Earnings Call: Q4 2020

Feb 3, 2021

Welcome. This is Jesper Soderkruis. I am the CEO of Bull, and we're here to present our quarterly results for the fourth quarter and the full year 2020. I'm here in Sponga at the GOL headquarter together with our CFO, Kristina Rubinhard. Before we start the presentations, a few practical matters regarding questions. You can submit them in the chat function, and you can add them during the presentation, and we will respond to them at the end of the presentation. So please send your questions, and then we will show them and respond to them after this presentation. So 2020 has clearly been a very challenging year. And near patient diagnosis has been impacted by COVID-nineteen. The demand has really not been there. Also, instrument sales has been difficult in spite of new digital method. But before we dive into the results, I want you to do a little recap of BOL. So BOL, we provide a blood diagnostic for the near patient segments. We have a strong hematology in hematology background. We have a large active installed base of about 29,000 instruments. A normal year, more than 130,000,000 tests are done in the 100 countries where we are represented. So even if 2020 was a challenging year in terms of sales and profitability, we have used the time to improve and prepare ourselves for the future. And in the fourth quarter, we passed a very important milestone for Bull for the our new product platform development. During the past years, we have strengthened our organization, particularly in R and D, product development, QRA and operations. Thanks to that, we have made significant progress during the year. And very importantly, we passed this milestone, where we have now defined a clear path forward for our first release on the new platform, a five part instrument, a very advanced that will broaden our portfolio. We have made design choices, and we also made some technology choices, where we will use our proprietary laser technology instead of the technology we acquired in 2018. With this five part new five part instruments, we'll get a more broader, more attractive portfolio. We will address a larger market, which have a higher growth than our current market. Over time, we will also release other new instruments on this platform. If you look at our business, you can clearly see that we have been severely impacted by COVID. Instrument sales has recovered after the dip we had in the second quarter. But we see also that the testing went down and then our consumable sales also went down. So once the market open up again, we will see that both instrument sales and consumable sales will recover. We do have an active installed base of around 29,000 instruments. With around 3,000 instruments that we sold this year, what it really means is that our installed base is flat year over year, where we have been used to our growth. So even if it's been a bad year, I think we still have a very good position to get back to growth and profitability once the demand return. So in when we presented our third quarter, I mean, I think there was some optimism in the market, and we had very positive signals. That demand and optimism went down as the second or third wave of the pandemic hit many countries. If you now compare our fourth quarter compared to 2019, which was a record year and a record quarter, our sales are down about 23% in constant currency. Our gross margin dropped by 2.3 percentage points, and that's mainly driven by the low utilization in our manufacturing. As I said, we took some design choices in our platform development, which meant that the technology that we acquired in 2019 became obsolete, And we said, chosen the proprietary technology. That's a major step forward. But it also triggered a write down of that asset of €40,000,000 which we take as OpEx in the fourth quarter. Hence, we have a very poor operating margin, even though that's a noncash effect. If you look at our operating cash flow, we generated $24,000,000 in the fourth quarter. And then we did investments in the new platform of around $11,000,000 during the fourth quarter. Here you can see how sales how COVID-nineteen and the pandemic hit our sales. So basically, we see that there's slow sales in all product areas, both the instruments because it's very difficult to get out to the hospitals and the health care really have other priorities. But we also see lower consumption of reagents due to the lower testing done. As I said, there was an upturn in the third quarter, but that optimism declined. And actually, in the fourth quarter, we land 6% lower on sales compared to the previous quarter in 2020. We basically see that all markets are impacted. So as you know, this is really a global pandemic. So what does this do to our profitability? So this is an EBIT bridge for this quarter versus fourth quarter twenty nineteen. The main effect on the EBIT is, of course, the lower sales. And of course, what you see as we take this write down of the acquired technology as OpEx, that also hits the OpEx line with 40,000,000 But if you look at the adjusted EBIT margin for the fourth quarter, it's minus 1.6%, which corresponds to an EBIT margin of minus 1.7%. This is, of course, below our standards, and we don't reach our full potential. But it's been a very difficult quarter in many aspects and related to the pandemic. So if you zoom out a little bit and look back on all of 2020, I think despite the pandemic, we have instead focused on things that we could impact, and we have made good progress with many of our strategic initiatives. Prior to 2020, BOL has been seen a positive growth trend during many years, and that trend was now broken. We think that this is only a bump in the road. But with three quarters that heavily impacted by COVID-nineteen, it really has a big effect on our sales. Net sales in constant currency is down about 18%. But I must say that I'm really proud and very pleased with the progress we've made with our strategic initiatives, not only related to the important progress we've made in the platform development, but we have also worked with improvements related to our operations. We have strengthened our QAR organization. We are preparing ourselves for the new European regulatory framework, IVD. And we are establishing local production in Russia, which we plan to start up at the end of the first quarter this year. If you look at our results, we have these nonrecurring items. We did the write down of the associated company BioSurface in the second quarter, and we did the write down of the technology that I discussed earlier in the fourth quarter. So net sales for the full year, 400,000,000 versus the SEK $499,000,000 we had last year. Gross margin, 44.2%. That's slightly below last year. Our operating cash flow for the full year is SEK75 million, and the adjusted EBIT margin for the year is 8.5%. The Board proposed a dividend of SEK0.55 per share to be decided at the general meeting in May. So looking at the profitability for the full year and compare that to 2019. With the write downs, we had an EBIT of 5,900,000.0 If you exclude the write downs, the adjusted EBIT is $34,000,000 which I said as corresponds to an adjusted EBIT margin of 8.5%, which really show the strength and the resilience we have in our business model. The lower profitability is mainly related to the lower sales. In terms of gross margin, we're down 1.1 percentage point, and that's mainly driven by low utilization of our in our manufacturing. We have done savings in admin and sales and marketing. We've done less travel. We haven't participated in trade shows, etcetera, due to the pandemic, and we have replaced that with a number of digital initiatives. So overall, it's been a very difficult, very tough year. But we really have used the time to really prove internally and prepare ourselves and invest for the future. So I must say I'm satisfied with the achievements that our partners, our distributors have managed in this difficult time and also to the staff in bold that have worked through this very difficult time. If you look at our financial position, we talked about the cash flow. The operating cash flow was CHF 24,000,000 in the last quarter and 75,000,000 first full year. We have done large investments in our new product platform, but also done other investments. Our finances also includes a payroll protection loan of 11,000,000 and that recognizes revenue in the third quarter. Overall, our available liquidity has increased by SEK5 million this year. So going into 2021, I think we have a fairly good position going forward. So I guess everyone is eager to see how 2021 will play out. If you look at the priorities and clearly, some things we can control and some things we can control. If you look at the market recovery, I mean, the recovery will really be driven by declining spread of the virus and ease restriction in our markets. I mean, clearly, we think there's a, you know, continued uncertainty in the first half of this year. But let's see how much, you know, the vaccine will kind of slow down the spread and how quickly markets will open up. I think the challenge that we've seen during this past year and also see right now is really related to transport and logistics. And there is lack of capacity, and pricing has gone down and lead time has gone up, etcetera. We haven't seen that much of problems with the supplies of components. But what we hear from other industries is that there is a potential risk for component supplies. However, I mean, even if the fourth quarter was really, really tough, we see some positive signs of recovery now in January. So let's hope that it's that's how it will continue. So if looking at what we are doing in full now to make sure that we quickly and with full force get back to our customers and start sell again and drive our profitability. We will drive a lot of digital marketing initiatives. We will make sure that we will enhance our support to distributors, so make sure that the instruments that has been turned off during the pandemic, when physician office lab etcetera have closed, that they really get up in operation quickly. Of course, we look very much forward to start local production reagents in the first quarter. We also announced an OEM agreement in August, and the production to that customer will ramp up here during the first half of this year. And then, of course, very importantly, we're now in the phase that we regarding our new product platform, we will industrialize that product during 2021. So with that, end the presentation and open up for questions. So I have one question from Victor at ABE. Many moving parts in Q4, what can you say about underlying improvements made in 2020, primarily in terms of production efficiency and supply chain efficiency? Will you have better leverage when volumes increase? I mean, the answer to that question is yes. We have made significant improvements. And so I feel confident that when demand returns that we will have the capacity and capability to ramp up fairly quickly. Next question, Christian Lee at Pareto. The Board's proposal to reintroduce dividend signals improving outlook for 2021. Will this mean that you plan to wrap up your OpEx again? Well, I think what it signals is that we look very positive to the future. I think the OpEx, clearly, with some more marketing activities, etcetera, the OpEx will probably increase during the year. But I think what I I think the main thing is more in the investments that we will do now when it relates to kind of industrializing our new platform. So it's more the investments that will increase latter part of the year rather than the OpEx going forward. There's another question, Kristin. Can you talk a bit about the size of the Prokron you recently won in India? Should we expect softer margin to this delivery? So I think it relates to probably what we mentioned in the CEO word that we won some business in the Blood Bank segment in India. I mean, that's not a very big business, but it's significant because it's we open up a new segment where we haven't been before. So it will not have a big effect neither on revenue nor on our operating margin. Is there more questions coming or? Sorry. Victor again. So please elaborate a bit on the more potential of the Blood Bank segment. Is this a global opportunity and specifics regarding competition? I think it remains the same. We have now started open up. But I think the bigger opportunity, it is really in Asia. And it's not a super big opportunity compared to the other growth opportunities we have. But I think it's important that we address these specific segments and really learn. So I think it's a break in, but I don't think this is not going to be the big thing. But it's important because we actually get a better presence, better understanding of the overall market in India. Should I scroll down further? Thank you. So here's Chris. Thank you for the presentation. Could you please elaborate more on the revenue impact of the new five gs platforms in terms of volume? What will be key functionality and key selling points? What will be produced in Russia? And what's the impact? So if you now look at we have some five part DIF instruments already. But I would say they are more low end. But the new development that we're adding that we will have a more complete five DIF product offering. And this instrument that we're developing will be an advanced instrument that will be very reliable, very easy to use, and where we also have we can also manage a lot of tests per hour. If you look at the five part diff market, it's significantly smaller than the three part market, where our main revenue comes from today. But it is a market that is growing faster than the three diff market. And also, the consumable used in the five gs is has a higher price and higher margin. So it's clear that we will enter and we will have broader five part offering, and we will enter a market that will increase our overall market, and it will grow faster. So it should have a significant improvement on both sales and revenue two years from now. And I think the key functionality and key selling points, I mean, Bull, our brand, we are well known for high quality, very reliable, accurate instruments. And I think this is really what is needed also in the future as there is lack of skilled personnel. And the instruments that we have are really easy to use, very reliable and very accurate. And we will also add, you know, new measurements like retics to to this instrument as an example. And then, of course, this is a new platform where we will also release other products that will replace our current products in the portfolio. So going forward, it is really important and a major improvement in our product offering. So for Russia, we will make reagents. And the impact is that are two actually. In tenders, local production is favored. So you actually get a get a bonus, an incentive if you have local production. So it will help us win more business, and it will also help us with improved margin. And here, Victor has the question, how do you assess the trend for global market share? How has it developed in 2020 in your view? This is a question that is very difficult to really know for fact. I think there are so big movements. Things are changing so rapidly and that I think it's hard to do have some specific measures. We have talked to distributors. We have compared ourselves to peers. And more or less, everyone see around the same loss in sales as we do. So I don't think that the market share has shifted a lot due to the pandemic. Think but going forward, I think it's very important that you very quickly get out to the market, you're very active in marketing, so you're really first on the ball and really helps distributors, make sure that you get involved in the tenders when they come out. So I think moving forward, I think it's extremely important that we are very moving fast, being aggressive and be very present in the markets. And of course, we will watch the market share very carefully. So what did your new customer find in Tresiba board selected for reagent manufacturing? So I think you Martin here probably relates to the OEM agreement that we signed this summer, which is a ten plus ten year supply agreement for reagents. First of all, Bull is a company, one of few, which really manufacture both the instruments, the reagents, and also the control and calibrators. So I think we have some unique expertise when it comes to developing new reagents, new controllers. So I think that's one thing. And we have worked very closely with this customer during several years as they have developed a new instrument. And so and and they it's really been co development where they have developed instruments and we have developed reagents to fit their technology. And also, I think this is a it's also an old relationship. We have worked with this customer in the past. I mean, so they have really developed themselves or buy, and they trusted both, both due to our R and D expertise. But I think also very importantly, quality and the capacity and the capabilities we have in reagent manufacturing. So right now, these products will be produced at our plant in Florida. But I think they have global ambitions. And with our manufacturing footprint, with manufacturing now in both U. S, Sweden and Russia, that's they also see that as an upside. And we have, in particular for the controls and calibrators manufacturing, we have automatized that. So we can really ramp up that volumes very significantly without long lead times or big investments. I hope that was an answer to the question. There's another question from Martin. Are there further similar manufacturing rate opportunities available for bol in the future? Yes, there is. And we actually very are recently appointed a person that are addressing that specific segment to go into look for new business. And many of our OEM clients today are U. S.-based. I think there's also an opportunity to address clients in other parts of the world. Of course, this type of business has long lead times, but it's also but once we win those contracts, they are very rewarding because they give us five, 10, 15, 20 year olds long supply agreements. So it's great stability and it's great recurring revenue. Any more questions? Okay. Then I would say thank you very much for the question. Thank you for your attention. It's been it's not been a good year in terms of the market situation. But we I'm optimistic about the future. I think once the market will turn around, I think we have a strong market position, and we're really well prepared to leverage the opportunity that will open up, hopefully, very soon during 2021. That remains to be seen. Thanks a lot for your interest or questions. You're always welcome to reach out to myself or Kristina if you have further questions. And have a nice day or evening. Bye bye.