual relentless desire to connect and collaborate, which we've seen here in Q2.

So a lot of traveling, a lot of meetings, a lot of interactions, a sincere thanks to all our enrolled parties. And then finally, our investments into innovation, it remains focused and super dedicated. We have a number of progressing projects so that is exciting. We talked a little bit about the bone marrow here as an example, but we will certainly share more, as we pave our way into the future.

So with that, I just want to thank you all for dialing in, and I wish you a great summer, looking forward to communicating with you guys in autumn.