CellaVision AB

STO:CEVI

Earnings Call Transcript 2022-Q3

[Operator]

Welcome to the CellaVision Audiocast with Teleconference Q3 2022. [Operator Instructions] Today, I am pleased to present CEO, Simon Ostergaard; and CFO, Magnus Blixt.

Speakers, please begin.

[Simon Østergaard, executive]

Thank you very much, and thank you, everyone, out there listening in to hear about our third quarter highlights. I think we can get right into it. So if we take the next slide. That's perfect.

So the third quarter of this year has been a challenging quarter, and I will do my best to explain the underlying drivers behind our numbers. We did have some external challenges affecting our results. So we ended up Q3 with SEK 141 million in revenue, which represents a 7% growth. However, adjusted for currency effects, we had a negative 3%, and that is primarily due to the 10% positive contribution from the U.S. or 10% mainly from the U.S. dollar.

This results in an EBITDA of SEK 29 million, which is at 21%, which is obviously lower than our normal performance. And I'll do my best to explain what is going on revenue-wise, what's going on cost-wise, margin-wise, et cetera, et cetera.

If we look at the gross margin piece, the positive currency effects did not -- it certainly helped, but it did not quite contribute for the challenging market competition -- conditions, but also the increase in the inflation we've seen on our materials, which is hitting our costs negatively.

And generally, I would say Q3 is our difficult quarter. It's -- if we look historically, there is a bit around seasonality. We tend to have difficulty due to the vacation period, especially in Europe, Americas. This is what we've seen this year. This is no different. However, our weakest point this quarter is indeed in Asia, particularly in China and Japan and mostly in China. This is where we have implication from the lockdowns. We can talk a little bit about that later as well.

In terms of our strategic direction, we're pleased to announce that we are continuing our strategy that we have launched, the "Power of Focus." We've been successful in building up the required team to expand our focus also into new areas. So our strategic pillars around specialty and around new areas is going according to plan.

And we've also been able to increase our activity levels also up against the comparative quarter last year. So much more activities. So this is also seen by our ability to join conferences in Chicago and Bologna, where we've had participated in the shows, and we've launched the DIFF-Line.

We have also on the reagent side, on our reagent pillar, we have focused on really increasing our sales after the EU IVDR directive was launched in May this year. We're seeing and sort of starting to increase traction for our methanol-free, but in generally, a sound growth of our hematology reagents.

And also finally, on the internal side, we're successful despite the challenges of building and getting materials, et cetera, we've been successful in executing according to our construction plan where we expand our reagent premises in Bordeaux. So we expect that to be completed in Q2 next year. Next slide, please.

So I briefly launched sort of the result at the top line. And if we kind of go through the key points of the P&L here. Our gross margin was not quite -- it took a small hit compared to last year. Again, positive contribution from FX, but the pressure on the increasing material costs.

We had operating expenses of 56% of revenue. That represents SEK 79 million. So we did increase with just over SEK 20 million in OpEx. That is partly explained by we have SEK 13 million in R&D. We had SEK 6 million in higher activity sales and marketing wise.

In R&D, we also had a write-off of SEK 3 million. One of our -- couple of our small programs. So -- and then furthermore, and related to the R&D costs, we have used a bit more consultants to cover ongoing development projects because we have used ordinary staff to also validate replacement components in this difficult time. I should say, though, that supply wise, we have been able to serve our customers.

So we have been operating expense metric of 56%. We land the EBITDA at SEK 29 million. This is only 21%. So much lower than last year. However, our year-to-date is 31%.

And obviously, we are ramping up on the R&D side. As said, we had SEK 39 million before capitalization, which is an increase of SEK 26 million -- on a base of SEK 26 million, I should say, from last year.

And just a comment on the capitalization, we capitalized just over SEK 8 million. It's a bit lower metric than normal. And this is a result of our strategy. We are increasing also in the new areas where we are running projects that cannot be capitalized yet. So this is part of the incremental R&D where we've invested in a new team for the new areas. So that's the explanation for that.

Cash flow-wise, we landed an operating cash flow of SEK 31 million. We had investments, including the capitalization of the R&D projects of SEK 13 million. And we had financing activities of SEK 11 million, which brings us down to a total cash flow of SEK 6 million in the quarter.

All right. Let's take the next slide, please. So looking at the regional highlight, when we look at the revenue distribution, we're reasonably satisfied with the Americas and EMEA. In Americas, we had 23% growth in the quarter. Obviously, there is a strong contribution also from FX.

However, our revenue in Americas is about -- I'd say, 40% of the revenue is in euros. So we're not fully exposed to the U.S. dollar, which means that the number we represent here does represent growth.

And so we landed the quarter at SEK 59 million and SEK 214 million year-to-date, which is SEK 56 million, 6% year-to-go -- year-to-date. We still have traction. We have good activities from our team and our partners in North America, and we're pleased to get the feedback of the DIFF-Line at the AACC show in Chicago.

In EMEA, we see solid performance, SEK 74 million, over SEK 66 million in the comparative quarter last year and SEK 219 million throughout the year, which represents 14% year-to-date growth. We had pretty solid double-digit growth on the instrument sales. And also, as said, we're -- in Europe, this is where we also see traction on the reagent side, as I'll come back to.

The weakest plant, I said, was APAC. We have minus 54% growth. So we went down from SEK 18 million to SEK 8 million in the quarter. There is no doubt that the large order we delivered in Q2 is impacted by the lockdowns in -- especially in China, and that has led to inventory buildup and postponed orders from our partners. So we've had limited sales of instruments in APAC this quarter, which is really what takes our full quarter down.

If we go to the next slide, where we have cut the sales per product group. As I get into sizes, if we go to -- on the left-hand side, we see instrument growth of 0% this quarter, so SEK 75 million. However, if we look at the integrated solutions and our DC-1, they continue to do well in the Americas.

And also, if we look at the DC-1s, there is enormous traction to tie in the DC-1s to the network hospital chains. And in Europe, it's kind of mixed. Also the stand-alone laboratories request the DC-1. So we're pleased with it, and we are very excited about our launch of not just selling a DC-1 box, but selling a workflow solution for the small and medium labs with the DIFF-Line.

Reagents wise 8% growth, 11% year-to-date. We actually had 15% growth in local currency on our hematology reagents, which is the majority of our reagents sales. And this is really what strategically is extremely important for us. We still have a solid delivery of good reagents that goes outside hematology. And they are continuing to grow with single-digit growth.

On the software and others, we saw traction to combine the instrument sales in EMEA with Remote Review. So that's positive. So also the portion -- if we look at this and deduct the portion of software and others contemporary up against the total sales, that goes down in this quarter with a couple of percentage points up against year-to-date. And that is a normal consequence of our instruments being also a couple of percentage points down in the total revenue. That follows suit. So a bit low really on our instruments, which has a spillover effect to software. And as I said, primarily from APAC.

And I'll take the next slide. Which is the summary slide here. So here, we would kind of summarize our quarter as, CellaVision being on track with our plans with what we have set ourselves out to do. However, we're on track despite challenging conditions in the quarter.

So we had -- we were impacted by external factors such as the lockdowns in key markets, especially China. We are also impacted by the normal Q3 seasonality, which is historically, I think there's a difference between this year and last year.

Last year, our volume was, let's say, acceptable. We were on our way out of the recession. I think this year, we've had a very strong H1. We have been faced with strong orders in Q2, and that invites for inventory buildup if we are hit by external factors such as the lockdowns. That's what we are seeing in China.

And we have been successful in focusing and executing our strategy to build the teams, which is the first step to onboard new strategic pillars. And we've been working hard on actually managing the costs and the access to components. So obviously, that has an impact as well. We need to serve our customers, and we need to build and push our strategy to be the innovation leader within hematology, which we have set ourselves out to be for the long-term future.

Good feedback from not just having the DC-1 on the sales, but actually being able to present workflow with SmearBox and the StainBox, to cater for the small, medium lab -- laboratories. So we are continuing to work on the launch and the acceptance of the entire workflow solution as a package.

And then we're also continuing our reagents strategy. Very pleased to see that CellaVision with the brand of RAL and the ability now that IVDR is alive that we can see there is traction because we are compliant with the IVDR, so we have a competitive advantage. And we have manufacturing capacity for the future as we're building up.

So we are very curious about the work we do with our partners who are assessing our stains, so that we can expand into other geographies. So that is going according to plan.

So finally, a comment on our financial targets. Year-to-date, we're just short of the 15% in 2022. Our EBITDA margin, we have set ourselves up to deliver EBITDA above 30%. Traditionally, of the quarters, this has been -- we've exceeded that number by far. This has been a comment that we've received very often.

This quarter, we obviously don't deliver, but the metrics is given over an economic cycle, and we're at 31% EBITDA for the year. So this is a symptom of us pursuing our strategy, increasing our cost base for the time being. This is not the intention that it will have the same acceleration over time. But that combined with a challenging top line environment leads us to a lower EBITDA of 21% throughout the quarter.

Hopefully, that sheds a bit more light on our results. And Magnus and myself are very pleased to engage in any questions and conversations now.

So thank you very much for your attention.

[Operator]

[Operator Instructions] Our first question comes from the line of Ulrik Trattner at Carnegie.

[Ulrik Trattner, analyst]

I have a few, if I may. And you can start off with breaking down the growth per segment. And as you mentioned, hematology in reagent is growing 15% in local currencies. So that leads me to look at sort of instruments declining double digits organically, is that correct? And is that mainly explained by APAC? How is it looking in the other markets, Americas and EMEA?

[Simon Østergaard, executive]

That's mainly explained by APAC. Correct. Thanks for the question. So that's mainly due to the lower increase of instruments in APAC, definitely.

[Ulrik Trattner, analyst]

And would you still state that instruments are growing organically in Americas and EMEA?

[Simon Østergaard, executive]

Yes. So with double digit.

[Ulrik Trattner, analyst]

And on the gross margin side, you talked about one-offs in Q3 related to higher purchasing prices. How much of this is actually a one-off that won't carry into Q4 and probably next year as well? I believe we have seen a lot of companies experiencing higher purchasing costs and you had FX gains of -- on the top line of around SEK 13 million. Is this roughly what you experienced in terms of increased purchasing in Q3? I know you mentioned that it's slightly higher than that. But are we in the ballpark to assume that additional purchasing is around SEK 14 million in Q3?

[Magnus Blixt;CFO, executive]

Yes, Ulrik, Magnus here. When it comes to the increases in Q3 and what we call the one-offs, it's not one-offs due to write-off, write-downs or anything like that. It's one-offs or considered in a slightly longer perspective. It's a pressure upwards on purchase pricing. That will continue also into the future. Some of it is related to short-term increases that is spot market purchases, for example. And then when it comes to the -- a little bit longer perspective with inflation rates, it's really difficult to say what's going to happen.

[Ulrik Trattner, analyst]

And could you clarify if sort of FX gains of around 13%, are we to consider sort of the increased purchasing prices to be in that ballpark for SEK 13 million to SEK 15 million in Q3?

[Magnus Blixt;CFO, executive]

Yes. We can see that the FX -- the tailwind we've had from FX is almost offsetting increase in pricing that we've seen in the quarter. So it's close, but we -- there is a slight decrease in the margin and with unchanged customer pricing in a fairly stable mix, that is a conclusion you can make.

[Simon Østergaard, executive]

It's a fairly same rate. However, if we look at it, there's a few percentage points, if you divide the pie, and the reagents take a little bit more [ claw ] this quarter than normal.

[Magnus Blixt;CFO, executive]

They do.

[Simon Østergaard, executive]

So that also influenced the gross margin mix.

[Magnus Blixt;CFO, executive]

So that's a downside on the gross margin mix and then the APAC portion of total sales is a little bit lower, and that would be a slightly positive effect since we have lower rates of software in the APAC region.

[Ulrik Trattner, analyst]

Yes. And on R&D side, you note quite a lot of increase in costs here in the quarter. I think it's around 7% to 8% up year-over-year. But 2-part question here. So how much of this is explained by building up a new team around expansion areas and new indications? As well as you mentioned the SEK 3 million write-down in Q3, what is that related to?

And then the obvious question, is this sort of a new base level that we should expect, given that you're currently in this strategic plan to expand your product offering. So is this the R&D level that we should expect going forward?

[Simon Østergaard, executive]

Yes. The SEK 3 million that we have written off they are referred to 2 small projects that were paused as we entered the COVID. And roadmap wise, there is no rationale to continue those. So that's the reason. So that's true one-off, if you like. Then the incremental R&D cost of SEK 13 million, so the 78% you referred to, that's going from SEK 30 million -- from SEK 17 million up to SEK 30 million, as I recall it. And these are -- a rough estimate would -- the half of it is our new teams. So we're really ramping up in being able to serve the specialty segment and also following through the acquisition of Clearbridge last year, so this is our FPM technology.

And then, of course, a big thing for us is just to stay ahead of the game is next-generation development. So this is also where we've ramped up. So in terms of what does the outlook of R&D costs look like, I'd say we have been ramping up definitely to deliver on the strategy. You will not see the continued growth. I'm not saying that we're not expanding, but we will not accelerate the cost base to the same extent as we've done.

[Ulrik Trattner, analyst]

But this should be a maintained level?

[Simon Østergaard, executive]

This is maintain -- well, maybe a few investments. That's how I would look at it. We think it's super, super important actually to -- with the aspiration and the mission we have. We believe that investing in our own activities is the way to build the ecosystem. So this is why you see a bit more organic investment. And this is how we can deliver on serving the customers with all the needs.

[Ulrik Trattner, analyst]

And then a lot of these investments are into new team specialty segments. You mentioned that FPM technology as well. When are we to then expect revenues from these expansion segments?

[Simon Østergaard, executive]

So we will be -- I have no doubt that throughout 2023, we will be explicit around news coming out on the specialty. So we're pretty excited about that. Good progress, good team. And then we will -- obviously, the FPM acquisition that can come in, let's say, 2 flavors. Obviously, it's a technology we acquired, which is also why we cannot capitalize it according to our policies. But we're vetting the opportunity for this technology. I think I've said this before. This can certainly be used outside of hematology, but it also has -- carries a competitive advantage within hematology. So I'll be more explicit as to when we'll utilize that technology. We're in a very positive technology maturation phase for the time being.

[Ulrik Trattner, analyst]

2 more questions, if I may. You mentioned instruments growing organically in both Americas and EMEA. Is that the case for both the DC-1 and the large lab products? As well as do you believe that there's been any sort of inventory buildup in this region heading into Q3 that could help sort of mitigate numbers going into Q4?

[Magnus Blixt;CFO, executive]

No, I think we had -- for Americas, we had a bit of an inventory buildup in Q2. However, we still served Americas with DC-1s throughout the Q3 quarter. But we know that there was a bit of inventory sitting as we exited Q2. So that that's positive from the sense that we've baked off the inventory, and we have served the customers throughout Q3. So pretty good traction around it. This is positive.

[Ulrik Trattner, analyst]

But where there organic growth for both the DC-1 and large labs in let's take America in -- as an isolated market?

[Magnus Blixt;CFO, executive]

Yes, absolutely, Ulrik. It was. And I could highlight a little bit on our split when it comes to FX effects because about 1/3 of our sales is in U.S. dollars and 2/3 in euro. And we've seen the strongest currency FX change on the dollar, of course. It's around 4% on the euro and around the 20% for the dollar. So that mix is important to keep in mind.

And also, our sales in -- on the American market is partly in U.S. dollars because some of our high-running products are sold in -- on global contracts and in euro across the world.

[Ulrik Trattner, analyst]

Thanks for clarifying that. And last question, CapEx related to new production lines in -- for RAL in Bordeaux. How much are we talking about in SEK terms?

[Magnus Blixt;CFO, executive]

In the quarter here, I think we had investment in intangible assets of around SEK 4.5 million, and the vast majority of that goes into that project in Bordeaux.

[Ulrik Trattner, analyst]

And that is for the entirety of that -- the entirety of that project?

[Magnus Blixt;CFO, executive]

Yes, EUR 3 million, EUR 4 million.

[Operator]

[Operator Instructions] Currently, there are no further questions coming through from the phone lines. So once again, if there are no further questions, at this point, I'll hand back to our speakers for the closing comments.

[Simon Østergaard, executive]

All right. Thank you very much, and thanks again for dialing in to hear about our Q3. As said, we are still on track, despite -- with our activities, despite the challenging conditions throughout the quarter.

I'd highlight the seasonality and the impact from APAC. However, on behalf of the team and my colleagues, I'm proud to see the progress we do on the internal lines. And we'll do everything also to work our way out of the challenges we see in the external environment with increasing cost prices and how to mitigate supply situation, but also building the foundation for the future and pursuing our mission that we have set ourselves out to do.

So thanks a lot. We're looking forward to update you on -- at the next quarter.