Good morning, everyone, and welcome to Boule Diagnostics third quarter earnings call. It has been a very intense period for us, with a lot of activities, but we have also faced a very challenging market environment. To give some highlights of this quarter, the recorded revenue growth that we saw in this quarter was thanks to positive currency development, where our largest volume growth was in Asia. I also note that our consumable sales remain at the pre-pandemic levels as it has been over the last year. However, our gross margin is pressured by some supply chain disturbances. We do face a very volatile market that we operate in, and that continued to cause headwinds in the market and also for us at Boule. India is a very important market for us, and we have some 12,000 instruments installed there.
More and more, we see that the Indian government is favoring made in India products in public tenders. For that reason, we've had a longer discussion on how to establish local manufacturing in India. In this quarter we have now signed an agreement with one of our larger partners to have contract manufacturing of reagents in India. The agreement was recently signed, and we are now implementing and transferring local production of reagents to India. We expect that we will ship products locally produced in India in the third quarter next year. Another important milestone for us in this quarter was to fully secure preferential rights issue SEK 150 million, which I will address later in this presentation.
I'm also happy to notice that we are making progress in our new development programs, and we are now building prototypes of our advanced 5-part system that will be the first release of this, on this platform. The prototypes that we're building now will be used verification and validation during 2023. Let's look at the financials for the last quarter. Okay, I think I was out of sync there with this slide. Let's move to the next slide. Look at the financials. Net sales reported was SEK 126 million, which is 12% above last year. However, if you look in constant currency, our organic growth was -8%. That can partly be explained that we had delayed deliveries, due to a production stop due, in August, where we lacked some electronic components.
A large portion of all the instrument sales was in the last month of the quarter. We have also seen that in some markets, the development of the local currency has not been very favorable, so there has been a very high landed cost for some distributors. The strong dollar in combination with our price increases that we implemented mid this year has reduced some and delayed some of the investments in new instruments. If you look at the gross margin, we landed at 41%, which is 4% lower than last year. However, it's 2.9% above where we were in the second quarter this year. Contributing to this lower margin are some one-time items.
One thing that continues to burden our gross margin is that we buy components, particularly electronic components on the spot market. That was like SEK 4.5 million in the third quarter. We also had a reclassification of some articles by the Swedish customs for the period of July 2019 to April 2022, in which we took a cost of SEK 1.1 million during the third quarter. It is unfortunate that we have really worked hard, and we did increase prices, but we could not fully compensate the temporary higher production cost. We saw that our operating margin decreased to 4% in the period. Despite that, we have continued to execute on our strategic plan and are continuing to invest in a new technology platform.
If we zoom out and look at how sales and revenue are developing, year by year, you can see here that our consumables sales, which is the red line here, is continue to be above the pre-pandemic levels and has been like that over the last year. As you can see, we have had, you know, also historic drops in terms of instruments shipped per quarter. In this quarter, we had a significant drop, which can partly be explained by this production stop, where we lost some business, and we could not catch up in the end of the quarter.
The good thing, however, is that the price increases, the strong dollar has maintained the instrument revenue at the same level as in the second quarter. If you look at how sales has developed for the various product groups, you can see here in this bridge that all products show growth except for OEM and CDS brand, which we believe is a quarterly fluctuation. OEM and CDS brands has grown by 26% this year if you look at the first nine months. As you can see, it was mainly consumables that drove the reported growth this year, this quarter. If you look how the different regions has developed, we noticed that it's really the strong U.S. dollar that drive growth in general.
The main growth reported in the third quarter came from Asia, and it's very good development in Indonesia and Pakistan that contributed to that. Despite terrible war in Ukraine, we see that Eastern Europe remains at fairly high revenue level, and this is driven by our local production in Russia that more and more operate independently, and is developing well despite, you know, the very difficult business environment. In Africa and Middle East, we had some delays in business in Egypt due to restrictions in payments of foreign currencies from Egypt. Overall, as you can see, we see stable growth across all regions. If you look at the profitability, the reported revenue was mainly due to the positive currency effect.
Our gross margins continued to be pressured by the supply chain disturbances and of course also purchases in the U.S. dollar. This is partly compensated, but not fully by the increased prices that we implemented to our distributors in mid this year. As we discussed there were some one-time effects on our gross margin, both spot purchase due to lack of electronic components, but also this retroactive customs fee, which affected both gross margin and EBIT of course of 4.4 percentage point. OpEx has increased. This is partly also explained due to the strong U.S. dollar as we have fairly large operations in the U.S. and we do a lot of component purchases in U.S. dollars.
OpEx also includes redesign to mitigate the component shortages, and we have also been more active in the last quarter at exhibitions and has traveled more. We have also strengthened the organizations in particular in terms of improved compliance. We had an EBIT of SEK 3.6 million, which is equivalent to an EBIT margin of 2.9%, which we of course are not at all happy with. We are working to improve that situation. Looking at cash flow, the working capital are affected by the production stops and the increase in working capital is mainly due to decreased accounts payable and also slightly increased inventory of some SEK 2 million.
We have continued to invest, even if it was at a slightly slower pace than the previous quarter, but we invested SEK 15 million in a new product platform, and we have also extended our check facility and increased utilization of the check facility of SEK 18 million. Overall our cash flow was SEK 18 million. Looking ahead, we are in a market which is very volatile and it's very difficult to predict exactly how things will develop. We noticed that we had a good order intake at the end of the quarter. We also noticed that we continued to have disturbance in our supply chain, and that, you know, we continue to have this increased cost due to purchases on the spot market. We also start to see some effect of the inflation.
We are working to improve and mitigate the risk in our supply chain and one example is that we have built buffer stock to some of our suppliers that we have in China to avoid production stops if there will be further lockdowns in China as one example. If we look how business are developing in the various regions, we see that our U.S. business is developing well, a lot thanks to our strong OEM business, and we expect that business will continue to deliver and perform over the coming years. In Asia, we see that there are opportunities outside India as well, and in many of the South Asian countries there are opportunities. I think that was proven in the past quarter where we had Indonesia and Pakistan that delivered very well.
For India, which is an important market in Asia, the local manufacturing will be very important going forward. Eastern Europe, there is a lot of question marks of course. There's no end of the war in Ukraine in sight, and the sanctions and the business environment in Russia will continue as it is. Our products are not under sanctions, and our business there in Russia is operating independently. But clearly there's a risk that that business will decline. In Middle East and Africa, we had a weak quarter, but we see that there's a pipeline building thanks to our increased local presence and also the new distributors that we signed up last year. Clearly, if the market develops well, there are a lot of opportunities for Boule.
However, we don't know how the weak economy will impact public tenders and in various countries. We also see now that there has been some central banks that has limited payments temporary in foreign currencies as there is lack of dollars in several of the markets where we operate. We continue to deliver on our strategic plan, and Boule really want to make a difference, and we want to reach more patients and deliver decentralized diagnostics to more people around the world. There are some temporary headwinds that we are dealing with every day. The supply chain challenges has really been something that we have had to focus a lot on in the past year, and we will continue to focus on going forward.
We see that there's a lot of geopolitical instability, which create a very volatile market, both in Europe but also around the globe. We are learning how to deal with that going forward. We also notice that there's been a shift in regulatory landscape. We had to invest, and we had also to focus on compliance. We introduced the new IVDR regulatory framework in all our products, technical files, this past year. The expenses towards the IVDR compliance will reduce. On the other hand, we had an inspection by FDA in our U.S. Operations this summer, and they had some observations, and that we are now addressing, which means that we continue to have cost and focus on improving our compliance going forward.
Our operational priorities going forward is, of course, a lot of focus on our new product platform and bring the new first products to market. We working towards improving our profitability and cash flow. We are increasing our marketing and sales activities, and a lot in focus is to work with our working capital and also may mitigate the risk that we have in our supply chain. A lot of focus also is on our developing our organization and the people that we have in the organization that is doing an excellent job in dealing with all these difficulties that we see in this market right now.
I'm very pleased to see that we have a new Senior Vice President for People and Culture, Aishat Bislieva, that joined us in October, and I very much look forward to work together with her to develop the organization going forward. An important milestone for this quarter was the fully secured right issue that will bring SEK 150 million to the company. I would like to thank the existing shareholders for the trust and the support of our business. The right issue was approved by the extra general meeting last week, and the prospectus will be published later today. The subscription period starts on November 14 and ends at November 28.
Each existing shareholder of Boule will get the preferential right issue for one new share for every existing share, and the subscription price is set to SEK 7.7 per share, which is 35% discount at the closing price at the end of September. The right issue is fully secured by a guarantee by some of our major shareholders. To sum up, it was a challenging quarter, and we're not satisfied with the financial result, but I think we managed a lot of things anyway during the quarter. The growth that we reported during this quarter was thanks to strong U.S. dollar. It's also great to see that our business model is working. We continue to see that we have stable recurring consumable revenue from a large installed base.
The gross margins are held back by supply chain disturbances mainly. If we can just fix that and if we get some improvements in the market in general, we know that our gross margin will improve significantly. However, going forward, I think we need to continue to be agile and ready to mitigate various situations that happen in this quite volatile market that we operate in. I'm also very happy to see that we now have secured financing to modernize our product platform and that we can continue to execute on our strategic plan going forward. Thank you very much for your attention, and I open up for questions. Do we have any questions?
Yes. Hello, Jesper. Can you hear me? Hello?
Gonzalo, I don't hear you.
Can you hear me? Hello?
Hello.
Hi. Can you hear me now? Yep.
I can hear you now.
Great. Thank you very much for taking my questions. I have a couple of them. My first question is on your reported sales. You're mentioning that the low sales are related to fewer instruments sold during the first two months of the period, but not as bad during September. How is the situation with the shortage of electronic components? I mean, you mentioned that you're building stock of components, so could we expect the lost or delayed sales from Q3 in part transfer to Q4 numbers?
I think in terms of shortage of components, it's looking brighter now than it has done for a long time, but I mean, nothing is guaranteed. Right now, we don't see any short-term issues with components.
Okay. Thank you. A second question is on the investments that you have in your new platform. I mean, you mention in the report that you have reduced the investments there to SEK 15 million in this platform. How is this going to move forward? I mean, you mentioned that this is temporary, but how should we understand this? Are you planning to increase the investments there until launch, or should this gradually slow down before launch in the next quarters?
I think we plan to increase it again and be at the level where we were in the second quarter. In the phase we are in right now, we are investing in prototypes. We are investing in production equipment. We are investing in clinical studies. If you look at the use of proceeds of the rights issue, you can see that we'll continue the development, which means that we are, you know, finalizing the development. A lot of that is, of course, focused more on production aspects. What we will add to this activity are the validation studies and the clinical studies, which will consume more money going forward.
Okay. Thank you very much.
Any more questions? Seems that there are no more questions. I hope that you are able to.
Hi. Jesper.
If there's no further.
Christian.
Christian, please.
Yes. Good morning. I have a couple of questions, please. I was wondering if you could elaborate a little bit on the production stop that you had in August. How many instruments do you believe were affected negatively?
It is very hard to say, but we know that we lost some business due to unavailability of instruments. It was a bit unfortunate. If, as you remember, that we had production stops also in the second quarter, and then we had a planned production stop in July, you know, due to the vacation period. That followed the production stop in August. Some 80% of the instruments that we sold in the third quarter was actually shipped during September. It was a lot of catch-up towards the end of the quarter, which is.
Okay.
is not really what desired, you know, nor by us, nor by our customers.
Okay, great. I was also wondering if you could comment on the average sales price of your instruments that are on a very high level now. I think it's on the highest levels since 10 years back. How much is related to the price increases and how much is related to the currency effects?
That varies from market to market, but I mean, about one third of the higher ASP is related to price increases, and about two thirds are the stronger dollar. In particular stronger dollar, but also the euro is stronger.
Okay. Excellent. Thank you very much. That's all from me.
Thank you very much. We have Johannes Vilas.
Yeah. Hello. Do you hear me?
I hear you loud and clear.
Thank you. My name is Johannes Vilas. I'm a private shareholder. I have a question about the lost orders in this quarter and the production stop. What happens with these orders? Do you lose them to competitors, or do the customers postpone the order so you can recover them later? The second question is, do competitors have the same problems with the component shortages as Boule has had this quarter?
In terms of lost orders, I mean, it's very, very difficult to judge, you know, based on a single quarter or intelligence. I would say it's a mix. Clearly there are some delayed investments, but we also know that there are some customers that has purchased from other suppliers. I would say the majority is more delayed investments. In terms of how other players experience the supply chain issues, I think that's also varies from time to time. We know that several suppliers in all industries are experiencing similar problems. We know that suppliers from China and Japan are maybe, you know, purchasing more components domestically.
They could have some flavor of their operations compared to us that rely on components more from global sources.
Okay. Thank you.
Thank you very much. Good questions.
Jesper, I have another question, please.
Please go ahead.
I'm little bit curious about the development in Eastern Europe. You increased your sales there compared to last year.
Mm.
Is that Russia improving or increasing or are there any other markets that are advancing? Just if you could elaborate, please.
The main growth actually comes from Russia. It's the local manufacturing to the domestic market that is contributing to that growth.
Is that related to region's sales or also instruments?
It's both.
Both. Okay. Do you have any challenges in, you know, getting the money out of the country?
Yes. I mean, let's be clear here that, you know, what's happening in Ukraine and Russia is really terrible and very, very tragic. We are providing healthcare equipment and none of our products, none of our customers nor are we under sanctions. You know, in reality, we should be able to continue to do business, but it is a very difficult business environment. One of the issues we have is that our bank is not accepting payments from Russia.
We have very long discussions for every payment with the compliance department of the bank, even though that we have taken measures to make sure that we follow all sanctions, that we for every shipment we check both the products, all of the customers and against the latest sanctions list, just to make sure that we are fully compliant with all sanctions.
Yes, sure. Do you see any implications on your cashflow from this development?
Yes, we are building up cash in Russia that is more and more, you know, in operations and that cash is stuck in Russia now. We have ongoing discussions with our bank how we can get payments from Russia.
Okay, great. Thank you very much.
Thank you. If there's no more questions, I would like to thank you for the attention and interest in Boule, and wish you a very pleasant day. Take care. Bye-bye.