Welcome to the presentation of CellaVision Q3 report. 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. Now, I will hand the conference over to CEO, Simon Østergaard. Please go ahead.
Thank you very much. And thank you very much everyone for dialing in for the Q3 report for CellaVision. I'm Simon Østergaard, President and CEO here of CellaVision, and I have our CFO, Magnus Blixt, with me. So I'm pleased to report on our Q3 here in 2023. I think one of our highlights, one of our headlines, is that we continue our what we call positive trajectory from the previous quarter into Q3. So the headline of our report is a revenue of SEK 168 million in Q3, which represents 19% growth and 11% organically, given the tailwind we have on FX. So we'll talk—we'll sort of digest our numbers, our P&L today, and I'll try and explain what is behind the numbers.
Sort of before diving into the P&L on the next slide, I can say that we continue to see momentum in Americas. A year ago, when we were in the same call, we really were suffering in APAC, and especially, as a consequence of the situation in China. We are seeing some recovery in APAC, so that has really fueled the demand for our instruments. In EMEA, it's two things. It's on the plus side, we see really robust recurrent revenues from our reagent sales. However, we see very soft instrument sales this very quarter. I think in general, I'm very proud of our team, and the work we do with our partners.
We have significant progress on our strategic direction and what goes on behind the scene here in terms of our investments, both in our programs, but also in our, investments in production capacity in Bordeaux, or in Martillac, where we have our reagent facility. So we just completed our large investment and, and, had the inauguration, actually, very much in, in this month. So production is about to start, and we can support future growth, going forward. On the R&D side, I want to highlight, that all the work we've done on, on the bone marrow application, it's, it's really a pleasure to have presented it at, at the ISLH, early summer in New Orleans, and later on in Anaheim, California, AACC.
And then we've been working with demonstrating for a number of European labs and have gotten feedback. So now we have really fine-tuned the specifications and locked the product, so we are now entering clinical validation, so we can launch our product for bone marrow to assist bone marrow diagnosis by the end of sort of H2 in 2024. So it's super exciting for the company. And we have other things that we will talk about in next upcoming quarters, but I'm really, really pleased with what the team does and the progress we do in terms of our R&D investments. Let's dig into the-
Can I ask for a short timeout, Simon? And I will hook up a charger to-
Okay, got it. We have a practical issue.
Charging.
Downloadable. I don't know. Oh, okay, now.
All right, so we are back. I apologize for the technical issue. We were running out of battery on the loudspeaker. So can I ask the organizer whether you still hear me?
Yes, everything is okay.
Perfect. Okay, excellent. Thanks, we will hop into the next slide. Thanks for that. So here we have our P&L. So, in terms of our financial development, just setting the scene, the net sales of SEK 168 is up against SEK 141 last year. And we're well aware that we are comparing. We have a soft compare in Q3 2022, and we'll talk more about where it comes from regionally wise. I also want to remind or educate our audience that Q3 is historically a low quarter for CellaVision. So given that, we dare to say that we are continuing the positive trajectory into Q3 here, after having a similar or a little bit better Q2 this year.
So I said, if we unpack the, the key financial elements, when we go through the P&L, then, growth-wise, as said 11% organic growth, up against an easy compare. Our gross margin is a little bit lower than normally, so it's only 66%. I think the main contributors, probably twofold. There is certainly elements, unusual elements on our product mix, which drags us a little bit down, and then we also have some inventory impairment, so a write-off of just over SEK 2 million. So it takes actually our gross margin down by almost 1.5%.
So this is not a cash flow influencing figure, but this is what we continuing evaluating our balance sheet, and this is what we decided to do to represent our inventory the best as possible. So that leaves us with operating expenses, where we spend SEK 78 million. So 47%, which is pretty much in line with the entire year. So we have flattened our expense growth development. We're a little bit lower on R&D, also capitalizing a little bit more, 12 million versus 8 million in this quarter. And then we have a little bit higher sales and marketing costs if you unpack the 78 million. That leaves us to an EBITDA of SEK 43 million versus 29.
So you also recognize a little bit more about the scalable model that we have. When we have a very soft top line, as in our comparable Q3 last year, it really influences our EBITDA. On the other hand, this quarter, we end up with a reasonable, strong EBITDA. The margin is a little bit lower, 26%, a little bit lower, also taken down by the gross margin. Since we aim for being at 30% or above. R&D spends pretty much under control, in line with our expectations of 21%. We had an operating cash flow of SEK 41 million before we adjust for the working capital items.
We've really gotten a very positive impact from working capital, both because we had inventory, but also on the accounts receivable side. So we end up with an operating cash flow of SEK 73 million, after the working capital adjustment. And then we have done some investments, both in terms of the R&D, but also in terms of our investments in the plant in Bordeaux, that I mentioned. And then we have our financial cash flow, outflow. So that leaves us essentially with a total cash flow, a very strong total cash flow of SEK 44 million this quarter. Yeah, I suggest we unpack the revenue side. So if we go to the next slide, we can look at the regional highlights.
So percentage-wise, it's a strong quarter if we start with Americas, but again, percentages are only percentages. They're a function of today and last year. But again, we increased our sales to SEK 87 million in the quarter. And we are really seeing sort of a robust engine serving the integrated health networks across the Americas. And it really goes hand in hand also with our small-scale offerings of the DC-1 that is gaining increasingly traction. So we are serving the networks pretty efficiently. So that's good. Then we've also seen some sales going to Latin America. So we're pleased to see that we're also adopting digital morphology in that region.
EMEA, I think that's definitely our Achilles heel. This is where we see both as we hear also from the industry, that there is an impact on the macroeconomic environment, and the appetite to invest or the competition for funding in the popping space, because there's a pressure on healthcare spends, also given other sorts of investments that the society needs to entertain these days. As mentioned, Q3 is historically a somewhat weak quarter. July to September is peak vacation period in Europe, so that can also influence our low sales.
I think also generally there is opportunities across Europe to really get down and deepen, so we are working on deepening our collaborations, because I think there's a training piece where digital cell morphology is not adopted. So there's much more that we can do in collaboration with our partners. So that's on us to make sure that the adoption actually flows. It's difficult to reach the same momentum as we see in Americas, because Americas is really scalable across all the different states. That doesn't go well in Europe. However, we're confident that with the solutions we have, by also training and really educating and developing new offerings, we have much more to do in Europe.
The reagent sales is doing pretty well. And so that's the good news, which is obviously a consumption or consumable, and that's an ongoing growth journey we're on there, where we have the strongest footprint in EMEA. For APAC, a year ago, this is really where our headache started. We only had SEK 8 million, and this quarter, we've been through various challenges and inventory challenges. We seem to come through that, and now we're seeing orders, especially for China, coming in. So that's the good news, that we are starting to see traction in that enormous market. We're still a little bit high on inventory in Japan.
So, the elevated inventory level does hinder serving that market with new instruments for the time being, but we expect that to clear out in the upcoming quarters. And then we will have, and we have our rollout of our classic stains in the APAC. We usually give a little bit more comprehensive update on that in the Q4 full report, so we'll come back to that at a later stage. Let's go to the sales per product group. So here the revenue is carved into the different segments: instruments, reagents, software, and others. Software and others being software, spare parts, and some consumables, not reagents, but oil.
If we start with the inventory, the instrument side, then again, I think it's important also to remind ourselves and the audience, that the compare is also, when we compare year to date, we also have the H1 included in our compare of 2022. I think we previously have communicated that we believe that the H1 of 2022 was somewhat inflated by the material supply issues that we were facing, our customers were facing. So that is obviously what we're up against as well. Even though this particular quarter here, if we look quarter- by- quarter, is relatively low, so that's an easy compare.
But sales increased to SEK 96 million in this quarter, and that brings us to SEK 264 million for the nine-month period. It's still our growth driver definitely, and as we talked about this morning, then obviously the European side is where we struggle when we talk about instruments. Small instruments, I think there's a—I initially also mentioned our bone marrow application, which is well underway, that will actually be another growth driver for our DC-1, because the bone marrow will be hosted by the DC-1 instrument, and by then, it gives us opportunities for software and instrument revenues coming up.
On the reagent side, strong sort of, SEK 31 million in the quarter, which brings us to SEK 93 million, up against SEK 75 million the previous year. So that's a function of higher prices implemented this year, higher volume, but also FX, since the majority of our revenue on the reagent business sits in euros. And then I might just want to, you know, reiterate that I'm pleased to see the work that our team has done to really succeed our planned expansion, on time, on budget, to sustain our continued growth going forward. So highly appreciated work by the team in France. Software and others, yeah, pretty flat.
I guess, since the instruments were up, it's typically the software—it's typically a function of software, but this quarter we actually have, compared with Q3 last year, we have more APAC sales, where we typically have a little bit less software than when we ship instruments for either Europe or and especially the US. That's probably the explanation for that. So key takeaways, again, allow me to reiterate that we're pleased to not that we are sort of out of the woods. It's a challenging market globally, but I think it's really good to see that for our business, we are on a positive trajectory. We hear really positive things. We see it in our numbers. So that's the good news.
There is a sincere demand for what we do and the offerings and how we assist blood-based diagnosis. Really momentum in Americas. Glad to see our reagent business, and we're working on how to support the different countries, markets, and Middle East, and how we bring growth, and support with our solutions in the EMEA region. Then, even though I don't unfold everything, we will, we will certainly do that over time, but I can only say that I'm super pleased with the progress and the innovation that we deliver, given our R&D investments in bone marrow. It really highlights where we will take digital cell morphology, not just peripheral blood, but also to bone marrow applications.
I also wanna highlight things that we will talk about as we proceed and get into 2024. I think it's pretty obvious from the inside that the vision we had, have at CellaVision of elevating healthcare through the evolution of microscopy—we will present evidence for that statement and that vision as we go forward. We're starting to see enormous traction for our FPM acquisition we did a couple of years back. So I'm super excited going forward to start sharing a little bit more news about that. So with that, I think it's time for questions. So why don't we hop into that? So if I can ask the organizers to enable that, that would be highly appreciated. Thanks for your attention.
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 Ulrik Trattner from Carnegie. Please go ahead.
Hi, and good morning, Simon and Magnus. I have a few questions on my end, and perhaps starting off, it looks like you're out of the woods with the negative organic growth trajectory. But as you highlighted, EMEA is a challenging market, and beyond this macro situation, what are your distributors saying, and do you have any idea on when we should see a more positive view on the European market?
Well, that's—I totally understand the question, Ulrik. Thanks for that. That's a question we also ask ourselves. I think there are things we can do on the internal side, and there are things which are somewhat more difficult to influence in terms of providing a timeframe for this. I sincerely think that there are things we can do to really make sure that a digital cell morphology is adopted. I think we are disadvantaging the labs by not enabling them with a digital solution. So that's on us, together with our partners, to make sure that they understand the value proposition, and they actually include digital cell morphology to support and mitigate the shortage of staff.
I think there, there's much more we can do there. It doesn't come as naturally, and we have to do it per market. I think that's what drags out the timeline quite a bit. And then I also think that for the adapters, for the adapted labs, we have a pretty well-functioning solution, so we need to innovate and provide even more value. So that's what we do in our lifecycle management program and our next gen programs, where we really will deliver superior technologies for the lab also in the future. So that's what also make growth come back.
I think really around the macroeconomic situation, I think there is a resistance to invest in healthcare in certain areas because there's such high pressure for spending funding elsewhere, also within the healthcare system, but also outside. We know, we all know what the situation in the world is, and I think that really impacts us. So it's super difficult to get a concrete question as to when we break the ice, but I think we do whatever we can to keep the adoption of the digital cell morphology top of mind of the labs.
Okay, great. Two follow-up question on that. You talk about doing more work internally, and a few years ago, you started the initiative on expanding your direct sales support organization and consequence to you to working on this internally. Does that mean that this direct sales support should be expanded further beyond what you're you currently are operating at? And secondly, you're seeing resistance among labs and hospital budgets to include digital cell morphology. Is there any difference from your view in terms of small labs, medium-sized labs, and then large labs, and by extension, are you seeing different growth for your large system versus the DC-1 system?
Yeah, with regards to the later, we see higher growth, sort of because we come from a lower base, especially in the U.S. There, we see really significant growth rates on the small versus the large, but we still see growth on the last large system there. We think the growth on the small system is a little bit, it's influenced by the same drivers as we see when we look across Europe. But we have no reason to believe that there is no, there is not a market. We're still selling our instruments, but adoption is slower. That, that's for sure.
Great.
The first question regarding the internal side, if you are to accelerate the initiative you started a few years back with expanding your direct sales support in order to accelerate-
Yeah
the conversion to digital technology.
Yeah, we adjust. No, that's great, Ulrik. Here we have adjusted our approach a little, because as you will see, we have really kept our cost in control.
So we have started to work a little bit different, which meant that we are not investing. We're not planning on investing significantly amounts in sales and marketing, but we are spending our spends a little bit differently. And we are working very digitally, both training-wise, etc . So we're using different tools in order to get a better reach on how we convert our labs and how we support our partners.
Great. And if we could move on to the cost side of things and the margin side a nd perhaps we could start off with the gross margin, which was quite low in the quarter, and you mentioned there's some product mix in this. But could you help us decipher the reason for quite a low margin in the quarter?
Sure. Yeah.
Yeah. Maybe you can give a stab on that one.
Yeah.
I can start off on this one. We have two; it's twofold. One part is the write-off of inventory. We always keep our balance sheet clean, and when we see... when it's necessary to do some write-offs, we do that right away. And this quarter, it was a little bit bigger than other quarters. That's why we mentioned it in the report. So that brings it down. Without that, maybe we would have had 1% or 1.5% higher gross margin. Then on the other hand, it's the product mix that is unfavorable for this quarter. And that goes both for, let's say, the traditional CellaVision products, the instruments and software, and also the reagents product mix.
So it's twofold when it comes to the product mix.
Okay, good. Inventory partly explains, but should we interpret this as a geographical mix, where APAC customers hold generally lower gross margin versus, for example, Europe, that is this minor portion here compared to the previous quarters?
Yeah. For the CellaVision part of—for the instrument and software part of the portfolio, that is true. We, we've got strong sales in the APAC region, and in that region, the software ratio is lower than in example, Americas and Europe. And that brings the general gross margin down than since software has high, high profitability, high gross margin.
And if I remember it correctly, in Q1 and throughout the end of Q1 and into Q2, you raised prices on your systems, and you were expecting to see component shortage and inflation to be offset by these price increases by now. If you can give us some more update on where we are at in terms of the price increases and in terms of it offsetting the inflation and parts spent. Is it purely a product mix, or is there still something happening on that end?
I would say that, yeah, the price increases were successfully implemented by January first, this year. Some orders were taken late last year, then we honor the old prices on those. So we didn't see full effect of the price increases in Q1, but by Q2 and now in Q3, we have full effect of that. And there is still some inflationary pressure on the cost side here, but we have, you know, reasonably well, and also with a little bit of tailwind from the FX offset, that. So we're back to stronger gross margin, the way we had it in the history, let's say. So we're back around the 70% or just below the 70%.
So for this quarter, the lower outcome this quarter is related to the one-offs on inventory reductions and product mix, I would say.
Okay. Last question on my end. Bone marrow now entering into clinical validation. I assume that you are reiterating your timelines on when you expect the system to be beyond the market. But in terms of R&D spend, does this mean that we are to expect an accelerated R&D efforts on your end, towards end of the year and early next year, or how does it work?
No, that's a fair question, Ulrik, and though I, I would say it's kind of baked into the current run rate. Of course, it does cost to do the actual validation and so forth, but it's pretty much covered in the current run rate. That's how it pans out. So we don't expect a raise-
from that, from that program.
Great. And if I can perhaps squeeze in one last question. You mentioned you were out showcasing it. Can you give us some idea on what the feedback has been thus far and how the market is taking on-
Yeah, no, no.
this new technology?
No, thanks for asking that question, Ulrik. Yeah, I think, just briefly setting the scene, this is a super, super difficult analysis to do. So in the stem cells, you have the production of red and white blood cells, and then they mature through various stages, and then they become part of the red and white, mature red and white blood cells. And when you have a deficiency, it's really laborious for the lab tech to do an analysis on a bone marrow sample and understand the different cell stages before you have mature cells. So the way our network has identified these intermediate cell types has been super impressive. And that is, they really see that there's a workflow advantage from this.
Then the actual software component, the way you navigate within the software, how you operate through, and how you can compare the different images, how you can reclassify if you wish to do so. That has given us some really good feedback on how... what is it they're looking at, the ones who are driving the software on a daily basis. And that has made us introduce some last, let's call it, last-minute changes or adjustments to even further improve the workflow experience in the software and the application. So I'm super pleased with really doing innovation together with the users. So that's a pretty good example of that.
So that's the feedback we've gotten, and then we have done a successful DND, and then now we're entering and really demonstrating that the application can assist manual microscopy. So that's what we need to demonstrate. Everything has been developed, and that's where our timeline is unchanged, with an expectation to have completed the clinical validation by late summer. So we expect to launch in H2 next year.
Okay, great. By your impression, when you are out looking at this workflow, is it fair to assume that it looks quite similar in terms of the workflow efficiency advantages of your blood system compared to the bone marrow workflow situation? Because your old system showcased quite some big improvements in terms of workflow and economical benefits. Are we in the ballpark of achieving that with the bone marrow system as well?
Yeah, definitely. And it will be an even more look and feel, even more modern look and feel, to the bone marrow module. So that's another, you can say, advantage you will see, and which, of course, we will also launch for our current systems. So it will be a modern product, going on the DC-1. And we think it's gonna be a pretty nimble sort of piece of solution that you can adopt also in the large labs, so you don't disturb the workflow of our current solutions running peripheral blood samples. So, no, I think it will spearhead digital morphology. We even see certain markets where I believe that the bone marrow module here can actually market digital morphology on the peripheral side.
So if they can see that you can really facilitate and alleviate the challenges by, by doing diagnosis in bone marrow, there may be an increased appetite to, to adopt the classical digital morphology on peripheral blood samples. So I, I think it's a super promising product for, for our company.
Okay, great. I'll get back into the queue. Thank you very much.
Thanks, Ulrik.
The next question comes from Christian Lee from Pareto Securities. Please go ahead.
Hi, Christian. You might be on mute.
Christian Lee, Pareto Securities, your line is now unmuted. Please go ahead. Christian Lee, Pareto Securities, your line is now unmuted. Please go ahead. As a reminder, if you wish to ask a question, please dial star five on your telephone keypad.
All right, Christian, we don't hear you. I think this seems to be the day with a few technical challenges.
There are no more questions at this time, so I hand the conference back to the speakers for any closing comments.
All right. All right, Christian, but, we can catch up, and thanks for your attempt anyway.
We actually have a question from... Sorry, we have a question from Ulrik Trattner, a follow-up.
Okay.
I'll let him in.
The next question comes from Ulrik Trattner from Carnegie. Please go ahead. The next question comes from Ulrik Trattner from Carnegie. Please go ahead.
Great. Hopefully, you can hear me. Yes, two follow-up questions. It's regarding the competitive situation and if you are experiencing any difference now versus last year, especially in the U.S. and Europe with Scopio and given the growth in APAC this quarter, are you experiencing any competition from Mindray in that geography? And you mentioned a few geographies in APAC, but if you can help remind me which geographies or which countries in APAC grew here in Q3, that would be helpful.
Sure. Yeah, I think that the largest competitive, not just threat, but where really the footprint is in China. So I think it's a well-known situation that Mindray and Sysmex are really the two key players in China around serving labs with hematology lines. So there's a head-to-head competition on the cell counting side, and obviously now that Mindray has presented its digital morphology line, they can go all the way through, just like CellaVision and Sysmex does. So I think this is where we see. This is where the market is mostly challenged. Bear in mind that everybody in China, they are operating via distributors. So it's a totally distributed country.
So our partners work via distributors, which means that it's hard to get the insights from the actual labs because there are many layers out there. But obviously we can see that there is momentum for our solutions. So I think it's gonna continue like it has been for the last many years with a head-to-head battle, primarily with Mindray and Sysmex, and then you have a small proportion of local players as well. So that's the market where we see the most competition. There are other players, as you mentioned, coming up with digital morphology solutions. We have to say that, but we haven't seen them in labs.
The reports we get, we don't see a lot of them implemented in final labs. So I would imagine that there can be some assessments going on and so forth. And we also know that some of our customers are assessing competitive solutions and then a number of them end up choosing CellaVision. So that's kind of the... I'd say that's the high level situation of the competitive landscape.
Just a quick follow-up on that. Do you feel you have partnerships with all the big blood players out there? And some competitors, taking Scopio as an example, have entered collaborations with partners of yours, such as Beckman Coulter. Has that, in any way, impacted your relationship with a company such as Beckman?
I think it's probably not fair and good to sort of comment specifically on individual partner relationships. But it's obvious that we're in the world to really we wanna be a super strong partner for innovation and collaboration, and we have differentiated our approach. Given the changes in the competitive dynamics, we've had to adjust our approach, and here it becomes obvious that where do we actually really do joint development programs and where is there less appetite for doing so, also commercialization-wise we still believe that the customer, the end users, where we have the patient sitting and being diagnosed, they deserve the best possible solution.
This is why we still give access to our partners with the CellaVision solution, which we believe today is the most robust and well-proven technology. We are confident that with the investments we do, we will protect that leadership position, even with changes in the competitive landscape. We're very confident around that, but we're not complacent.
Great. Thanks very much for clarifying that. That was all questions on my end.
For sure.
As a reminder, if you wish to ask a question, please dial star five on your telephone keypad. There are no more questions at this time, so I hand the conference back to the speakers for any closing comments.
Yeah. So I wanna thank everybody for listening in. Me and Magnus are really pleased to report what we dare to say, positive trajectory for both in Q2 and now also in Q3, which happens to be historically a weak quarter. So we appreciate the momentum. We've taken some hits on our gross margins. We believe it's more or less one-offs. We know that there is challenges in Europe, but we take pride in really continue growing and pursuing the opportunities. It's not necessarily short term, but also long term. We really are proud of the work that is being done in Americas and plastering our solutions across those integrated health networks.
And then I also finally wanna emphasize that the progress we have on the strategic direction makes us confident that we're doing the right things and we're investing in new solutions, I dare to say short term and medium term and long term. So with that, I'm super excited to give you an update after we've completed the fiscal year here in the calendar year 2023, and that will take place on the 7th of February 2024. With that, thanks for listening in.