Good morning, and welcome to the BICO Q1 FY 2022 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Erik. Please go ahead.
Hello, and thank you for taking the time today. My name is Erik Gatenholm, President and CEO here at BICO, and today I'm here with our Interim CFO, Mikael Engblom. The purpose of this call is to present the full Q2 results and provide a business update for BICO Group. I would like to start by thanking the entire team for the continued strong efforts in Q2. It's truly been a great pleasure working with everyone, serving our beloved customers around the world. We're on an exciting journey together to create the future of life-saving treatments with our customers, and we're looking forward to continuing to serve their laboratory and research needs in the areas of tissue engineering, cell line development, multi-omics, and diagnostics. Please proceed to slide 3.
We will start today's session with the Q2 highlights describing the quarter in more details, followed by financial performance reviewed by Michael, followed by a business area performance update, and finish off with a general outlook for the business. Please proceed to slide 5. In Q2, we achieved revenue of SEK 537.6 million, resulting in a total revenue growth of 83% and an organic growth of 7%. For the first half of the year, we achieved a total revenue of SEK 1.014 billion, corresponding to total revenue growth of 140% organic growth of 21%. Worldwide demand for BICO's products remained strong in the second quarter, reflected by order.
A high order intake and continued interest in our expanding laboratory tools portfolio, especially throughout our bioprinting business area that achieved 47% organic growth and our biosciences business area that achieved 19% organic growth. Much of this success is thanks to our automation, laboratory sample preparation tools, tissue engineering platforms, and workflow products that are tailored to some of the most complex customer applications in the world. It's meeting the needs of major players such as global pharma companies and healthcare providers. Some of the very important and worth mentioning is that we've seen several new exciting regenerative medicine applications nearing or initiating clinical trials. These new applications come from the development work where our technology platforms have been used, indicating a faster clinical approach for bioprinting technologies than initially anticipated.
What we thought would take 10 years has in fact materialized into five to six years, showing a great clinical potential for bioprinting of human tissues worldwide. While the worldwide demand for our products remained strong throughout the quarter, we did start to see macroeconomic effects signaling potentially weaker markets ahead, triggering certain important organizational adjustments and actions. Mainly, we've started to implement improvements with our credit and accounts receivable processes and are working to strengthen our prepayment requirements for certain customer segments. We're favoring working capital. It's important to note that this has resulted in a rejection of several orders during the quarter. Another important action was the planning and implementation of a group-wide cost savings program targeting SEK 100 million in cost savings over a 12-month period.
These cost savings are anticipated to materialize gradually over the rest of the year and to be in full effect from the first quarter of 2023. As already mentioned in our first quarter, we have shifted our approach from rapid M&A agenda to stronger focus on commercial success and synergies within the business areas. This has resulted in enhanced focus on integration of already acquired companies and strengthening of both internal control, but also capitalization on commercial and technological synergies. This has shown great results in the launch and sale of new product lines such as the C.STATION, G.STATION, cellenONE HD, and continued success with our Biosero Green Button Go automation software that was recently installed at what may be the largest automated cancer diagnostic systems in the world. Please proceed to slide 7.
I will take you through some of the key financials, starting with the second quarter. The total sales growth was 83% during the quarter, whereof the organic sales growth was 7%. The EBITDA amounted to -SEK 62.9 million and was charged with a one-off bad debt provision of uncertain accounts receivable in two group subsidiaries, which resulted in an EBITDA effect of -SEK 44 million. The preliminary trading update released on July 15th stated that this item would be accounted for as negative revenue. However, after a more detailed technical accounting assessment, this is instead primarily accounted for as a cost of bad debt in the income statement. The adjusted EBITDA amounted to SEK 11.1 million, corresponding to a margin of 2.1%.
The difference between the reported EBITDA and the adjusted EBITDA is related to this one-off credit item, option programs, acquisition-related cost, and restructuring cost. The company recorded a net profit of SEK 43.1 million despite the negative EBITDA result. This was due to net positive currency effects in the financial items, mainly related to unrealized exchange rate effects on non-currency hedged intra-group loans in the parent company. The parent company is loaning money to the subsidiaries, and there's a revaluation effect. That amounted to SEK 243 million in the quarter. Move to page eight for the half-year financials. The total sales growth was 140%, as Erik mentioned, whereas the organic growth was 21%.
The EBITDA amounted to -SEK 82.3 million, and the adjusted EBITDA amounted to SEK 17.1 million, corresponding to a margin of 1.7%. Move to page nine . During the second quarter, the cash flow, including changes in short-term investments, amounted to - SEK 323 million. When adding the cash flow from the first quarter, the total cash flow during the first six months amounted to -SEK 484 million. This results in that the total cash, including short-term investments, amounts to SEK 991 million per June 30. Cash flow from operating activities for the quarter amounted to -SEK 150 million, whereof -SEK 75 million consisted of change in working capital.
The changes in working capital were, among others, related to increased inventory to support future growth and mitigation of supply chain risks and increased contract assets following an increased amount of ongoing large customer projects. Cash flow from investing activities was impacted by the acquisition of Allegro 3D and paid installment of contingent consideration totaling SEK 73 million. During the quarter, the group invested SEK 60 million in intangible fixed assets, mainly attributed to product developments and new products. Investments in tangible fixed assets amounted to SEK 78 million, of which SEK 42 million was due to buildings that Scienion and Ginolis are constructing for their own operations in Berlin and Oulu, respectively. The remaining investments scheduled for these buildings are estimated at SEK 110 million in 2022, and SEK 60 million in 2023.
The negative cash flow this quarter and the first half year reflects our ambitious growth agenda, focusing on product development, expansion, and rapid increased sales. However, with the change in macroeconomic environment in terms of customer demand and financing, management has taken measures to strengthen cash flow with a view to self-finance organic growth. In July, the company launched a cost reduction program that targets reducing expenses by SEK 100 million on a 12-month basis, as Erik mentioned. This includes organizational restructuring and improved efficiencies. The cost reductions are expected to materialize gradually over the rest of the year and be in full effect from the first quarter of 2023. Several cost reduction initiatives, such as personnel cost reductions, were executed this summer, and the cost reduction program is on track, aiming to strengthen cash flow from increasing EBITDA and reducing capitalized development cost.
The company is working on reducing working capital, which has increased substantially over the last 12 months. This includes continuing to focus on accounts receivable, payment terms and collection processes, as well as optimizing inventory levels. Management is also addressing the cash flow from tangible investments by investigating financing opportunities for the ongoing facility investments in Germany and Finland. With that, we will move over to some update on the business areas. Please move to page number 11.
Thank you, Mikael. In the second quarter, the Bioprinting business area reported net sales of SEK 153.7 million, representing 29% of total group sales. The organic growth was 47%, and the segment generated an adjusted EBITDA of SEK 7.4 million, representing a margin of 4.8%. The reported EBITDA was -SEK 14.4 million, corresponding to a margin of -9.4%. As mentioned earlier, the business area has seen significant market traction for its tissue engineering product offering, and one important example to highlight is the recent acquisition of Allegro 3D, resulting in a successful launch of the new light-based bioprinting platform, the BIONOVA X. The BIO X platform accelerates research in biomimetic models, regenerative medicine, and disease modeling.
An interest in this system is so high that the business area will surpass the full-year sales target well before year-end. The platform is complementary to our award-winning, best-selling BIO X platform, and we anticipate several synergistic customer cases to arise from the combination of both platforms. Another successful case worth mentioning, especially highlighting our ESG agenda and ability to reduce the use of animals in research, is MatTek's delivery of our first batch of EpiAirway Monkey this quarter to the National Center for Advancing Translational Sciences, NCATS, an arm of the National Institutes of Health, NIH, allowing them to translate their historical in vivo monkey data to in vitro human model using our EpiAirway data. This helps enable the deeper understanding of SARS-CoV-2 infection in the human lung and screening for antiviral therapeutics. Next slide, please.
In the second quarter, the Biosciences business area reported net sales of SEK 212.5 million, representing 39% of total group sales, and the organic growth was 19%. The segment generated an adjusted EBITDA of SEK 23.5 million, representing a margin of 11.1%. Reported EBITDA was -SEK 15 million, corresponding to a margin of -7.1%. Biosciences' latest acquisition, Biosero, continues to develop according to plan, announcing a key patent underlying its Green Button Go laboratory automation scheduling software. As mentioned previously, we also recently installed what may be the largest automated cancer diagnosis system in the world. This system runs tests on patient samples that detect multiple types of cancers through a single blood draw, contributing to early cancer detection and monitoring a patient's response to treatments.
Now, Biosero is building a similar size system for another customer in another application. This clearly shows how BICO's bioconvergence technologies are directly impacting the healthcare industry and patients around the world, something we pride ourselves in doing on a daily basis. In addition, Discover Echo continued to capitalize on its innovations within microscopy, where they have replaced traditional eyepieces with high-resolution touch displays to allow easy viewing, manipulation of images, and collaboration. The microscopy market is stable and continues to show strong growth, catering both academic segments as well as industrial customers. Customers ahead of plan, Echo is ahead of plan for this year and has improved gross margins, making them a profitably growing anchor in the business. Next slide, please.
In the second quarter, the Bioautomation business area reported revenue of SEK 171.4 million, representing 32% of total group sales, and the organic growth was -17%. The segment generated an adjusted EBITDA of SEK 7.7 million, representing a margin of 4.5%. The reported EBITDA was SEK 2.9 million, corresponding to a margin of 1.7%. Within Bioautomation, we see strong customer demand for our new innovative products and the earnings contribution from these launches. This is our most product launch intensive year ever, especially for single-cell handling instruments such as our cellenONE, consumables such as our cellenCHIP and proteoCHIP, and our services business. We expect a strong earnings contribution from this mix for the 2022 full year to compensate for the anticipated volume decline in custom Bioautomation instrumentation.
Worth mentioning is that Cellenion signed an agreement with Bruker for co-distribution of a complete solution for single-cell proteomics that integrates our cellenONE system and proteoCHIP consumables products for sample preparation with Bruker's timsTOF single-cell proteomics mass spectrometer for analysis. Order intake year-to-date more than doubled compared to last year for the system. It's clear that the new and rapidly growing field of single-cell proteomics is driving this growth, where we have a unique positioning and value-adding features and USPs. Rather than using one system for single-cell isolation and additional devices for sample preparation and incubation, our cellenONE device offers a unique and fully automated bioconvergence workflow in a single enclosure.
While the custom instrumentation performance in the business was negatively affected by several internal and external factors, the strong performance of the Q Instruments business and the higher revenues, in particular for the BioShake products, helped to offset the declines in our customer, custom instrumentation revenues. The lower sales volumes and dampened sales development mainly due to the lockdown in China and disruptions to global supply chains affecting our ability to manufacture and deliver systems. Please proceed to slide 15. Looking ahead, we do see a macroeconomic effect signaling potentially weaker markets for certain product segments, triggering the previously mentioned important organizational adjustments and actions. With our cost reduction program delivering improved efficiencies and cash flow, we remain focused on maintaining our positive momentum. We remain committed to our strategy of achieving desirable organic growth while delivering a positive EBITDA.
We're pushing technological advances with new products and more value-driving solutions in the pipeline that generate top-line growth and profitability. Based on years of research and development, we have a tremendous portfolio of products and services that contribute to the future of life-saving treatments that will impact patients' lives for years to come. We're committed to building a long-term business based on customer demands and delivering value, focused on sustainable growth, improving efficiencies, and delivering first-in-class products and services to our customers. The measures we're now taking are necessary to the continued success of the company. Next slide, please. I would like to once again take the time to thank the entire team for the tremendous efforts in Q2. It's been truly a great pleasure working with everyone, expanding our global market reach and continuing our bioconvergent story.
We're also thankful for all the shareholders and investors who continue to support us on this journey. We are committed to our vision and mission, which is to create the future of life-saving treatments by reducing the organ shortage and speed up drug development by providing accessible life science solutions that combine biology and technology. With that, we would now like to welcome any questions and comments that you may have.
Thank you. We will now begin the question-and-answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. We have our first question from the line of Ulrik Trattner from Carnegie. Please go ahead.
Great. Thank you very much. Good morning, Erik and Mikael. I have a few questions, if I may. We talked about this during the profit warning call, but could you help us provide with a revenue split by customer group, both on top line as well as if you can provide us with a split on customer groups by accounts receivable now, since by the sounds of it, the problem mainly relates to small biotech companies. How big portion out of both sales and receivable are these?
I can see if I can try to explain. I mean, the credits that we did, the provision on accounts receivable was related to the Biosciences and the Bioprinting business areas. It was related to two different Subsidiaries in the BICO Group. They were limited to two companies, those credit provisions that we did for bad debt.
Okay. Could you provide us with any more granularity in terms of the customer type in terms of what these relates to? What I'm aiming at here is some type of confidence that we are done with seeing bad debt losses going forward.
I see what you're saying, Ulrik. Some of the customer base is that where we have experienced these challenges is mainly in smaller biotech or distribution companies, and certain partners that would help us in potentially new regions or existing regions. I think it's quite spread out. With that being said, a general sense has been the difficulty in raising capital or attaining financing for smaller companies has proven to be challenging in terms of this current market environment.
If I may rephrase the question. How many of your customers are cash flow positive then?
I would say I mean, I can give you exact details on all the customers and their financial or cash position today without further analysis. I would say the majority of our customers are larger pharmaceutical, biotech or diagnostics companies with quite substantial and strong financials. I mean, these are highly liquid companies. Many of our customer base is also from academic institutions where budget restrictions have been proven to have less of an effect in economically difficult and challenging times. With that being said, I would say the majority of our customers are good paying customers.
Great. Thank you. If we were to look further on the cash flow side, operating cash flow - SEK 115, and adding on CapEx, and if we were to take out the acquisitions being made, we're still looking at a run rate of around SEK 250 million-SEK 260 million a quarter. Could you please give us some more guidance on where we should expect these numbers to perform or go in the next or the remainder of 2022, please?
I mean, we don't provide any forecast, so I can't be too specific. I mean, we have seen a substantial increase in working capital, and that is something we're addressing now to reduce. When it comes to the EBITDA result, we have introduced a cost reduction program which targets to improve EBITDA. We will see some gradual effects of that during the rest of the year and then the full effect next year according to our plans. When it comes to the facility investments, which has consumed a lot of capital, we're looking to find a financing for these two building projects specifically, and hopefully neutralize that future cash flow exposure related to those buildings.
Great. Two questions sort of following up on sort of future cash flows here. Could you talk about the likelihood of paying out earn-outs for acquisitions being made throughout 2021? Given the sort of performance in the second half of last year as well as the first half of this year, my guess would be that they are far, quite far away from obtaining these earn-outs. What would be your take on that?
I mean, we have acquired many companies, and there is a big variation between the financial performance in the different companies. Some companies in the group are doing excellent, while some companies are reporting losses. We have been, you know, making assessments of the total amount on future expected payments on contingent considerations. In this close, we have estimated it to about SEK 489 million to be paid over the coming years due to past acquisitions. Out of that amount, we expect SEK 225 million to be paid within the next 12 months. We are expecting milestone payments based on the performances of our companies.
That leads to how confident are you in delivering a positive EBITDA and improved cash flow? Because if we were to do sort of our estimations here, we're looking at a run rate of at least minus SEK 100 million in operating cash flow going forward. I know that earnings are quite heavy towards the second half of this year. We're looking about SEK 225 million expected earn-outs within the next twelve months, and you have a cash position of roughly SEK 1 billion here at the end of Q2. What measures are really here put into place? Where should we see sort of the confidence in not you needing to raise additional capital in the market to finance your operations?
Yeah. We have the financial target, and we're committed to the financial target of delivering a positive EBITDA result. I'm not able to provide any forecast at this point. I can only point towards the activities that we are addressing. The cost reduction plan that we have launched. The working capital reductions that we are in the process of working with. The financing of the tangible facility projects. Those are the specific activities that we are addressing and that we expect to see results from.
Okay. Great. Last question on my end. That would be on the Bioautomation. Perhaps this would be best addressed to you, Erik. Why is this part of the business performing so poorly? Looking at the companies within that segment, Cellenion previously reported sales growth of around averaging 30% with an EBITDA margin of 20%-24% prior to the pandemic. Biosero is a high margin company. Then it leaves Cellenion. What's really sort of failing here, given that. Looking at the numbers, looking at the organic growth and looking at the EBITDA margins, it looks like something has gone a bit wrong.
It's a very good question, Ulrik. I can address that and shine a bit more light on it. First of all, Biosero belongs to Biosciences, so that's part of a different business area. If we just address Bioautomation as a business area, we have been faced with quite a few challenges both internally and externally during Q2 and perhaps even the entire first part of the year as we've seen in the organic growth that was delivered for the area. What we are battling with is basically supply chain challenges. We're battling with COVID both in effect from lockdowns and deliveries, but also internally for manufacturing of systems and deliveries.
What we have to remember is that Bioautomation stems out from BICO's previous industrial solution segment, where we're providing customized automation solutions, which are massive manufacturing systems that can produce diagnostics tests, medical devices, and a wide range of products for the healthcare industry. These systems are on a very, very different delivery schedule and lead time than the laboratory solutions or laboratory tools, and product segments that we work in. We have to decouple a little bit in terms of how these business areas work. You know, when orders come in for Bioautomation, those could be in the range of $1 million-$5 million. While when orders come in the other business areas, they could be in the range of tens to hundreds of thousands of dollars.
It hits us quite strongly when there is discrepancies in orders or deliveries of products going out. Specifically in Q2, it's worth mentioning that we have been facing challenges with delivering of systems. That's something that we're working on. It's a mix of component shortages, personnel shortages or resource shortages due to illnesses. There are a lot of reasons for why these products couldn't be delivered. Most importantly to mention is that we are addressing those challenges. We're addressing those issues. We're working heavily with getting products out. We're working heavily with finding alternative markets and segments to offer these products to in case there is a push-out of demand or delayed purchasing decisions from our customers, which we have seen for more CapEx-intensive purchases.
I'm fairly confident that we will start seeing improvements, and we will start seeing a continued positive development for the business area Bioautomation as well, moving forward. It is a work in progress.
Just a quick follow-up on that. Given that Q3 and Q4 2021, the companies in the former sort of industrial solutions Bioautomation has really underperformed both sales-wise and EBITDA contribution-wise. Should we expect this trend to follow, or are these, in your view, quite easy comps for you to achieve higher growth in this segment and better profitability?
As previously mentioned, you know, our financial. Our strategy remains to be committed to our financial targets, and we are gonna work diligently and around the clock to ensure that we can show good deliveries. In terms of the Bioautomation segment, you know, H2 is typically the strongest part of the year, and both from an order intake perspective, but also from deliveries and revenue.
What Holger, our business area director for the business area has mentioned in his more detailed segment, which you can find in the financial report, is that he's confident that we will build alternative positions in, for instance, single-cell proteomics. More focus on sample preparation through our Q Instruments business and work diligently to bridge some of that gap or some of those short-term challenges that we're experiencing with our customized industrial solutions. With that being said, we are also finding alternative markets and new application areas for our customized solutions, which I think is going to be a very important part for the growth journey moving forward.
Great. Thank you very much for that. That was all for me, and I'll get back into the queue. Thank you.
Thank you, Ulrik.
Thank you.
Thank you. We have our next question from the line of Jacob Lembke from ABG Sundal Collier. Please go ahead.
Hi, good morning. I have a few questions. I think I'll start on the demand side. You mentioned in the report that demand remains strong across basically all business areas. Yet you also mentioned that there is a, you know, sign of a market slowdown, and this was something you cited in the when you released the preliminary numbers. Can you sort of walk us through the sort of weakness you're seeing or the caution which you have highlighted before?
Absolutely, Jakob. Thanks for taking the time today. In terms of the demand question, I mean, as mentioned in the report, we did notice strong demand for most of our product segments and product portfolio. Of course, in particular we saw strong demand for bioprinting and biosciences, where perhaps some of the customer segments have been specifically targeted, you know, towards academic or institutional research where budgets are more stable. We have seen more challenges and a slowdown in demand is really on the emerging biotech industry or emerging biotech customer segment, but also on the push out or delay of larger CapEx investments from more industrial customers where budgets have been delayed or pushed back to either Q3, Q4 or even Q1 or later 2023.
With that being said, we are taking a more cautious approach, seeing these new adjustments or new developments in the macroeconomic effects. With that being said, I think we're still quite confident that our academic customer segments, our pharma laboratory tools-based products, will continue to perform. We're being cautious in terms of what we see both from our peers but also from the developing market around us.
Okay. A follow-up on that. Just, I mean, as you mentioned in Bioautomation, you have this sort of larger CapEx products and should be considered as a more cyclical business. Now given perhaps the economic environment and also maybe the sort of funding climate, that there could be a lesser inclination to undertake such investments going forward and that we could see a weakness for some time in this segment.
Could you repeat the first part of that question?
Yeah. If Bioautomation is more of a cyclical business and given the economic environment, that if we should expect sort of a weakness for a longer time here in that area.
It's a little bit hard to give a full estimate on that. But what I would say is that during more difficult financial times for certain companies in the segment, these companies could at times look at improving automation and efficiencies in their manufacturing and development processes. When it comes to that, we are ready to provide better efficiencies and faster manufacturing capabilities and better automation. Even if there could be a prolonged downturn of the larger biotech or life sciences industry, I think that over time, the business will continue to perform quite well. But there are, of course, both internal and external challenges that we need to address, and we're doing that actively now, starting now in Q2.
We will continue to address those in Q3 and Q4. I think that, you know, we wanna be a little bit cautious in terms of how we approach the market with the reduced confidence that we have seen over the last couple of months.
Okay. I understand that. My next question is on the cash flow and the working capital. Could you just give some more detail on the receivable tie-up and the inventory build-up in Q2, and also if this was according to your expectations at this stage, where you are in this sort of turnaround process?
Yeah. The increase in inventory was about SEK 65 million in the second quarter. This is due to that we increased inventory as a consequence of supply chain issues. Building inventory, that's something we've been doing for several quarters to be able to deliver products. We have also prepared for a rapid growth, and for that reason, increased inventory. What we see now is that with the expected market slowdown and with some of the supply chain challenges being reduced, we're looking to reduce the inventory. We're in the process of working through that with the companies in the group. We are in a change mode here from building inventories to secure deliveries for rapid growth.
Now we're looking into how we can reduce the inventory. When it comes to the operating receivables, it was minus SEK 82 million in the working capital. About half of that was due to large customer projects being ongoing and not delivered, primarily related to the Bioautomation area, which Erik touched upon. We have also seen some increases in accounts receivable, but that's more to do with increased sales in the second quarter compared to first quarter. We are also in the process of reducing Days Sales Outstanding and improving payment terms and collection processes as Erik touched upon. We have had a positive effect on operating liabilities of SEK 72 million, primarily related to accounts payables increasing and accruals.
This is something that typically varies between quarters depending on when deliveries are made, et cetera. That's some more flavor on the change in working capital.
Just my second part of the question, if you are or if this is going, I guess, according to plan, or if you are satisfied where you are at this stage?
I mean, we have identified working capital as an opportunity for strengthening the cash flow, and we are focusing on improving that. Obviously, we're not satisfied with the current working capital. We think that we can do improvements in this area. That's why the management team is working on reducing working capital.
Okay. My final question is just, I mean, also on the working capital and particularly the receivables, if there's any particular business unit or a business area that stands out in terms of high share of receivables?
I mean, bad debt provisions that we did in this report was related to the Biosciences and Bioprinting business areas. That's where we've had high amount of receivables in two Group subsidiaries. That's where the issue has been in terms of valuation. When it comes to the overall picture, we believe that we have opportunities in all divisions to improve Days Sales Outstanding and receiving payments quicker for our deliveries.
Okay. Where you look at it now, I think the receivables days are at around, I guess, 90 or 100 or somewhere like that. Would you say then that there is a few businesses that are way above the average and the rest of the group is more like around the 60s or 70s somewhere?
Yeah, I mean, it is. There are big variations between the companies in the group that builds up to this average. I don't want to go into the details on discussing each subsidiary in the group.
Okay. Understood. That was all of my questions. Thank you very much.
Thank you, Jakob.
Thank you. As there are no further questions, I would like to turn the conference back over to Erik for any closing remarks. Over to you.
Well, I would like to just once again thank you so much for taking the time today. From all of us here at BICO, we wish you a great day.