CellaVision AB

STO:CEVI

Earnings Call Transcript 2022-Q4

[Operator]

Welcome to CellaVision Q4 Report 2022. [Operator Instructions] Now I will hand the conference over to CEO, Simon Ostergaard. Please go ahead.

[Simon Østergaard, executive]

Thank you very much for the introduction, and welcome, everybody to the conference call for CellaVision, where we report our Q4 results. So as said, I will give a fourth quarter highlights, and then we can take questions.

So our headline this time around is that we have an underlying demand for our services and offerings that we deem unchanged, but we certainly have external challenges that are interesting, which means that we are considering our quarter as another soft quarter on the top line; however, with control on our business and our cost base.

We ended the fourth quarter with SEK 152 million in revenue. That represents a negative growth of minus 7% or with currency effect of plus 10%, then we actually had an organic decrease of 17%.

Okay. Of course, we're up against tough compares in Q4 and also Q1, Q2 coming up. However, this is certainly considered a soft top line. I will get into the EBITDA a little bit later, but that is SEK 48 million versus SEK 60 million last year, which represents 32%.

The main reason we see from the top line challenges is really around our, you can say, improved supply of components, the security of getting components, but also especially the increased cost of capital that has led to reduction of inventory levels amongst our customers or our distribution partners. So there's a high focus on working capital, which has challenged our ordering pattern.

We have favorable currency effects. However, we've seen high inflation on our cost base to manufacture our products, so we have not had full compensation from the currency effect. So we have a decline on the gross margin.

With regard to the cost then, we have not -- the numbers presented today do not include any price increases in Q4. We have negotiated our price increases, and they will be adjusted by Q1. So this is here where we have achieved higher-than-normal price increases, which will come into effect from this current quarter Q1.

In terms of our strategic direction then, in total, we estimate that we have increased the adoption of digital cell morphology in the large laboratories. And now we estimate that we are at the -- we're past 26 -- or we're around 26%, so coming from 24% last year. We have seen positive feedback from DIFF-Line.

This is the workflow solution that we have started to -- that we completed this year, the last quarter. So we're starting to see that with our distribution partners. We expect that to be positioned and launched by them. So this is our MCDh reagents, our smearing and staining box that goes hand-in-hand with the DC-1 for the small labs.

We're also getting traction from our reagent expansion. We launched our products -- or we developed new products for APAC new classic stains. And they -- in the report, you will see our progress on -- per country. So we are starting to see some revenue coming out of APAC and not just Europe.

If we go to the next chart, we will see the financial development of the company. So SEK 152 million versus SEK 164 last year million, and that leads us into a total revenue for the year of SEK 639 million.

Again, I think our financial year is really depicted or characterized by a very strong H1. And then the impact of -- the macroscopic impact, especially on the interest rate, the cost of capital is where we see an issue. And then also the COVID situation, especially in China, has really impacted us. So we land the year at 4% growth organically.

Gross margin, 67%, as said. So material prices have really gone up with the inflation. And of course, there's a function around the FX, what happens with the FX on the Swedish krona. But we believe that our price increases will take us back in the normal area, but of course, with the uncertainty around the FX impact.

Operating expenses landed in the quarter at 40% of -- 41% of revenue, so that's equal to SEK 63 million. We have provisions reserved for the incentive program for the company and management, and we released those SEK 5 million. So that has led to lower operating costs.

And then I'd also say on the R&D side, we had SEK 35 million spent, so that's 23% of sales. However, we managed to capitalize SEK 16 million. So that's really a sign of 2022 has been a year where we have onboarded a number of new colleagues. Our management team has really worked hard on recruiting. And here we're starting to see output also on the projects in terms of capitalization, so I think that's a good sign.

On -- in terms of the cash flow, we ended the year at SEK 28 million operating cash flow versus SEK 46 million. We had -- of course, the cash flow was impacted by the lower profit before tax and the increased inventory buildup that we've done.

Essentially, going from the operating of SEK 28 million down to the minus SEK 8 million, that's the journey of capitalizing our R&D, as I said, SEK 16 million. We've also increased our investments in the production facility in France, where we are building a new factory. So we have SEK 9 million -- spent SEK 9 million on that, which also impacts the cash flow we have. And then we have financing of around SEK 11 million. So that leaves us with a total cash flow of minus SEK 8 million for the quarter.

We end the quarter and the year with cash liquids at the end of the year of SEK 108 million.

All right. Going into the regional highlights, starting with the Americas. So here, we -- our sales decreased to SEK 67 million. So obviously, it's a decline on the quarter of minus 9%. We landed the total year of -- at SEK 280 million. So actually, it represents a full year growth of 34%.

So a healthy signal, but of course, very skewed with a lot of traction in the first year and weaker quarters in Q3 and Q4. We've had -- when we look at our sales, it's really what we call nonintegrated systems, the DM models that has not gotten the same traction. We have -- here, we also emphasized the interest for the DIFF-Line that started to be marketed.

But the DC-1, as a standalone, which has been available for the American markets for a couple of years now, is continuing its journey of -- it really resonates with the satellite labs and network labs out there. So this is actually where we see the majority of our growth over the year. So that's positive.

In EMEA, we have -- we're going pretty much flat, SEK 61 million versus SEK 60 million last year. And we also land at SEK 280 million in this region. Here we really had a focus on -- we've gotten the feedback in terms of working capital. The cost of capital seems to really fluctuate our ordering pattern, so that has really led to slower sales and a flat year.

And we still have a lot of activity. So there's been no issues. COVID, obviously, in Europe, we have a number of -- we have growing interactions with our partners, but also the end users. But bear in mind that the sales cycles are long here, but we are really working hard to penetrate the individual countries, and that's what we can see. It's harder to penetrate EMEA across borders as opposed to the traction we have in America.

Our [ deal sealer ] or very, very tough region is APAC this year around. We landed the quarter at minus 21%, and the full year was minus 24%. So sales declined from SEK 31 million last year to SEK 24 million this year. And bear in mind, we only had a Q3 which was really weak, where we had SEK 8 million in Q3. So 2 very, very soft quarters in APAC, which results in just for Q4 -- sorry, for the full year a decline of minus SEK 24 million from SEK 103 million down to SEK 79 million on the year.

And it's really COVID-related in this region. It's -- we still have challenges operating, moving around the country and -- especially in China, partly Taiwan and Japan. But primarily, China is the main jurisdiction where we really face issues, and we're not kind of out of the woods there. So that has impacted both the demand, but also the challenge we had that we in Q2 had large order, which was not installed, and that has been installed throughout these quarters. But this quarter, we did ship an order. So we came up better than Q3.

Yes, I think we can proceed to the next one. In terms of the -- when we cut our sales per product group, we still see traction for our instruments. But it's very -- as said, it's a bit dependent on what type of model or what product lines we are looking at here.

When we look at the large systems, still traction -- there is still traction to request for the hematology lines. We have no sign that we are losing to competition. So this is why we also emphasized the macroscopic environment in our report and the factors that I've alluded to.

In terms of the small DC-1, especially I mentioned that in Americas, we really have traction with the network hospital labs. And in general, in Q2 -- sorry, in Q4, I'd say we've probably doubled our DC-1s pretty much across every region. And if we look at the year and look at the growth, it's very similar to last year. The volume growth we reported last year in the annual report was 56%.

And we're in the same range, maybe a little bit higher if we look at the growth rate for the human labs and maybe a little bit slower if we include the category of DC-1 for that category. So a lot of traction. The main part of the incremental growth is coming out of the U.S.

With regard to reagents, here, we had SEK 25 million, and only SEK 23 million in EMEA, a little bit soft. We were -- we missed a bit on sales for our main market in France, but we -- even though there is usually not that much fluctuation between the quarters then, we believe we can see that this is a type of a one-off for this quarter that we had a small dip.

In terms of APAC, as you will see in the report, there is a lot of progress now that we are ready for commercialization after we've done our registration, evaluations, et cetera, across multiple countries. And now we are -- we've just completed Thailand in this quarter.

I'm pleased to see that now we're kind of doubling our APAC revenue. So now we are ending the year at SEK 3.5 million. And where we had hardly any sales, pretty much nothing in Q4 last year, then now we have exceeded SEK 1 million in this quarter. So traction on the APAC side.

Coming to software. It's a bit soft also because of the instrument situation. However, we do see some good traction in Europe for our high-runners in terms of Remote Review, but also the Advanced RBC, and, in fact, also the body fluid. But the Advanced RBC and the Remote Review are our high runners, and we see growth in EMEA.

We would probably -- we have a hypothesis that we're selling quite a number of DC-1s going into the network laboratories. They already have a Remote Review. So part of our software can actually be impacted by the fact that we have a lot of growth in building these ecosystem across the hospital networks. But if they already have access and they don't increase the number of users, then we don't -- then that doesn't translate into incremental software revenue.

All right. Coming to the summary slide here. Yes, I'd emphasize again that the underlying demand is unchanged, but we really feel that we are in the middle of the woods of having external challenges that persist not losing to competition, but we began with a very strong momentum coming out of the COVID phase in Q4 and into H1 of 2021.

And we've faced -- given the entire cautiousness that's what we see amongst our distribution partners, and that has certainly led to softer sales in the last 2 quarters. We have a lot of progress. We -- in terms of what we do and our -- articulating our strategy and executing on the internal side and building the bandwidth to build these innovation programs with -- the team has also mitigated a number of supply chain disturbances, which we see much lesser for the time being. And we are really increasing our profound and deep foundational discussions with our customers and our distribution partners.

So we continue also on the new technologies that we have acquired and what we developed internally. So I really expect you to hear more about that in our quarters to come, probably starting next quarter with news on that agenda. But essentially, we are aiming to maintain and build and expand our superior product portfolio because we believe that the integrated ecosystem that we have started to install is the way we win long term.

Bandwidth expansion has taken place successfully, and now we are back within our financial target of being above 30%. We have a dip last quarter with one-off, et cetera, and slow -- low sales, but we are controlling our cost base diligently, and we are pursuing our strategy plan as laid out.

So with that, I will open for questions.

[Operator]

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

[Ulrik Trattner, analyst]

Great. A few questions from my end. Perhaps, we can start off with the softer comments on -- or the soft comments on the U.S. market or the American markets. And you're alluding to macroeconomic factors. Is this something you're hearing from distributors? And would you be -- would you not be surprised that you have a higher momentum for the DC-1 compared to the DM range if this were to be an effect of the -- of macroeconomic factors?

[Simon Østergaard, executive]

I think the macroeconomic factors is -- in the conversations we have had with our distribution partners, it certainly involves around Europe. It's more -- that's where we see it the most. U.S. is more of a private market, so this is one thing.

And I think the inventory management piece has been most profound in Europe, and we also believe that our performance in the U.S. has actually been better as compared with U.S. So mostly impacting in Europe, I would say, when we talk about the macroeconomic factors, especially around cost of capital.

[Ulrik Trattner, analyst]

Yes. Great. And could you give us some numbers on how the DM range is growing? I'm looking at 5% decline year-over-year for instruments in Americas. And since you're saying that the DC-1 continues to grow, how much is the DM range declining year-over-year? And this is 5% reported. I'm guessing it's more organically as well. And is there a complete stop? And -- or was there a big tender that you were awarded in Q4 last year? Or what's sort of the reasoning behind the decline for quite a stable segment?

[Simon Østergaard, executive]

Yes. And as said, so then you're alluding only to the nonintegrated systems, right?

[Ulrik Trattner, analyst]

Yes.

[Simon Østergaard, executive]

Yes. It's an observation. We can see we actually have solid growth in integrated line, so that can also be a sign of who's winning in the market, obviously. But we see, in general, that the DMs is down. We don't disclose growth rate per product line, but we can obviously see that the growth for the integrated system is really attractive out there.

[Ulrik Trattner, analyst]

Okay. Can you shed some more light on if this is correct or what I'm seeing in the number is lower tax rate on software and others in the U.S., seeing that declining by 5 percentage points sequentially throughout the entirety of 2022? Is there any reason for a U.S. client to be less prone to buy the most advanced software and upgrades on your system? Or is this just temporarily affected?

[Simon Østergaard, executive]

No. I think there is a decline, but I think it's a function of us placing DC-1s in network hospitals where they already have Remote Review installed. So they built the ecosystems, but they may not have sufficient number of users.

So they upgrade the Remote Review or they already have a sufficient number of access to the Remote Review. So we don't get the software sales because it's already there, so to speak. I think that's one of the reasons -- probably the main reason for that.

[Ulrik Trattner, analyst]

That's great. And you mentioned price increases. So how much are we talking about that's going to be implemented here from Q1? How much range do you have to go to your distributors and increase prices?

[Simon Østergaard, executive]

Yes. So it's obviously sensitive given the confidentiality we have with individual partners. Usually, it's -- we have only raised our prices with a few percentage points, and we are above that range this year around. It varies from product categories, and it also varies with the partner. But we are confident that we can regain part of the loss that we have seen with the impact of the inflation.

[Ulrik Trattner, analyst]

Great. Two more questions on my end. First would be you sound more optimistic on not only customer supply chain, but also your own supply chain. And if I remember correctly, you've been buying inventory on the spot market for the last few quarters. I'm guessing that's going to reverse here in the first few quarters of 2023. Or are we already seeing positive effects from not buying more expensive components?

[Simon Østergaard, executive]

Buddy, you're absolutely right that we have increased our inventory. We have increased our inventory, indeed. Depending on the components that -- it may not just be a few quarters. We have -- for certain components, we have acquired a little bit more. But we are starting to eat in on that, and we are not having the same -- as you correctly say, we're not in a situation where we are negotiating very high prices on the standard components, so to speak. We're kind of out of that seat. So we are more confident, I can confirm that.

[Ulrik Trattner, analyst]

So it's fair to assume, at least, towards the second half of next year to have a more sort of positive gross margin development from reduction in pricing of components. Would you be confident in terms of that statement?

[Simon Østergaard, executive]

Yes. Again, it's -- our gross margin is a function of a few things, but I think what we control in terms of the pricing and our cost prices -- our own -- I'm confident from that perspective. But just to add, the FX, it's going to be tricky as well. But what we can manage, we're doing the right thing for that.

[Ulrik Trattner, analyst]

And just one last question, and this would be on R&D spend. So we have, for the last few quarters, if we were to add the capitalized R&D spend together with your reported R&D spend seems a ramp-up. And I'm guessing this is related to the expansion segments and the new platform.

And I think we talked about this in Q3 for this level of R&D spend expected to continue in terms of access level to support the new platform. And I hear you saying that you will be able to present more about this perhaps already in the next quarter. But I'm guessing, we're not supposed to see this as an IVD product in 2023.

[Simon Østergaard, executive]

Yes. So -- well, we -- at least, we will have output from our -- one of our strategic pillars coming up soon. We're very excited about that. In terms of R&D spend, you're absolutely right that we, this year, have increased our cash going into the R&D team. And this is pretty much the level where we want to be.

We don't foresee a dramatic increase going forward from here because we've spent 2022 really spelling out the strategy and executing building the team. This is also why our headcount has increased. So -- but we're pretty much at the level where we can execute. And this is also what you see with the increase in capitalization. So we are spending less time on onboarding -- excuse me? There is someone in the back who needs to mute. I think it's the organizer.

[Ulrik Trattner, analyst]

Okay. Got you. It's my end. Sorry about that.

[Simon Østergaard, executive]

No problem.

[Operator]

The next question comes from Josefine Persson from Nordea.

[Josefine Persson, analyst]

So yes, I need to get back a bit to the weak development in the Americas again. So can you please just give me some color on the difference that you see versus Q3? Can you give more explanation apart from the macro-related explanation?

[Simon Østergaard, executive]

Apart from -- sorry, Josefine, apart from?

[Josefine Persson, analyst]

Sorry. Apart from the macro-related explanation.

[Simon Østergaard, executive]

Yes, yes. I think the main difference that we see, we actually -- even though the numbers we've kind of crawled down a bit here, and we are up against a pretty reasonable Q4 last year, we should bear that in mind. But I think what we've seen is that this quarter, the DM lines, they have been very limited in this very quarter. That's the major difference.

In terms of the access to the labs, the appetite for solutions and also working with our partners in terms of working them to do joint launches, et cetera, we have a lot of traction, and that has occurred over the course of Q4. I think we have -- we come out of Q4 with optimisms for the activities that we do jointly with our partners. That was -- that has really accelerated throughout this quarter.

[Josefine Persson, analyst]

All right. So it sounds like you believe that you're entering Q1 with a better momentum. Or...

[Simon Østergaard, executive]

I think we -- at least what we can control, I think that's fair. I would be really honest to say that the outlook for the macroeconomic influences and the way -- the cost of capital, the management that our distribution partners is driving, that's really hard to tell. So are we out of the woods? That, I can't guarantee. I don't have line of sight to that. But I feel confident that we will flip around and grow our business.

Also as I said, we have no signs that we are losing to competition. So I feel confident that we are doing the right things, but it's not a quarterly game for us. Well, it's also a quarter game, don't get me wrong, but the things we work on is longer sales cycles and, obviously, investments into programs that we start to demonstrate in short time. And then it's a long run in doing the right things to have the winning solutions also in the future.

[Josefine Persson, analyst]

Right. And another question. Are we seeing the same pattern of hesitance among customers when it comes to replacement sales? Or are the current customers considering waiting another year until they replace the instruments? Or what kind of pattern do you see there?

[Simon Østergaard, executive]

Yes, it's a good question. We're a bit of certain -- first of all, we can't see whether it's a replacement or a new. However, we're a bit uncertain whether they're -- whether the hospital environment is getting influenced. We don't have direct signs of that, but that's something we're trying to understand, whether the hospital, and especially in Europe, where you have public hospitals, are they getting impacted by the purchasing power going into exchanging, replacements or just a new one -- just buying another line. That's hard for us to say. But I like your question, and we are working on understanding it ourselves.

[Josefine Persson, analyst]

Yes. All right. And then, yes, you mentioned that the distribution partners will postpone orders. When do you expect these orders to be placed? And do you think we can see...

[Simon Østergaard, executive]

Yes, that's really a function -- yes, the thing is I expect it to happen in 2023, definitely. And so I don't think we are 4 quarters out. But I really want to reserve and don't build out too many expectations for the very future that we can't see for the very near-term future because it's really a matter of -- we can see there's a totally different focus on cost of capital now that interest rate pays in.

So that's a function of them driving down their inventory. But also, of course, it's a function of when they win the tenders and when they need to install. So a little bit uncertain outlook on short term, but confident that we will come back on a little bit longer -- short to medium horizon.

[Operator]

[Operator Instructions] The next question comes from Christian Lee from Pareto Securities.

[Christian Lee, analyst]

I was wondering, on back of the price adjustments starting from Q1, do you expect to maintain the gross margin at around 69% in 2023 or perhaps even better?

[Simon Østergaard, executive]

We're aiming to get back there, I would say. Of course, we would like to go better. But I think that's a fair estimate.

[Christian Lee, analyst]

Excellent. And I know that you have perhaps started to implement the shift to the subscription-based model for software. Do you -- have you started to implement this? And do you expect to have adverse impact on your software sales going forward?

[Simon Østergaard, executive]

Yes. No, Christian, we haven't implemented that in our existing solutions. That's something we will implement in our future solutions going forward, as we have new implications.

[Operator]

There are no more questions at this time, so I hand the conference back to you, Simon.

[Simon Østergaard, executive]

All right. Thank you very much, everybody, for listening in. So in summary, obviously, we are facing some tough quarters on the top line. I'm proud to say that we are controlling our cost base and investing in the right programs. We truly believe we're doing the right things to execute our strategy and continue our leadership position within digital cell morphology.

So with that, I want to thank you also for a good year, listening in and working together with all of you, and I'm looking forward to work hard and get out of the current situation with hard work and the right work. So thanks for now. Bye-bye.