CellaVision AB

STO:CEVI

Earnings Call Analysis

Strong Q4 Earnings and Strategic Moves

Amidst macroeconomic challenges, the company achieved its best quarter ever with a top-line growth of 29% year-over-year, reaching SEK 201 million. A 27% penetration into the large laboratory market and a robust EBITDA margin of 36% highlight cost control and revenue strength. The full year showed a flat development, balanced by foreign exchange impacts. Strategic initiatives like the maturing FPM technology and a new 15-year alliance with Sysmex underscore a focus on innovation and long-term growth. The alliance aims to create superior hematology solutions and integrate digital microscopy with Sysmex's cell counters, signaling a deep commitment to revolutionizing the space.

Strong Top Line Growth and Market Penetration

The company saw a robust 29% growth in top line revenue reaching SEK 201 million compared to the same quarter last year, demonstrating strong market momentum and an upward trajectory against a weak comparison period. This performance signals an accelerating rate of adoption for digital cell morphology in laboratories, highlighting the company's success in gaining market share. With a 27% penetration into the large laboratory market, there is evidence of consistent and significant market capture.

Solid EBITDA Margin Amid Strategic Advances

A commendable EBITDA margin of 36% was reported for the quarter, driven by a strong top line and a cost-controlled, scalable business model. Strategic enhancements, such as the acquisition and integration of FPM technology, show promise in hematology and pave the way for diversification into cytology and pathology. Furthermore, the company solidified its partnership with Sysmex through a Strategic Alliance Agreement, ensuring strategic clarity and mutual commitment for the foreseeable future.

Regional Performance and Product Mix

All regions contributed positively with Americas leading at 31% growth for the quarter, articulating the successful resonance of the company's offerings in that market. Despite economic headwinds and tighter healthcare systems, there is nonetheless a prevailing strong demand seen in EMEA, which grew at 24%, and momentum in APAC, particularly in China, where sales were significant. Instruments witnessed a surge in demand, while slow growth in software is attributed to existing infrastructure in the American market.

Quarterly Reflection and Strategic Alliances Set the Stage for Futuristic Growth

While the business is susceptible to quarter-to-quarter variations and seasonality, the strong performance across all product lines suggests a healthy growth trajectory. The newly formed strategic alliance with Sysmex is not merely a continuation but a new chapter for long-term collaboration aimed at innovating superior hematology solutions. This agreement running until 2036 promises a comprehensive approach that integrates digital microscopy with cell countering technology, ultimately enhancing patient care in the field of hematology.

Executive Perspective on Market Conditions and Distribution Partnerships

Acknowledging the challenging macroeconomic environment, the company remains buoyant about its sales momentum and recognizes the need for continuous efforts rather than quarterly pushes in its markets. The partnership with Sysmex is strategic, aimed at aligning operations at various organizational levels to better serve end users and capitalize on synergies between the companies' solutions.

Earnings Call Transcript 2023-Q4

[Operator]

Welcome to CellaVision Q4 Report 2023. [Operator Instructions] Now I will hand the conference over to CEO, Simon Ostergaard. Please go ahead.

[Simon Østergaard, executive]

Thank you very much, and thank you, everybody, for dialing in to our conference call. So this is CellaVision's Q4 report that we will present today. And that, of course, also includes the aggregated numbers from the entire 2023.

I have our CFO, Magnus Blixt, with me, and we will be very pleased to have a conversation and answer any questions you may have after my presentation. So let's start with the quarter in brief. 2023 really started with sort of the same macroeconomic challenges as when we left the second quarter of 2022. So that was a little bit of an uphill battle. Then throughout the year, we have seen the inventory adjustments level out, and we have sort of had increased demand for our offerings, which has been seen both in a reasonable Q2, to the best of our belief, a pretty good Q3, given the fact that Q3 typically is a challenge.

And now we are reporting our best quarter ever here in Q4. Where we have SEK 201 million on the top line, which represents a growth of 29% versus the quarter last year. So that represents strong momentum, but it also represents growth-wise that we're up against a weak compare. I think that's fair. So we are looking into a year where we started off with actually tough compares given the momentum we had in the first -- first half of 2022. And then we looked in the second half of 2022, we had easier compares, but we've seen increasing momentum also on the top line, which is, of course, is reflected in solid growth figures. So overall, we're continuing our journey of really adopting digital [cell morphology]. They're both the manual microscopy but also, of course, converting whatever replacements we have out there.

So we estimate roughly that we have around 27% penetration of the large laboratory market, and we are starting to see sort of also a considerable amount of use of our small instrument, but of course, the adoption of the small instrument is significantly lower because we've just started the journey. In terms of our EBITDA margin, we are reporting 36% on the quarter. So I will talk a little bit about how we accomplish that. But that is essentially, of course, the strong top line. And then in our scalable model, we've controlled our costs very firmly which is sort of visible as we get through a higher revenue here. So 36%, I'll get back to that.

We have progress on our strategic direction. We laid out the Power of Focus strategy about 1.5 years ago, and we are continuing to execute across our strategic levers. In this quarter, I want to highlight inputs from our levers -- strategic delever that we call new areas, which is really based upon the acquisition of the FPM-technology that we acquired in spring 2021. We have matured the technology, and we are reinforcing our confidence in the role of FPM as a technology, definitely within hematology. We know what goods look like in hematology, and we've managed to demonstrate that we can really take images, both speed and image quality to the next level. So we are very confident and this is why we would like to share that, that we have made significant progress, which is also a foundation for the company on a long-term basis.

This also opens up for the aspiration of diversifying CellaVision. This was part of the long-term lever that sits in the power-focused strategy. So we have the progress we have with the technology opens up new opportunities within cytology and pathology in the laboratory environment. So here, we've started to exploit new potential partnerships. So I will be able to disclose more around this as we -- as the next couple of years goes by but we're very excited to share this view also because it is an area for future investment of the company.

Finally but not the least, yesterday, we announced that we have signed a Strategic Alliance Agreement with Sysmex. So that really formalizing our mutual commitment and creates strategic clarity for the company for the next 15 years. I will talk a little bit more about that agreement or alliance as we are about to end the presentation. I think I will go to the next slide.

So this is the raw numbers in the table that you see, and I will highlight a few elements. So I alluded to the net sales of SEK 201 million. That brings us to an annual revenue of SEK 677 million. So again, a very strong quarterly growth of 29% organic at 32%, but with FX, it's 29% organic. But of course, if you look on for the full year, we go pretty much flat, minus 1%. So we have 6% growth. But with the FX, it's actually flat or minus 1%. So that really cements my intro that we have had a tough H1, up against tough compares. And now we're really starting to confirm the value of our business and our offerings and we are seeing the momentum out there. So that's kind of how we should read those numbers.

We protected our gross margins. We've had pressure on our cost base. We have elevated prices, but we've also gotten some FX tailwinds throughout the year which also sits in our gross margin. So we're at 68%. Operating expense wise, well, basically, we've gone through the year where we've tried to protect our cost base and limited sort of additional increase. Because 2022 was a year where we ramped up and here, we have really protected our cost base. Of course, we have allowed for inflation. And there are some -- we had some bonus release last year, which we're partly carrying this year.

We've done a little bit of restructuring to set us up for success for the future. That results in an EBITDA of SEK 73 million, SEK 207 million -- so the 36% EBITDA margin translates into 31% equivalent to last year. So we meet our target of being above the EBITDA level of 30%. And essentially, this is a result also -- this also sort of seen from our strong cash flow. Our cash flow from operating activities were SEK 62 million and versus SEK 40 million in the comparable quarter last year. Then we had really a good contribution from working capital by bringing down our inventories so SEK 14 million. So that's translated into an operating cash flow of SEK 76 million in the quarter, and that brings us to a total cash flow of SEK 43 million.

The cash flow from investing activities and the cash flow from financing activity is more -- very equivalent to previous year. Yes. So I think to the next one. In terms of the regional highlights, so obviously, it's good to see quarterly growth across all regions. I think the story related to the different regions is a little bit different. So let me just be a little bit selective here. So for Americas, 31% growth over the quarter, translating into 12% overall throughout the year. So that is really a sign of that our efforts and our offerings, they resonate very well with the American market. Of course, we were hit with inventory adjustments in the first quarter of the year.

So this is what brings the annual growth a little bit down. However, very pleased to see the adoption of small and -- small instrument, our DC-1 solution being tied into the integrated health networks across the U.S. Also very pleased to see that we're starting to have operational activities around positioning our DIFF-Line, which is the DC-1, including our smearing and staining devices for the small lab segment. So we're starting to have activities both in the U.S. but also in Latin America. So taken together, we have a profound position that we -- and a very strong partnership where we believe we can leverage that for the future.

In EMEA, the situation is 26% growth. So the quarter very sort of solid growth. But on the year, it's actually flat, minus 1%. The story around Europe is that we have really continued our momentum in the reagent business. And bear in mind that our reagent business that we acquired back at the end of 2019, it's primarily out of EMEA. More than 90% of the total region sales comes from EMEA. But we're very pleased also with the -- the capacity expansion that we have invested in throughout the year that we have completed this year, we're set up to really fuel the growth, the continued growth in this area. On the instrument side and software side, it's been a tough year. This was a good quarter. We have identified key markets where we really see opportunity to bring digital cell morphology out there. So this is really something that we will do collaboratively.

We can strengthen our position, both by us elevating the game in how we work and the training of our sales staff so they can really convey the value proposition of digital cell morphology in conjunction with the cell counting. So we see potential, but the markets in Europe are very differently adopted. So there is work to be done, which is a good potential for the company and our partners. In terms of APAC, so 49% growth. So obviously, this is a bit of a comeback. APAC is dominated by a few jurisdictions and especially China has been tough for us. But pleased to see that the first half was really tough because of increased inventory levels sitting out there that were blocked for the reasons we all know, in terms of the situation and the aftermath of COVID, et cetera. But in Q3, we had revenue of SEK 22 million. And this quarter, we landed SEK 36 million. So we are seeing a continued or increased shipment to APAC and the majority of sales actually went to China. So that is also good to see that our solutions resonate with the market.

Cutting the numbers in a different way in sales per product group. Then we have certainly traction on the instrument, the instrument was equivalent to SEK 126 million in the quarter, up against the compare of SEK 91 million. So it's a strong instrument quarter definitely. Of course, we have the all-time high sales for China, which also influences software. Let me hop to the right-hand side of the slide here. I think there are two drivers, both increasing sales to APAC, where it does not drive so much software. That's one sort of reason as to why we only see 16% growth in Q4 on the software side, software and others. So it's a little bit mixed. And I also think there is impact from the fact that we are really selling quite a number of DC-1s and instruments to the U.S., where they already have remote review software in intercarrier health network. So they're plugging in more DC-1s to really expand their network, but it doesn't drive proportionately the same amount of software. This is also another driver where you see the 16% both compared to the 39% on the instrument side.

Yes. And here, I want to point out in the middle that we had 29% on the quarter and 28% on the region. So it really proves the very strong growth, 24% EMEA growth. And then also, we started a few years back our geographical expansions into APAC. And last year, we did SEK 3.5 million. And now we did SEK 6 million in APAC. So it's a small base, but it's a high growth of around 60% in local currency or about 70% in SEK. So that sort of moves on across the different markets, and we are continuing to adopt and convert and try and convert labs to utilize the RAL brand in classic state.

So the key takeaways from this quarterly report can be summarized like -- we really have continued market momentum. I want to emphasize that it's obviously a pleasure seeing the result of the team and our partners, building this momentum and really demonstrating this together with the end users. We also know that our business is structuring from quarter-to-quarter. So we are, of course, very positive looking upon this great results in our view. But we also know that it is not a fast-moving consumer business. It is influenced by a little bit of seasonality and other factors. However, we are very pleased with the result we present. And especially since all product lines and regions are contributing to growth, that is a healthy sign. Even though we are certainly aware that there is work to be done with our partners across all different regions.

Yes. We highlight Americas. It's really an interesting market where we really see how well the end users really digitalize their labs and their microscopy business and operations. So this is really something where it creates a strong momentum, and we will leverage that, the learnings as well through our other markets. So it is exciting, which is why we highlighted here. I talked about EMEA that increased 24%. It really justifies our capacity expansions of SEK 4 million over the last couple of years. And then we're obviously pleased that we could demonstrate that our solution resonates in China, and there is the need for shipments going to China for the majority of our APAC sales. Finally, also super important to emphasize the maturation of FPM as I started up by saying -- this was an acquisition that we did, which was a little bit of that. It was -- we saw the potential, let's put it that way. And I'm really pleased with the team, a limited amount of investments, but it has taken us very long in our confidence as to where we can bring this. So it really build some momentum for us, within our next-gen hematology analyzers and not the least potential to also contribute in pathology and cytology where you actually don't have the same macification as you do in hematology today.

So we can, we have a firm belief that we can actually extract additional clinical value in new segments and diversify the company long term throughout this dimension. That's pretty much what I had in terms of the quarter with regards to Q4, and of course, put in perspective to the full year. I want to spend the last couple of minutes in my presentation talking a little bit about the significant event that we announced yesterday, since we yesterday in the morning, signed a strategic alliance agreement with Sysmex Corporation that resides out of Cuba in Japan. This is obviously a company that we've been working with for quite a number of years. And so we added up to around 20 years. In fact, -- so what is this? Is this just a continuation of [Sysmex]?

No, this is a new chapter. Here, we are really formalizing a strategic alliance. So here, we are sharing, and we have reshared our mutual commitments to pave the way for superior solutions in the hematology space. And we, at CellaVision, have a firm belief that doing this together with Sysmex is really what can bring value to the patients and to our shareholders, and really allow our technology to flourish via the channel and the alliance of Sysmex. So you can say with the agreement, we create clarity on our strategic direction. We have clarity, and we have had the very important strategic conversations with Sysmex.

So now we are committed to this long-term alliance agreement that runs until 2036. We know the people. We know the culture throughout the years where we've been working together on individual projects. Now we are getting together with a more portfolio view. We know what goods look like together. And we have so many ideas and concepts that we can now bring to life, not as two separate camps, but we will be working on how do we really bring this together so that we can serve new offerings to the benefit of the patients together. So it's a deeper and it's a broader alliance within the areas of innovation so that speaks to the portfolio of what we do together and how we do it together. But it's also a deeper and a broader alliance when it comes to commercialization. So we have clarity on the fact that what is our mission to convert the manual microscopy into -- digital microscopy in conjunction with the superior cell counters. So we want to really position the ultimate hematology workflow together, and we want to engage in the field together and to understand the needs of the end user. So we pursue our common vision of really improving the healthcare journey for the patients with the blood-borne diseases.

So I think this is a pivotal thing also to support the power focused strategy. It lays as a very, very important strategic lever or strategic enabler to make things happen. And it really clarifies the relationship, not just at the corporate level, but in the regions, in the countries, between our colleagues, there is green light to really get together and do a difference. So I think it's a very important agreement for both CellaVision and for Sysmex. And I'm very pleased we succeeded coming to this point. And with this, I will actually stop the presentation and allow for any questions you may have.

[Operator]

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

[Ulrik Trattner, analyst]

And a few questions on my end. And starting off with the strong sales momentum seen in Q4 and starting off with EMEA and in the instrument side, you sound more upbeat on the market than in quite a long time. Are you seeing any change in willingness on the lab side to invest in CapEx versus what you experienced in Q3? And then in addition, you talked about strength and cooperation with key distributors. What does this mean in practice?

[Simon Østergaard, executive]

Yes. So generally, it's still a tough macroeconomic environment, I think we share that view. So I wouldn't highlight that there is major changes on the macroeconomic seen and by then on the -- so in terms of that translate into the pressure on the healthcare systems, et cetera. I think -- from our view, that's kind of unchanged. I think we are -- it's always good to see when you've been struggling a bit in certain markets, and it's good to see that there is a momentum. We've had some pretty decent shipments coming out this quarter. It really supports our view that there's just much more work to be done across the European markets, but it's not a quarterly effort.

It's a more continuous effort that needs to happen. And here, it speaks to your second part of your question in terms of what does it actually mean with key distribution partners. Well, the alliance with Sysmex really opens up for us to work at all levels in our organization to communicate and be out there with the end users together and convert the labs to utilize our solutions from CellaVision and Sysmex. And so it comes with, you can say, opportunity to operationally align as opposed to transacting together. So there are -- we will take our collaboration much further in how we operationalize and work as one to you.

[Ulrik Trattner, analyst]

Great. And if we can dig a little bit deeper on this collaboration with Sysmex and more precisely how this differs in comparison to your old collaboration that you've had with Sysmex for a very long period of time.

[Simon Østergaard, executive]

Yes. I would be happy to do so, Ulrik. But I will also respect the confidentiality that a strategic alliance agreement comes with. Having said that, -- we have, in this alliance agreement, it comes with a different ambition on how and how much innovation we do to get them, how we give birth to new initiatives, how we run the initiatives. So there is a commitment to continue to build a very differentiating offering for the hematology space. With Sysmex cell counters and the digital cell morphology solutions of CellaVision. So you should really see is us getting closer to operate to serve the customers in a much more integrated way, whereas before it was more like having a project, running a project together. There's a really big difference that's running an alliance versus running a project together.

So I think this is a pivotal thing that -- and the fact that we are building this alliance and that we commit to a long-term 15-year alliance allows us to do different things together, things that was not possible before. On the commercial side, of course, CellaVision, we respect the partners we have. And we -- our mission is really to place digital cell morphology in pretty much all labs, convert the entire market. So we still have let's say, transactional relationships with other parties, and we fully respect them.

But we are now sort of taking the strategic choice to work much closer with Sysmex, and that is also in how we commercialize. That's how you should see the alliance, layer that comes on top of a relationship we've had for many years, where we have, you can say, we've built trust and we've built some processes together, but we have taken that to a whole new level with this agreement.

[Ulrik Trattner, analyst]

Okay. And just a follow-up, and you touched upon this, but do you see a risk of this infringing on your other collaboration, perhaps mainly Beckman Coulter looks to be promoting scope labs, microscopes and they have a position in the U.S. market? Or is -- are we to expect that to be largely unchanged and just as being a deepening of your collaboration with Sysmex.

[Simon Østergaard, executive]

I think the -- when you mentioned Beckman, we will honor any agreement we have. But obviously, when companies choose to go with another solution, that also means that we can certainly transact so the customers access to CellaVision solutions out there. But at the same time, it does mean that we're not taking the same route with Beckman working deeper as we do with Sysmex. Here, we have chosen systemics. That's how you should read it.

[Ulrik Trattner, analyst]

A few more questions on my end, and I'll try to keep them short. APAC markets, and you mentioned majority of sales is to China. Do you feel more comfortable with the competitive situation to Mindray in China? Or is this more a generally more positive end market that we're currently seeing?

[Simon Østergaard, executive]

Yes. It's -- I totally understand your question, Ulrik. I think it's a very difficult question when we get to the end market in China. Of course, it's good to see that we're finally not talking about inventory stocking with our partners, and we are seeing that there is a need for shipping our instruments. That's what you can see from our numbers. We know that Mindray is a strong competitor in China on the total bloodline with their solution, and they are competing primarily against Sysmex CellaVision. So this is how that has not really changed. What we can see is that there is a need for our solutions in the market. So of course, we are continuing the competitive situation that takes place, especially in China, that's for sure. And that is another layer where, of course, our innovation, we believe that we have more innovation to bring out to differentiate our offerings. And this is another short, medium, long-term counter response we will have towards Mindray and others.

[Ulrik Trattner, analyst]

Okay. Great. And last question on my end, and this might be a bit more forward looking. It's interesting to hear what the FPM technology is -- you mentioned that it's maturing and it is an interesting technology. Where are we at in terms of it being commercialized? And as a follow-up question on that as well. I'm guessing the strategic alliance with Sysmex will, to some degree, include this new technology as well. But how will you -- what's your view on commercializing this technology? Because I'm guessing it can be included into the DC-1. I'm guessing it actually can be included upstream. But as you also mentioned, it can be included in pathology and cetology and there, I'm guessing it's going to be more of an OEM solution. so just the take on the FPM in general.

[Simon Østergaard, executive]

Yes. So as I said, then the acquisition of FPM was we could see the potential. But I think that the true value of FPM flourished when it came, and I'm really saying this not to brag about it, but it flourished when it got in the hands of the CellaVision team. And this is why we are confident that we can really make superior differentiating solutions within hematology by now. So of course, it will be something you will see in the CellaVision solutions in the future. Having learned and knowing what [indiscernible] look like in a hematology arena, that has given us comfort that we can actually take the technology and create very high-resolution images in other areas.

So that speaks to commercializing the technology with partners in development and supply and commercial partnerships with other partners outside of hematology. So it's not necessarily Sysmex. This will be other partners, we will be approaching and having conversations on bringing such a technology to life. So this is where I say, this is an area where we are prepared to invest, and it's obviously new partnerships that we're -- be able to communicate around as we progress on that journey down the line.

[Ulrik Trattner, analyst]

Great. Just a quick follow-up since you mentioned continued investment into this technology. R&D costs are coming down a bit sequentially and a little bit year-over-year. Are you seeing projects ramping down or certain products being ramped up for the start of '24? Or how should we interpretate the R&D costs versus your ongoing R&D projects?

[Simon Østergaard, executive]

That's a great question. I think you should see it in a way that in 2022, we really ramped up to increase the bandwidth in terms of the number of staff and capabilities that we needed. We will and it's obviously no secret that we've been going through the last 1.5 year with a vulnerable top line. So we've been very cost conscious in the way we've operated our business. So we have really taking control of incremental investments. However, we did allow a small team to work on FPM, which is the result that we report at high level and when appropriate, we will obviously share more. But we've really sort of been relatively strict both on our R&D costs and also on our sales and marketing, where we've done a little bit of restructuring to set ourselves up for success also in the changed partnering setup that we are pursuing. So this is why we also were able to deliver an EBITDA margin of 31% over the year.

[Operator]

The next question comes from Viktor Sundberg from Nordea.

[Viktor Sundberg, analyst]

Viktor Sundberg from Nordea. A couple of questions from my side. Also one here on Sysmex. I mean the DI-60, which is integrated in the Sysmex hematology automation line -- any idea how much of that is your instrument sales versus a Sysmex that are more stand-alone and not incorporated in the Sysmex line setup in a lab? And also on Sysmex, could Sysmex new XR-series that was released during the summer last year drive a lot of replacement, you think, when they switch out, say, the older XN-series. Yes, I think I'll start there.

[Simon Østergaard, executive]

Yes. No, great. Great to have you here, Viktor. Yes. We -- we have a very, very detailed idea around our DI-60 sales, and it is the majority of the last -- how we serve the large lab segment. And you should see that as a function of the market share of Sysmex. So that is their predominant instrument that goes into the last lab segment. So it is the majority of our large instrument.

[Viktor Sundberg, analyst]

And when the Sysmex will launch their XR series more broadly in the market, will that drive replacements in any way? Or how should we think about that?

[Simon Østergaard, executive]

Yes. Yes. it will -- we expect that the majority, when a bloodline is exchanged typically, it's the entire bloodline that will be changed. That's kind of the pattern we've seen. But we are also aware that the policies and the -- you can say the macroeconomic environment can change that dynamic a little. This is why it's pivotal for CellaVision to invest in innovation. So we keep on sort of increasing the value proposition of our solutions. So you will see that over time also from CellaVision to make sure that it is attractive to exchange and drive the adoption together with the XR series.

[Viktor Sundberg, analyst]

And also a question here on employee turnover, perhaps. It seems like you're down a bit versus Q3. So I just wonder what's the reason for this? And if you can perhaps elaborate a bit on -- Yes, why that happened, if there are any like operating cost benefit during the coming quarters. I don't know if you showed a negative employee number previously quarter-over-quarter. So just wanted to dig into that a bit.

[Simon Østergaard, executive]

Yes. No, it is true that we've done a little bit of restructuring. So we have restructured -- especially in our marketed port organization. So the interface with our partners and specially Sysmex. And that is really to set us up for success towards Sysmex and have a very cost-efficient setup. So that has -- those are actually restructuring costs that we are booking in this very quarter here. And this is the reason why you see the drop. Primarily, this is the reason.

[Viktor Sundberg, analyst]

Okay. And also focusing on APAC here, which was a strong point, I think, in the report. What are the key drivers behind the increased market penetration in the region I think you were up 2 percentage points in 2023 in terms of market share, which is impressive. I also want to understand if that could increase here going forward. And I think the many investors' line of thinking here is that the lab space -- in the lab space have been that you kind of have to give up to China to the local guys when the government favors domestic suppliers, but you seem to defy that in a way here in this report. So any color here is highly appreciated. Is there also a quality difference perhaps between, let's say, the Mindray systems and you guys that have been around since the beginning of 2000.

[Simon Østergaard, executive]

Yes. I think, of course, we have a very well-proven line together with Sysmex, which is top of the standard, but I don't want to comment on the quality of Mindray. I think it's for the end users to determine what they think about that. But I'm pleased to see that there is certainly a demand for our solutions in China. We don't want to be complacent. So it's not going to -- we have to really work for it and to differentiate in order to see continued growth. I think there is a number of drivers which are very different in China. I think that's what you also alluding to, Viktor, in terms of being sort of made in China. And so we are working on initiatives to codify those, let's say, adoptions to the Chinese market.

And so we will be -- we have strategic initiatives around that so that we will be able to serve the Chinese market. We still see it as a very attractive market. It's even though that there is in certain tenders, there are -- there is an advantage of being a Chinese, then if not in every tender. So there are definitely opportunities to keep on paving the way for the Chinese market also because the hospital segments, Class II, Class III is a significant dimension where it has not adopted the technology. So we still see a huge potential in focusing on the market.

[Viktor Sundberg, analyst]

Okay. Great. And also in Europe, also seem to be recovering here a bit. But as you say, at least what we are seeing is that the underlying hospital markets still seem to be struggling a bit versus the U.S. So are there any like short-term trends that favored you just in Q4? Or is this sustainable? Or what do you see in terms of the hospital market here in Europe?

[Simon Østergaard, executive]

No, I totally agree, Viktor, that there is -- it's a larger challenge with very -- with many public hospital systems across Europe. That's one challenge versus the U.S. where small private, et cetera. I think really what -- there is a -- there's just hard work to be done and really positioning our offerings. And it seems like we've been around for so long, but I'm surprised to learn how little labs across certain European markets, they actually know about this technology. It's mind blowing. So I think there is marketing, there's training. There's things that are in our control if we choose to invest and do the hard work.

So as I said, this is not something that will just move the needle every single quarter, and there will be fluctuations, but it's something where I truly believe we are more in control of actually working hard than macroeconomic environments. So I have a firm belief that both across Europe, but also in the Middle East, there will be opportunities for us, even though the competitive situation also can change in those markets.

[Viktor Sundberg, analyst]

And do you have flexibility to market this product alongside Sysmex in Europe if you believe that you could -- get more people interested in the system, et cetera?

[Operator]

The next question comes from Christian Lee from Pareto Securities.

[Christian Lee, analyst]

I have two, please. I have a follow-up question on the Sysmex agreement. Is it an exclusive commitment from Sysmex side as well? And you also mentioned that the agreement could give birth to new initiatives. So will it result in new products? Or is it more about integrating your sales efforts?

[Simon Østergaard, executive]

Good to have you here. So first of all, there are exclusive components in the agreement, but it's not something that I can disclose. With -- so that was the first thing. In terms of the innovation, it's relatively broad. So it can be innovation, which actually includes both the cell count and the digital dermatology. But it's also -- it can also be other elements which are more related to the digital cell morphology. The beauty here is that we are getting very aligned, and we have a channel to bring our technologies out because we are selling indirectly. So the commercial transactional relationship does not change. We are selling our offerings via Sysmex who brings it out on the global scene in the hematology lab. That does not change.

[Christian Lee, analyst]

Okay. That's clear. And your capitalized expenses of development increased to 8% of sales in 2023, how should we think about this in 2024 as you are investing more into FPM technology? Will it be at the same level or perhaps increase?

[Simon Østergaard, executive]

Yes. Magnus, maybe I can invite you in here. I think the capitalization is an interesting topic that we are constantly discussing, but maybe you will give it a go.

[Magnus Blixt, executive]

It's a good question. And first of all, I want to say that the principles [work] for how we do the capitalization, they are unchanged. So the changes we've seen depends more on where the projects are, in what phase the projects are. Ramping up projects and ramping down projects often mean that we need to run more cost over the income statement rather than capitalizing to the balance sheet. So depending on the phase where the projects are, you can see -- and you've seen some increases, and it means that our projects are running at high speed currently. And we expect that tempo to continue also during this year. So we don't foresee any changes, any significant changes in levels of capitalization from here.

[Christian Lee, analyst]

Would that be in absolute terms or as a share of sales?

[Magnus Blixt, executive]

I would say as a share of sales.

[Operator]

The next question comes from the line of Jonathan Martins from [indiscernible] Private Bank.

[Unknown Analyst]

Simon, thank you for taking questions. I want to switch it up a bit. I want to ask you about the reagents business. So basically, it's very strong in EMEA, but like more nonexistent in the U.S. And I want to know why this -- and also a follow-up on that is, shouldn't there be a correlation between like rising instrument sales and rising sales in reagents?

[Simon Østergaard, executive]

Yes. So in terms of our geographical expansion strategy, then of course, there is more to be done in Europe. That's where we are harvesting the majority of the growth, the 20% growth -- 24% growth, sorry. In APAC, that's a -- you can say, -- that's an adoption curve that we've started across the different countries. So this is where you come from a low base, but we are seeing significant growth. And we are working on sort of expanding our classic stance across APAC. When we go to the U.S., there's a little bit different ballpark there. So ballpark, it's true and -- generally with the ballpark comment is that -- we hardly have any sales for our hematology solutions in America. The plan is to bring our methanol-free reagent into Americas. We believe that we need the methanol-free, that the more a stronger value proposition in terms of the class expense. We need more of a superior stain to penetrate and substitute the players in the U.S. So this is a program that we are working on. We need to get the methanol-free to work on the smearing devices of our partners before we can launch in the U.S. So that is the reason why you don't see any significant sales across the U.S., for now.

[Unknown Analyst]

Okay. That's clear. Another question is regarding capital allocation. So in your remarks and also during this call, you talked about like many opportunities, both in R&D and in marketing the product to other markets. And I'm wondering, does it make sense to pay out a dividend now because it's like SEK 60 million, I think, wouldn't it make more sense to cut the dividend and reinvest those proceeds into the business?

[Simon Østergaard, executive]

Yes. I think you should see CellaVision. So first of all, I'd say dividend is a matter that is determined by the shareholders essentially and the Board. Having said that, -- we're a very, very solid company. We are down to -- I believe our debt is around SEK 34 million. So we're really driving down the debt and we now have SEK 120 million in cash. So with -- so hardly any leverage any debt in the company. So in terms of financing demand, I think we are able to finance new initiatives or M&A on the balance sheet actually. Having said that, of course, the inflow of cash that we generate can be utilized differently, but I think we follow the direction of sort of continuing where we are since we believe that is good for our shareholders who own the company.

And then we can change that decision if it makes sense, so to speak. But for now, we think that it's the best direction to continue as we've done and also because we are driving all the metrics and the right direction of the company.

[Operator]

And there are no more questions from the teleconference at this time. So I hand the word back to you, Simon.

[Simon Østergaard, executive]

All right. Thanks a lot, and thanks to everybody for listening into this Quarterly/2023 call. So just a few key points I want to highlight. Of course, it's a pleasure to hear at the year-end to have these all-time high quarterly revenues. We have a firm belief in what we do, both short term and long term. However, we will have fluctuations per quarter over the time. But I think what is really -- I wouldn't say comforting, but what is really a profound pleasure to work with this team is that our direction is set. And that is by having both sort of the underlying business that we see with the momentum.

It's the confirmed potential of our acquisition of the technology FPM that we've talked about today, both within hematology and beyond. And then it is also a pleasure to have had the discussions and commitment now to have strategic clarity, together with Sysmex on a long-term perspective. It is a pivotal lever for us to execute on our Power of Focus strategy. So I want to thank the entire team, our partners for this relentless effort to pursue our vision of really pushing the evolution of microscopy across the field. And with that, I wish you a great day, and thanks for listening in. Thank you.