Earnings Call: Q4 2020

Feb 4, 2021

Thank you very much, and welcome, everyone, to this call where we will go through Cellavision year end bulletin and a little bit of background to Cenavision and the financials and activities for Q4. I'm calling in from winter, sunny and cold Lund. Lund is where we have the head office of Cellavision. My normal role is that I'm CFO for the company, but currently I'm doubling as acting CEO. For those of you who have called in, in the past, I'm sure that you recognize that it's usually it was Slakka Risto that presented these reports, but he has left Cellavision in November and is currently heading up Mannliche Health Care as a CEO for that organization. Cellavision has appointed a new CEO in Simon, Estergaard, And we are looking forward to welcoming him on board in March. And in the meantime, I'm doubling as acting CEO. As usual, we will start with a short presentation of Celavision and then continue with activities financials for Q4 and also full year. And at the end, there will be time for some questions and answers. Please move on to Slide number 3. Our vision, background to our story and what we do. Cellavision it's a medtech company, and we're active in the field of digital morphology. To be more precise, we analyze blood cells, and we provide solutions for the LUD lab in hospitals and commercial labs. Our vision is to replace the manual microscope and not only replace the image capturing parts, but also automating the analysis of the image and creating with our technology an efficient workflow in the blood lab. Since this is high volume, routine analysis, the value that we create when implementing our solutions is very good for the health care sector and for the patient in the end, a great value there. Please move on to Slide 4. The first market that celavision approached around more than 10 years ago is the largest labs. That's where it makes the most sense to automate. We find about 17,000 really large labs around the globe, about 5,000 in Americas, 5,000 in EMEA and 7,000 in the APAC region. And our definition of a large lab is a lab where you do more than 130 blood samples per day. And for this market, which is our original market, we created instruments, what we call our high capacity instruments. And then they are well suited for this market. I talked before about that this a routine analysis. And if you look at it on a global perspective, we there is about 2,500,000,000 blood samples taken 3 year. The first step with a blood sample like this is that it goes through an instrument called a cell counter. It's a high speed analysis and about 85% of the samples, they get analyzed and to a sufficient level in that instruments. But in about 15% of the cases, a more in-depth analysis is needed. And this is where television instruments come into play or you can use a manual microscope. And our market penetration today, let's say, is that we do globally about 22% of these 380,000,000 samples, they go through a television instruments and still 78%, they go through the manual microscope. It's not homogeneous. So in some areas, a lot more than 22% go through television instruments in our what we call mature markets. And then other places it's a lot less. But on average it's about 22%, meaning that there is a lot more to do on this large market large labs market. That is our original market that we have approached. Slide number 5 please. Last year, we launched a new system where we could also analyze blood samples are suited for medium sized and small sized labs. It is lower in capacity and significantly lower in price. That's why it's not suited for the high lab sector, but more suited for the medium and low. And our definition is that if you do less than 130, it's a medium lab and if you go even lower, so it's less than 30 samples per day, then we call that lab a small small lab. And in this sector, there's about 1,500,000,000 blood samples drawn every year. The process is very similar to the large labs and about 15% of them are flagged out for in-depth analysis. And then you can choose to use either a manual microscope or of course Celavision's new instrument, we call it the DC-one, which is well suited then for this medium and small lab sector. And since it's a brand new instrument, we haven't sold so many. So if you count in percent, it's less than 1% of the world market that goes through our instrument and by far the majority goes through a manual microscope. As we launch this solution, we can see that we can gain big market share in this sector versus the manual microscope as well. Move on to Slide 6 please. Let's see. Okay. So we do commercial operations in an indirect business model. And it's efficient and scalable for us to do it that way. On the sales side, we sell through partners the benefit is that these partners, they have existing sales force and service technicians around the globe. And they also work with the other instruments in the bloodline. So when a hospital or a lab exchange their bloodline. They are looking at an array of instruments that needs to be replaced. And these forecasts, they have the full assortment. So from a selling point of view, it makes sense to replace everything at the same time. We have complemented this indirect sales model with local presence. Only a few persons celebration employees in each country and they support and help our distribution partners in these countries when it comes to talking about the benefits of digital morphology of doing it in our instruments instead of using a manual microscope. And we have learned that it makes a big difference if you have these market support specialists in place or not. And currently, we have the we have them in 18 countries 18 markets and we reached more than 40 countries with this. So we still have some white spots on the map, but the coverage is starting to be pretty good actually. When it comes to manufacturing, we have 2 approaches. One is a 3rd party manufacturer and one is in house. And when it comes to our instruments, both large and small, we do that with a 3rd party manufacturer in Jonkoping, north of Lindheim in Sweden. And when it comes to reagents states. Then we have a facility in Bordeaux in France where we do that manufacturing in house. We are about 180 employees worldwide as a company here. Most of them are based here in Lund. At the bottom of the page, you see the names of the partners that we use for sales and distribution. Well known names, well known players within the field of hematology. And the top row is they are good at selling our large labs instruments. And the small and the bottom line is for the smaller and midsized labs. Next slide please, Slide 7. This is Salawision strategic agenda. We have 5 agenda topics, strategic agenda topics. If you look at the first one, geographic expansion, we still have some white what's on the map. And we find that this indirect business model that we have is very efficient in covering these white spots. So what we do is add new market support presence. And with that, we can open up new markets and very fast grow and cover more countries around the globe. The solution that you use in a mud lab is the same if you do it in APAC, in EMEA or in Americas. So geographic expansion is very important for us. Segment expansion is important as well. We started out in the large labs. We have instruments for small labs, small and medium sized labs as well. And we also have instruments aimed for the veterinary market. The veterinary market is a lot smaller than the human market, though, but we have developed instruments for that as well. Innovation is an important goal and strategic agenda for us. And we continuously develop new systems and new analysis sets and we spend about 15% of our revenue. We're reinvesting innovation. So that's an important part. Streamline supply chain. Well, both 3 pm, 3rd party manufacturing and in house. We focus a lot on quality and we focus a lot on cost control in this area. And when you're a company like ours work with partnerships for sales and for production, the partnership it's important to maintain. So we spend energy in making it easy and simple to interact and work with television you're a partner to us. So please change for slide number 9. Here we have the hematology workflow. So first, I'd like to talk a little bit about the workflow and the instruments that we have in what we call a bloodline, it's a series of instruments. And then secondly, we can talk about CELA Vision part of that offering. And as you see on the top line, we have the large labs described and the bottom line is the small, medium sized labs. So the first thing that happens when a blood sample comes into the blood lab is it goes through a cell counter. And about 85% of the samples are being analyzed and the result of are sufficient in that step. But 15% of the cases, you need further analysis. The first step to do is actually to prepare a glass slide that can go under a microscope or into the television instrument. And you make a smear and you make a stain. So these two instruments are called slide preparation instruments. And then the next step is to color the slide to get good contrast of the blood cells that are on the slide. And Sellavision has also developed same protocols describing the procedure on how to do this in the best way. And then the final and last step is to put the slide in television instruments to get the automatic analysis going or you can choose a manual microscope as well-to-do that. For the large labs, you can see that the 3 first steps that are those instruments are provided with our partners, the cell counter, the smear maker and the stainer. They're part of our partners' assortments. And what television can provide here is stains that goes into the stainer machine and then stain protocols to get the right procedures going and of course our large celavision instruments for digital morphology. If you look at the small and midsized labs, celavision can take a bigger responsibility of the workflow. Our partners they provide the cell counter still, a smaller version of it, a little bit lower capacity and cheaper of course as the rest the instrument in this bloodline here. And television can also provide the smear maker to make the glass smear. We can provide the stainer, just stain the glass and we can also provide of course then the liquid reagents that is sold or put into the stainer. And the same protocol and the digital morphology system. So very similar workflows, but celavision can take a little bit larger responsibility for the small and medium sized lives. Slide 11, please. Now we're into financials and the 4th quarter highlights. If we look at the 3 regions, Americas is usually our biggest region. We can summarize with that Americas has had a tough year. There is a slight improvement in Q4 compared to the previous two quarters, but it's still negative 43% versus last year, which was a very strong year then. So it's a tough comparison. And the full year comparison year over year is negative 34%. We can't conclude though and we're happy to see that the attachment rate, if there is a bloodline being replaced in the Americas, the attachment rate or the ratio of these bloodlines being sold with the cellavision instrument, that's unchanged. So the conclusion our conclusion is that when the market recovers, then our sales should recover with it. Few activities that we've had in on the American market. The DC-one, the small lower capacity instruments got FDA clearance in October. And by that it's commercially available in the USA. And also we continue to work with the launch of Orel Stains, the products that are being produced in the factory in Bordeaux. They are we have previously been strong in Europe. Oran has a history a strong history in Europe, but not so strong in Americas and in APAC. And we are continuing to globalize that offering. The APAC region, it has had a strong Q4 and actually a very strong year as well despite the pandemic. We have 23% positive versus last year in Q4 and the full year comparison is positive 29%. And it's mainly driven by our 2 largest markets in Asia, China and Japan. In China, we haven't seen so much effects of the COVID pandemic. The business climate is basically normal and good activities, so strong sales in China. And we also see good demand in Japan and we see that some old technology is being replaced with television technologies that has given a special boost to the Japanese market during the year. Some areas in APAC are still affected by the COVID and the second wave of the COVID like Australia, Korea and India. And they're still fixed travel restrictions are in place. EMEA had a stronger quarter, the last quarter of the year compared to the previous quarters. That was plus 6% versus last year for the EMEA region. Full year growth was 44%, but we acquired a company, RAL, last year in Q4. So if we adjust for the structural effect of that, it was negative for Czechoslovakia was negative for full year for the EMEA region. We could see a few larger tenders in Q4 that helped the sales and also compensated a bit for the difficult business segments that we still have seen in Europe. And we last in January, we established market support resource in Russia and its proceeding and registration some products have begun in Russia. So that will be our next market in the EMEA region that we open up. Next slide please, Slide number 12. Yes, continued key highlights. The Celavision DC1, we talked about in that we got FDA clearance in October. And we have now information that our key partners are planning to launch in March already. And as soon as the pandemic and the business climate allows, we expect to see increased sales from a low level, but increased sales of this DC-one instruments. That is well suited for this market. Registrations are ongoing in China and they're continuing according to plan. And we have the CE mark from before. So now it's only China that is left for registration, then the whole world is open for DC1 sales. Comments regarding the COVID situation. We continue to adapt to the COVID situation, still travel restrictions, and we work digitally, both internally with meetings and also externally with meetings with customers and trainings and service technicians. We're happy to see to say and to see that we have not had to reduce our workforce at all. Our workforce is intact, and we are ready to accelerate. We have the staff in place and as soon as the market recovers, we are ready to accelerate. So we're waiting to see the positive signals in the market. Reagents distribution. We acquired the company RAL, who produces RAL produces reagents, the Saints. And we acquired Rail in October 2019. Historically, Rail has been strong in Europe. And now we are globalizing the assortment and tests and evaluations are ongoing in the APAC region and in the Americas region. And then last but not least, we're looking forward to welcoming Simon Sjergard as new President and CEO of Cellavision. And he will come on board in March. So in a little bit in a month's time, we will have some Hinge onboard here at Cenavision. Okay, next slide please, Slide 13. Financial development and some key insights for Q4. You can see that we had the sale of SEK 131,000,000 in Q4 and that was a reduction with 13% compared to the last period same last year same period. And the comment there is that we had negative FX effect. The Swedish krona has strengthened versus euros and dollars. And the FX effect was about 6%, meaning that we had an organic growth of approximately 6% in the area. Stable gross margins and underlying operating expenses versus sales. We can see that we have 41% if we take the ratio of expenses versus sales, and it's quite low. And it's proving that our cost conscious operations is preserving the margin for us. The EBITDA margin is 31%. And we feel that under the circumstances, that's a good margin. We have significant effect from COVID and also effects from negative FX and still we have 31% EBITDA margin. Next slide please. Slide number 14. Further comments on the Q4 results. Well, we commented already on the effect of the effects on the sales. If we look at the full year, we also have a structural effect. We did the acquisition in Q4 Odfjell in Q4 2019. And if we deduct the structural and FX effects from the full year. It's not the 2% growth, but it's a negative 10% the organic development on the sales. I talked before about the expenses and how we run a cost conscious operation. We don't we haven't had to layoffs or reduce any workforce, but we have prioritized our projects and focused on the most important ones. And by that, we have been able to reduce our expenses. And the organic reduction, adjusted for structural and FX fact is negative 14% year over year. Development projects, that has increased. Our capitalized R and D has increased versus last year. The full year is €25,500,000 versus in million last years. So it means that we have been able to prioritize our important development projects. So there we have not reduced activities, which we think is important for the future of television. And if we look at the cash flow, the full year cash flow for the company, the total cash flow was approximately 0. And a couple of onetime effects on the cash flow is that we did not do any dividend like we have done in the past. Usually, we have had dividends, but not even this year due to the corona. And also we had a slight increase to inventory due to a lag time by of critical components. And that increase will continue into 2021, and then we see reductions of inventory over 4, 5 years. So it's a temporary increase in inventory that we see related to this one time buy. Next slide please, Slide number 15. Here is financial development year over year. And if we look at the growth trend, we can see that 2020 is definitely a different year in the light of COVID-nineteen. So growth here is 2% only compared to the previous periods here, a lot lower. Gross margin is around 66%, which is lower than previous periods as well. That's product mix effect from the acquisition of RAL and adding the product group reagents has reduced the overall gross margin to this level to 66%. And then we have the ratio of operating expenses versus sales. So we can see that the cost conscious operations, we end up at 43% on this KPI, which is quite low over a historic period, as you can see. And with this operation, cost conscious operation and scalable business model that we have, we've been able to preserve quite good profit margins and the EBITDA margin for the year is 30%. And if we look at the chart down below here, we can see that definitely that 2020 is a special year. There is less growth and you can also see that operating expenses is down and EBITDA is down, but not as much as it would have been if we had kept our original plan for operating expenses. So we think that we have balanced this special year 2020 in a good way. That was the last slide. So thank you for And we will now open up to questions. Our first question comes from the line of Ulrik Trattner from Carnegie. Please Thank you very much. I have a few questions. In the report, you sounded quite muted in the interim market recovery in the U. S. And satisfying that recovery is supposed to happen once vaccination program have had effect. Are we still to expect growth in the first half of this year in the U. S? Or is this more on a sort of negative stance that you're expecting growth to rebound first in the second half of this year? Yes, exactly. U. S. Being the largest market for us and a very important market. We follow the vaccination programs as careful as you can. We found some good websites where we can see the trends. And if I follow if I have the right data, it looks like about 10% of the American population or the U. S. Population has now been vaccinated. So the vaccine program seems to be rolled out a little bit quicker there than average around the world, I would say or quicker than in Europe at least. So that's I think that's the most important factor to find to have the market go back to more normal conditions or normal market business climate. Another factor is that we see that we are learning to do business or businesses are learning to cope with the pandemic and using digital ways of doing business. So there is a slight effect of that learning curve, we feel, but the most important factor is actually the rollout of the vaccines. Another comment to that is that we have rather long sales cycles. You can see that how replace bloodline in hospital. It's a rather long cycle from first visits to installment and training and that line being put into operations. And of course, when the pandemic hits, it slows down a little bit. It takes a little bit longer time to slow down. But then as the pandemic wears off, since the sales cycle is long. It takes a little longer time to ramp back up again. So we are confident or we are optimistic, but it will take a little bit time before we back into the full swing. And it's really hard to judge and say. I think the best way is to actually follow the trends of the vaccinations and also to keep in mind that the sales cycles are quite long for television. Would you say that it's more crucial that the society opening up that you have the availability to go out to these labs or is it more sort of tied to the general health diagnostics as this is our part of a bloodline that that is back up to capacity back from where it's been shifted more towards COVID-nineteen? For the sales cycle for us, it's more it's important to be able to actually to visit the lab to have access to the lab and to do the installments, do the trainings, do the quality systems and get the new bloodlines operational. That's important for us. And to do that, you need to be able to travel and you need to be welcome into the hospital. And if the hospital is too busy taking care of other things that are more urgent, then it's hard to get the attention that you need or it's hard to find the time so I guess it's a mix of the two things that you're mentioning. Okay, great. And just as the DC1 was approved in October last here, how much did the DC1 contribute to sales in the 4th quarter? Very small contribution so far. It's basically pre launch let's say pre launch systems that we have shipped. And we expect to see, as the market recovers and as our partners focus more on this and work more actively with the DC1. Then we expect to see more increase in the sales. But so far, the DC1 has been hard to launch. It's a new technology, and new technologies are not that well known and it's part of nature that you need to talk a little bit more about it when it's a new instrument. And that's even more difficult under a pandemic than to sell some technology that is somehow known at least our large labs are a bit familiar with our instruments, I would say. And then it takes a little less physical meetings to get the sales going. But for the DC1, it's been more difficult. Okay, great. Then on to its operating expenses and you're talking about structural cost reduction. So year over year 14% for the full year. But as I look at the numbers, it seems like your capitalized R and D have gone up 37% year over year. Wouldn't it be more fair to look at adjusted numbers? And by those numbers, it seems like there is simply close to 0 sort of cost reduction year over year? Yes, I would say that's a valid point actually because capitalized R and D increased from €16,000,000 to €25,000,000 And that is seen as a reduction, of course, of expenses. So in one way, I think it's a fair comment. And then in another way, we can say that it's we have been more efficient with our R and D time spent. It's been spent on projects that we will live off in the future. So in that sense, it's been more efficient this year. And it was actually quite low last year because the DC-one, the new small instrument, was in the final stages. And in the final stages, there was some fine tuning and some commercialization and industrialization of the product. And those expenses we were not able to capitalize. So I'd that's it was rather low last year actually and better spent this year. Okay, great. Last question before I get back into the queue. And it's actually regarding to sort of capitalize the R and D and depreciation and how we should be able to decipher the gross margin between the different segments. Is there any way that you can specify RAL sales in the quarter? Or I believe sort of specify what was sort of the gross margin for your sort of original morphology analyzers? And also on sort of RAL's gross margin development, it seems like it's down closer to 6 percentage points year over year. Although we see sort of a gradual recovery from last quarter, which was on a really low point. Any reason for Raul being at that level of the gross margin, is that based on scale? Yes, I think the part of our business that has less the impact from the pandemic is actually the rail business because it's not the installation product, it's recurring business. And we haven't had so much hiccups in the supply chain either. It's been working quite smooth under the circumstances. And we have actually seen a bit of growth year over year on that segment. So we're quite pleased with the development there. And then long term margin developments for Al, well, we think that we can see that increased volumes in a factory usually leads to some improvements. But we also see that improvements are usually linked to hard work. So it's not going to come overnight. It's probably hard work and gradual step by step improvements that we can expect. And we also see that it will be hard to come up to the same level as we have for the instruments. I think competition and the market climate make that very difficult. Okay, great. And just if you can help us sort of decipher what RAL sales amounted to or if you can specify the gross margin of your morphology analyzers ex RAL, what those numbers were? Yes. I can give some hints on that. In the report, we have one table that is reconciling sales. And in there, there is a product group called reagents. And reagents is the largest part of rail sales, almost 90% or in that area. So by following that in the reports, you can get a good sense of the development. And what was the other question? It was margin development for the rest of the assortment. The rest of the assortment is quite stable actually when it comes to gross margins. You can see smaller swings. And I would say, if you follow currency effects, because we have the sales in euro and dollar and most of the costs are in Swedish kronor, there is some leakage like computer components and optics. We buy them in kroner, but there is a leakage from U. S. Dollars into the kroner with a bit of delay. So by following I would say by following the exchange rate, you can follow the old gross margin development quite well. Okay. Great. So just to be clear, a good proxy is that 10% of our system sales is actually rail systems as well, so capital goods? There is a bit of rail systems that are being sold in the numbers, it's quite small numbers so far. Great. Well, thank you very much. And I'll get back to the queue. Our next question comes from the line of Felix Wignan from SFO. Please go ahead. Magnus, thank you very much for running us through the numbers this time. I really appreciate it. A couple of questions, please. The first one would be if you could add some more detail to the comment around the tenders in Europe and whether these have translated into revenue already as it sounds in the Q4 or whether these have been orders and probably how they phased through the year, if you could add? That's the first question. Yes, a few I mean, part of this business is actually that you reply to tender. So I wouldn't say that it's extraordinary or a one time effect, but we could pinpoint that the few of them probably fell into the Q4 period. And it was related to sales in Italy and sales in Germany and a bit in the UK, a little bit of a mix there. And we think that, that helped the sales a little bit for the European region in Q4. And we have a volatile business, so it's not unusual that you see swings between quarters. And but we just highlighted that in the report because during the circumstances and the pretty tough conditions that we see during the 2nd wave of COVID in Europe right now, we thought it was appropriate to highlight that in the report. Sure. Thank you very much. The other question also comes back to R and D and capitalized R and D. Just for me to understand it better, does this increased capitalized R and D relate to still to the NDC1 development or to other new projects? And if it's 2 new projects, if you could give some more detail around the type of project. I think in the past, we discussed about malaria or bone marrow analysis. So just some more detail would be fantastic. And how you're getting ahead on this? Thank you. Yes. The DC1 is now launched on all markets except on the Chinese market. And as soon as our products are commercial in a market, all cost after that is expensed. That's our accounting procedures to have it that way and I think that's pretty much standard. So the capitalized R and D is related to new developments And it's both hardware and new platforms, new more modern instrument platforms. And then it's related to software that you can load on the platforms and others yes, other software developments that are needed to have a competitive offering. You mentioned a few specific ones there. I won't do that because we're not usually not disclosing the pipeline of product development because it's sometimes an iterative process to move forward and that could be re prioritization, sorry, over the period. So we prefer not to comment on the specific ones. But large part of it is related to platforms for future instruments, I would say. That's fine. Thank you very much. And then just 2 more quick questions. The next one on leverage, please. Just I don't have the numbers in front of me right now. Where does net debt to EBITDA stand now? And where do you expect this to be at the end of 2021? The leverage, sorry. Could you repeat that, please? Sure. On leverage is the question. The first point would be on net debt to EBITDA, where that stands at the moment just because I don't have the numbers in front of me right now. And where do you expect that to end the year at for the year 2021? Where do you expect net debt to EBITDA then? Yes, similar to me. I have to pass on that. I don't have that numbers either in front of me or in my head. So I have to pass on that one, sorry. But we depreciate over 5 years on the loans that we have. That's the guidance at least. The loans are related to acquisition of the RAL that was done in Q4 2019. Okay. That's fine. And then last question on RAL. I remember that in past conference calls, we discussed about the competitiveness of the product. And competitors, I think Merck and others, stepping up and maybe wanting to defend their market share instead of allowing RAL to scale. So just if you could share some anecdotal evidence of how that has developed, how competition has behaved over the last year. I think in a comment, you also mentioned that competition is tough. So just some more color would be fantastic. Thank you. Yes. I think when you look at products like reagents. You should look at the full cost of not just the cost of the per milliliter or per liter, you should look at the full cost of running your equipment. So there is a part that's quality related, if you get good quality because that saves time. And there is a part where that could save time in service and maintenance. And then there is, of course, the cost of the products. And if you look at the whole perspective of that all those parameters. We believe that the rail offering is quite competitive actually. And it has to be proven. It has been proven in Europe and we think that we can prove it also in other parts of the world. We have some sales in Korea, for example, in APAC. And we are doing evaluations in both North America and in Asia to see if we can convince our partners and our customers that we have the best offering when it comes to this. I think also that the protocol, the staining protocol, the process description of how to use it, I think that's important too as a factor will increase quality and save time in the labs. Okay, perfect. Thank you very much. That's it from me. And I look forward to follow you over the next quarters and years. Thank you, Magnus. Thank We have a question from the line of Karl Oskar from Berenberg. Please go ahead. Magnus and Erwan. I think most of my questions have already been answered. I just want to tie a little bit back with what Ulrik was asking about in terms of the markets going forward, obviously, I know it's a little bit it's a very different situation that we're in. But following on from the Q3 results, the sort of the communication from your end was that we're past the trough. And is this sort of a reiterated statement from your end, do we think that will pass the trough? Or should we expect more severe jumpy quarters going forward? I expect it to be a rocky road still, but I expect to see gradual improvements going forward. I also think it's a really difficult situation to predict what's going on because I think we are in hands of a lot of external factors when it comes to recovery in the markets. And quite closely related to supply and implementation of vaccine programs. So I think we will see great improvements during the first half of this year, but we won't be back to normal activities. That's the hypothesis that we're working from right now. But we don't know if we're right or not, but that's our view right now. Thank you, Magnus. That's all for me. There are no further questions were disturbed. So I hand back to Magnus for any closing remarks. All right, thanks very much for calling in and thanks for your interest in Cellavision. Next time the report will be presented is in April. That's going to be our Q1 report. And then you will have a chance to meet the Sven Ostergaard, our new CEO, who will be presenting at that time. So thank you for now.