Welcome to CellaVision Q1 report 2023. For the first part of the conference call, the participants will be in listen-only mode. During the questions and answer session, participants are able to ask questions by dialing star five on their telephone keypad. I will hand the conference over to CEO, Simon Østergaard. Please go ahead.
Thank you very much. Thank you everyone out there for taking the time to listen in to our Q1 report. I have CFO, Magnus Blixt, with me, and we'll be happy to answer any questions that may arise after the presentation of the report. The quarter in brief. We landed a revenue of 139 million SEK, which translated into an EBITDA margin of 25%, 35 million SEK. This was not news to the audience. This is what was communicated a few weeks back in a special announcement. We found it appropriate to announce our results a little bit in advance for this quarter since we've had three quarters in a row that were relatively soft.
The revenue decline was consequently translated into also the EBITDA margin of 25%, which is lower than our financial ambition. The primarily highlight, or you can actually call it lowlight, but the reason here is the inventory reductions that we've been faced with from our distribution partners. Here we claim it's due to an uncertain economic climate taking full effect. I think we've gained a lot of insights into the inventory levels with our partners, and we are confident now that the program that was launched pretty much last quarter has come to an end in the sense that the inventory levels are now down in EMEA and Americas at decent levels. A little bit more ambiguity around the situation in APAC, especially Japan, when it comes to inventory level.
I think it's also important given the fact that inventory is really the key prime reason for the low top line. It's important to put a perspective on our top line and our compares. We've learned that the inventory levels have actually increased over the course of the last 1.5 years coming out of the pandemic era in these jurisdictions. The prime driver for that has been the material supply situation that we were faced with about one year ago and a little bit longer, where we had electronic component shortages across multiple industries, but also facing our business obviously. That has led to a little bit more increase on the security stock levels over the course of the first half, so our compare.
So maybe our revenue numbers a year ago were a little bit, I shouldn't say inflated, but were impacted by the stock level build-up, which actually took place for a little bit longer as well. Then in the second half, obviously, the interest rates went up and that gave rise to increased attention on the cost of capital and by then also working capital, which is why we've for the last half a year, we've been seeing that in our order intake from our partners. The growth has been restrained for this reason and also we see a relatively weak quarter in APAC.
We see the COVID implications in China is probably the main driver for the unclear outlook in that region. On the positive side, if we look at our strategic direction, we're really gaining share in EMEA with regards to converting to RAL branded reagents. Our journey of registering labeling our classic stains, the product labeling all the evaluations that leads to commercializations across APAC is taking place throughout the various countries as we communicated in the previous report. A bit of news here. We've talked a lot about our new strategic pillars, for this report, we find it appropriate to announce that the resources that we invested in our strategic pillar around specialty analysis is paying off.
We're proud to have developed a bone marrow module. We have a first version that will be demonstrated and has been demonstrated recently for clinicians and lab personnel. This is something that we will demonstrate at the ISLH and the AACC trade shows in May and July. We will also start our clinical validations this year. We are aiming for getting CE mark next year to be launched. This is a really tangible outcome, and this is really where we see an opportunity for the company to drive our DC-1 adoption of the small instrument, but also for the large labs where the bone marrow analysis is primarily conducted. That's exciting.
We do have exciting news, even though we've obviously had some headwind on the actual results. Organic growth, so SEK 139 translates into -21%, because we had FX, positive FX impact of 7%. We landed a gross margin of 70%. It came up from Q4, where we were at 67%. We're starting to see the price increases taking effect here in Q1. We also had a favorable product mix. But primarily the price increases is really paying off here.
On the operational side, we, or on the operating expenses, SEK 0.52, so SEK 72 million. I think where our admin costs are flat. On the sales and marketing is where we've increased from SEK 28 million up to SEK 32 million. The majority here is actually, it's currency effect because most of these costs, they sit outside of Sweden, so it's EUR and USD. It's a bit of inflation. There is a proportion where we've increased, taking on board a bit more cost for conferences. Also the ISLH comes up in May, has been booked, most of the cost in Q1. We also have expanded with a person in Singapore to drive our APAC operations. Coming back, as said, EBITDA, SEK 35 million.
If we look at the R&D spends, SEK 34 million. We capitalized SEK 14 million, so we have traction on our development programs. That's what is deducted. In the P&L, you will see SEK 20 million booked as R&D costs up against the compare of SEK 18 million. A slight increase and which is in line with our strategy. Looking at the cash flow, we have cash flows from our operations of SEK 31 million, and that translates into an operating cash flow of SEK 19 million. We have also had an inventory build up ourselves due to the lower sales. We're not in a situation where we can just stop manufacturing overnight.
However, we are working throughout the rest of the year to drive down our inventory level as sales picks up, and also by adjusting our setup with our manufacturing partner. On the investment side, the cash flow from investments is minus SEK 23 million. Here you see also an increase. We had, as mentioned, SEK 14 million, that is being capitalized for development programs. We also had SEK 9 million of the investments, which is primarily related to our manufacturing expansion in France, Martillac. We are building our factory and the program is running according to plan and will be done over the summer. That translated into a total cash flow of minus SEK 15 million.
That should be seen in the light of also a strong balance sheet. We're now down to long-term debt just over SEK 50 million, SEK 53 million, and we have our cash at hand is SEK 93 million. Let's take a look at the regional highlights here. Here you see the growth rates up against the compare. Obviously, a tough compare in, or sorry, a very low performance out of Americas with -29%. I would say that pretty much the gap from 59 to the 82 is equivalent to what we estimate is inventory. We have been very hard hit by inventory reductions, especially in Americas.
The underlying funnel is something that we worked with our partners around, and it looks healthy. There's a healthy outlook for orders from hospitals that are placed, and that leads to our comment that we believe there is a positive outlook for orders in 2023. I think also the stock level here should be seen. I think I mentioned that, but especially for the U.S., we know that there has been some level of stock built up over the years as a result of the situation we've been on, as I alluded to. Looking at EMEA, it's more flat. We've both had a bit of currency tailwind, but we actually we've seen traction also on our hematology reagents.
This is where we have the majority of our reagent business. We're really seeing the RAL-branded products as mentioned. We landed the quarter at SEK 65 million, just above the comparative quarter from last year. We're getting good feedbacks both in the trade shows, but also when we visit customers. The inventory reduction was also present in EMEA, but to a lower extent than what we have seen in Americas. For APAC, our sales were down to SEK 16 million. We did have some sales, obviously, a little bit of reagents, but otherwise some instruments were shipped towards China. I think it's still a challenging outlook. It's difficult to operate.
It has been very difficult to operate in the area. Especially in China, the situation has been prevented from customer visits. We hope that the clearing out and the normalization, even though they're still struggling with infections, but we hope that throughout 2023, we will see some level of normalization. For the next quarter, we will have a tough compare coming up. We had a large shipment for China in Q2 2022. That is really what hit us in Q3. This was specifically the large shipment that was not in-installed due to the lockdown, just to remind the audience that in Q3, we only did SEK 8 million in out of APAC. We had nothing going to China. This means the upcoming quarter will be a tough compare for us.
If we cut the numbers per product group, really as you can see, the inventory management, of course, hits the instrument where we have minus 23% growth. We are still confident around the outlook for the business, except for our uncertainty around the pent-up demand for APAC. We Last year, we launched the DIFF-Line as we were ready with it. We've gotten direct end user feedback, and there is a certain and explicit demand for standardizing the workflow within the small to mid-sized laboratories. I think what we are also learning now is that our partners are really ready to launch. It's been trained and funneled through our partners sales forces.
There will be a rollout there, and we think and believe that will fuel standardization of the workflows across these labs. I think this is really good, seeing both we had the annual volume growth of 45%, DC-1, but getting the DIFF-Line together and then pairing that with all our labs, where we have a significant installed base, and then glue that together with our Remote Review, that is what builds the ecosystem that we talk about when we talk about strategy. We do believe that we have such a good traction also for for the target audience for IHNs. In the U.S., where you have these Integrated Health Networks, we think this will be a game changer.
Despite the low numbers for the quarter, we are very convinced that we are doing the right things and we have the right solutions to actually plaster our glued solutions across lab sizes and then also tailoring that with more content like bone marrow will be successful. For the reagents, we actually saw increased growth here, 23% on the hematology reagents. Very healthy double digit. As we've communicated previously, we're seeing that continuing in our large region. We are actually pleased in APAC to both with the conversations we have, but knowing that our products are being evaluated in labs.
We certainly expect that will translate into to the commercialization, full-blown commercialization effort across the various countries that were communicated, of course, invoices. We're confident that we are rolling out, so that will be an appetite to convert to RAL brand stains, and that will primarily happen as the stainers are exchanged. The software was down as well. That is a function of the low instrument sales, so minus 17%. Of course, we still have significant sales of others, and that's also because the spare parts and the consumables are a function of our installed base. There is a recurring revenue element that keeps on bringing or keeps on coming in.
The key takeaways here is certainly that the headline is that we really believe and have trusted in the data that we've seen that the inventory reductions is what has taken our top line down. We have fostered this has sort of fostered a lot of attention also on the high interest rates and the low working capital with the whole economic climate. We expect orders to improve throughout the year. The level of transparency is most limited across APAC, but we believe that over the years, as I said, we will see China clear out and hopefully we'll see Japan as well. It is a bit ambiguous to us for the time being.
We are very confident around our strategy for the different regions and what we do together with our partners to roll out our superior stains. We are pleased to see the translation of our price increases improving our gross margin, since we've had some tough price increases and inflations on the material cost. Good to see our compensation is starting to kick in. We have obviously also, in light of the situation as we always consider how we spend our money, but we have increased focus on our cost control, both with regards to hires, the use of consultants, and our variable spends in general. We're still committed to invest in R&D. We think we have a solid plan.
We are solidifying it together with our partners. We wanna protect our leadership position within hematology because we believe that the differentiation is the response to the entire situation and to actually obtain the continued leadership within this niche business. With that, I think it's, we might as well take some questions and have the conversation going. I welcome any questions you may have.
If you wish to ask a question, please dial star five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial star five again on your telephone keypad. The next question comes from Josie Vilter Person from Nordea. Please go ahead.
Hello, Simon. Thank you for taking my questions.
Hi, Jose.
Now, Hi, now that we have entered the Q2, do you already feel that the sales momentum is improving already as a result of the inventory normalization, or do you think that this is more tilted to the end of the quarter or beginning of Q3?
A fair question. I would say overall, we are building confidence and seeing orders are coming in. I think we have a little bit better outlook than what has been the situation historically. It looks promising.
Do you still think it's more tilted to the end of, or to H2?
Oh, sorry. H2. I thought you said at the end of Q2. Sorry. I think we will probably come back to our normal situation. Even though we don't have outlook for H2, typically for our business, we have a pretty decent first half, and then we have a low Q3, and then we end up with a pretty strong Q4. I think that is probably the normal pattern. We will be more in line with our partners after this journey we've been on, discussing and seeing the inventory levels and so forth. I think we will come back to the sort of the normal rhythm. That's our expectations.
Of course, the loss that we've been faced with here in Q1, is relatively hard to recover unless, safety stock levels are increased again, but we see no specific reason why that should happen.
Okay. That's helpful. Thank you. We saw some gross margin improvements in the quarter. Do you think that the price increases have already showed full effect, or do you think, do you expect it to improve even more in the coming quarters?
Yeah. I wouldn't say quarters. I think, they're certainly affecting Q1. There might be a little bit more in the pipe Q2, because orders that were placed for Q1 before the 1st of January were old prices. I think you will see full effect in Q2 and not going further from there. I think it's also a function of our product mix, both across type of offering but also across customer grid.
Okay, thank you. On the reagent sales, happy to see that you're showing improvements there. What do you think is the reason behind the reagents growing compared to instruments and software?
Yeah, I think there is an acceptance of the RAL stains for certain markets, like France. It's been very mature. I think we have a extremely high market share. Our partners are, you know, positioning the reagents also outside France, and I think that's what you're seeing effect of. I think there's an acceptance also of, or we are supported by the fact that the IVDR kicked in in May 2022, and our products are IVDR compliant, which means that there's an extra pull for our reagents and maybe substitution of other suppliers who didn't make the cut and may have retracted from the market.
Okay, thanks. That was all for me. Thank you. Thanks a lot.
Perfect. Pleasure.
The next question comes from Ulrik Trattner from Carnegie. Please go ahead.
Thank you very much. A few questions on my end. Great to see that you have moved forward with your specialty analysis instrument and bone marrow being the first test. I hope you could help specify when in 2024 you're expecting this to be on the market and approved, as well as if you could clarify what classification under MDR or IVDR it will be. Again, is this to be considered a new device, or do you have any references in terms of a regulatory perspective?
Yeah. We expect it to be CE IVD marked. I think when we say 2024, I think it's probably good to aim for mid-2024. That's the best outlook. What is ahead of us is to do the actual clinical validation. When we go out with this news, we're very confident around the product. It has been viewed and been demonstrated for clinicians. We've gotten a very positive feedback. But we can't claim it's a product until we have validated it clinically on blood samples out there and shown that the performance is actually classifying cells within bone marrow samples to the same extent as what is done conventionally or manually.
That is what we are starting here this year, and it takes about a year. I think that's the best. It's CE IVD, as I said, Ulrike, and that's for, of course, it's for Europe. Our journey continues to register and file 510(k) for the U.S..
That's great. Do you feel comfortable giving sort of the more stringent regulatory framework now with IVDR in Europe that sort of have all documentations ready and feel comfortable with proceeding with that process in order to actually have a product approved by mid-year next year?
Yeah. We actually feel confident. There's always a risk when you have to demonstrate up against conventional methods, but we are very confident given the, you can say, given the ability of our product to identify multiple classes of cells within bone marrow, and then we will present that and have done that towards clinicians. We're very confident around it. Of course, there is a risk. We are going out with the news because we think, of course, everyone, including the investment community, they deserve to know it. It demonstrates our confidence in it. The other thing is, I think this is very important because this is a software application that will run on our existing DC-1 device.
It's a software application that we register, but the DC-1 is unchanged, which means that we are opening up for the opportunity to sell the DC-1 into the large lab segment, additional instrument revenue. Also from a customer perspective, we make sure that the high volume workflows that runs on pure field blood samples in the large labs is not disturbed. Actually run your bone marrow samples on the DC-1 sitting adjacent to wherever you wanna have it in the lab. It's a very flexible method, and it opens up a great. It serves, you know, the clinical need, but it also open up for an addressable market that is already converted to digital morphology.
Great. As you mentioned, it is added software built upon the sort of DC-1 platform itself. What are we talking about price-wise? I'm guessing you could convert already DC-1 customers to include bone marrow. For those customers, what would this imply in terms of pricing?
Yeah. I think the pricing, that's too early to comment on that. I think the existing customers, you're absolutely right. They can acquire a license to the software, and they can get going. However, the majority of the DC-1s, they sit in the small, mid-sized laboratories today, and we will continue the journey of converting those. However, some of them may certainly be, have great use if they're doing bone marrow samples, but we do expect that the majority of the bone marrow samples will be conducted in the large lab. We see it as total, let's say, virgin land for the DC-1 in the large laboratories.
Again, it fits with our ecosystem thinking and our strategic vision because no matter where the bone marrow will be conducted, our Remote Review, it's compatible with our Remote Review, so the results will be in our database. The Remote Review users, wherever the pathologist may sit, they can view the results. They can have it together with all other data that are acquired throughout our systems. We think it's a natural prolongation of our strategic content to our ecosystem.
Yeah. Okay. Great. Just a clarification, if I heard you or understood you correct, did you say that the safety sort of inventory boost was 1.5 years or one year? I think you said 1-1.5 years of perhaps the boosted revenue for systems or. Yeah.
Yeah. I think I said one to one and a half year. Of course I wanna put a bit of on clarity as to, since I don't have the actual inventory books of our systems historically. I have seen some data, which is not just our inventory data, but there I really get the impression, and in our conversations with our partners, it is confirmed that the inventory buildup in general has increased over as sort of coming out of the pandemic period, really to mitigate the serious supply crisis that were taking place from nine to 12 months, even more. That really fueled the and the low interest rate.
It really fueled the notion of we gotta, we gotta be able to deliver and install the blood line. We sold those for a longer period. I'd say especially the compares we're looking into here in Q1, probably also Q4 2021, but Q1, Q2 last year, they've been a little bit inflated by that situation, material, supply-wise.
Okay. A follow-up on that, obviously you talked about release of this safety inventory and a bit uncertain situation in China, but how much should we read into that Scopio midyear last year released a similar system, being sold, I believe, primarily to the U.S. market, and Mindray pushing their system forward into China, and these two being specific weak markets on your end when it comes to instrument sales? How much should we read into that?
I think for the first one, we see a number of digital imaging companies popping up. It is our impression that there's a way to go, but we expect competition to come. We've built a market, and the company you mentioned is obviously tapping into it, being very active from a marketing perspective. I will let the customers decide whether that's what they want. I just know that we have not discovered significant loss in the market. Our strategy of really pushing for content, what you see with our bone marrow launch here, is also a counterattack to be the single provider who can actually meet all the clinical needs despite lab sizes, et cetera.
We will keep on driving our strategy, and that should counterfight any imaging company popping up in this arena. I think with regards to China and obviously Mindray, that's certainly Mindray has been for years a significant competitor within the cell counting market. They have a significant market share, in particular in China, or very much in China, competing head-to-head with another large player. Then there are some percentage point which are local players. Our game plan there is to continue what we've done, being competing head-to-head with our DI60 system that is launched together with Sysmex. Here we are certainly in a tight competition. This is where I see the most competition across any market that is in China.
I believe we have an advantage also in now that we are coming out with reagents, RAL-branded reagents, so we can offer a full suite of the total solution. We will continue along those lines also to build this superior offering and compete on those terms with anyone who will pop up.
Okay, great. Just to follow up on that, Beckman Coulter, one of your distributors, looking at their hematology analyzer offering, it looks like they're promoting Scopio's solution. Have them adding Scopio to their list of systems that they're distributing changed or worsened your relationship with Beckman Coulter or is that essentially unchanged?
No, I think we certainly still have a relationship and our distribution relationships, we can. The best KPI is obviously our sales numbers, so we certainly that still exists. I think this is, this is an opportunity also to differentiate from the very strong, Sysmex CellaVision alliance. The customer speaks and would like to acquire CellaVision instruments. That's what we see. We respect our relationship being non-exclusive. That's where we are. Again, our prime objective here is really to provide the superior healthcare solution for the lab and by then the patients. So
If you can help me just to understand how big of U.S. sales, your U.S. sales is derived from Beckman Coulter today?
I think that would, probably be me overstepping the line in terms of confidentiality.
Okay, fair enough.
I'll refrain from that also.
Just fishing.
Yeah. Yeah, yeah. Fair enough.
Just fishing.
I understand the question, of course. I don't wanna get in trouble with-
Um-
With my partners.
Yeah. Understood. And last question on my end, if you can just help us give us a reminder on the seasonal effects, the general seasonal pattern of your sales and orders throughout the year, that would be very helpful.
Sure. I think typically we see, as mentioned, we had momentum both in last year, actually Q4 2021, Q1, Q2. Maybe a little bit inflation, especially for Americas. We kind of believe we'll come back to that. I expect a healthy outlook for Q2, again, with the caveat that APAC is a bit of a wild card for us, and it probably will be a wild card for a couple of months or quarters. That's the only sort of disclaimer I would put in. We don't have as much visibility for the time being into Q3 and Q4 in terms of orders.
Q3, typically what happens here is that we will have both Europe and, as in certain places it's very much a holiday season in July and for some of the countries it's August and also the U.S. If you take the sum of Q3, there are less weeks where there is opportunity to actually install blood lines, and by then that funnels back to the ordering our systems. We typically have in comparison a weak Q3, so to speak. That's a general trend. It builds up to a relatively strong Q4. That's the dynamic. We hope and expect to come back to that outlook for the year.
Okay, great. Oh, yeah, last question, if I can just squeeze that one in.
Sure.
That would be on the capitalized R&D, kind of an increase year-over-year. Should we expect sort of the same level or an increase given that you're now approaching more clinical activities for the bone marrow system? What should we expect here going forward?
That's a good question. Maybe, Max, I'll invite you into to this one.
Thank you. I think that the clinical activities around bone marrow will have a limited effect on the capitalized R&D. That's a smaller portion. Even though that project is coming to an end, usually we have a little lower ratio of capitalized R&D at the end of the project. In the total portfolio of activities that we have, that's a small portion, so it shouldn't affect much at all on the capitalized R&D.
Okay, great. That was all questions on my end. Thank you very much.
Thanks, Ulrik.
The next question comes from Christian Lee from Pareto Securities. Please go ahead.
Thank you. I have a couple of questions, please. How should we think about increased cost control that has been introduced? Is it about maintaining current cost levels or to reduce the expenses? If so, how much will the cost savings be, and when can we expect to see this impact?
Yes, Christian, first of all, we had a quite steep increase of expenses post COVID and also, yeah, explicitly last year when it comes to the R&D side of business. We think that was successful. We want to maintain that level that we have, but not increase it on the R&D side. We have the capacity to run our projects that we have ambition to run, so we feel that we're well staffed on that side. If we do any changes, it will be evaluating use of consultants. If we can run without or if we need special competencies, then we'd run with the consultants. We believe that we can maintain that level.
When it comes to admin, sales, and other overhead costs, then we're being more cautious. The cautiousness should be able to compensate for, let's say, inflation-driven e-expenses. We don't look at significant changes. It's more being cautious when if someone leaves, how do we replace? These are the thoughts that we're having right now. It's more a dampening effect than a drastic change, I would say.
Got it. Thank you.
Sure.
Could you please give us some color on the instrument sales? Did you still see positive sales trends for the DC-1?
Sure. sorry, Christian, can you repeat that?
Yes.
If you could give us some color on the instrument sales, if you still saw positive sales trends for the DC-1 instrument in Q1.
In Q1, I'd say, the small instruments were also impacted by inventory management. It was both the large platforms and also the DC-1. We had a relatively low Q1.
Yeah.
Okay. Thank you. My last question is regarding the bone marrow application. You couldn't reveal the price levels, but if you could discuss the revenue model, if you are thinking about having a subscription-based model or if you will also offer perpetual licenses.
Sure. No, that's a great question, Christian. Of course, not the actual price level, but the model will be that our customers will purchase the DC-1 as a platform. That will be a platform where other things obviously can run. They will buy this license and the concept is that it will not be a perpetual license as we've done historically, but it will be a license that does not impose a lot of transactions for the lab in terms of monitoring consumption, et cetera. It will not be a perpetual license, so it will expire after, let's say, five years, with some flexibility, in terms of three, five, seven years and price adjustment, according to what you sign up for to begin with. That's the thinking around it.
Great. Thank you very much. That's all for me.
Thank you, Christian.
There are no more questions at this time, so I hand the conference back to the speakers for any closing comments.
All right. Yeah, first of all, thanks for listening in, and not least for these qualified questions to really understand the depth of the business. We as said, we look back on three tough quarters for these unprecedented times. Generally the glitch in revenue sort of translate into a lower EBITDA. We've actually come to a level of confidence that tells us that the market is requesting our solutions, so that's not the root cause here. We've gained increasing knowledge from our partners in really understanding how we should navigate in this indirect universe where we thrive. Despite the headwind, then we are really driving our destiny. We are investing in the future.
Today we mentioned the bone marrow as a first example of our under our specialty analysis pillar. I think that you should really see that as a sign of confidence and also as an output from the R&D. There will be much more coming from our side, both for the specialty but also for new areas and not the least for the large lab segment as we drive through the coming years. It's exciting time. We appreciate you staying with us and we are looking forward to updating you again in July, I believe it is. Thank you very much for dialing in.