Earnings Transcript for CLLKF - Q3 Fiscal Year 2024

Maria Forss: Hello, and a warm welcome, everyone, to BICO's third earnings call for 2024, where we will present our quarter 3 2024 report. My name is Maria Forss, and I'm the President and CEO of BICO; and together with our CFO, Jacob Thordenberg, I will present our report. Today's agenda is divided into 5 sections before the Q&A. We will begin to summarize the quarter and highlight significant events. We have also had some recent events, which we will also comment upon, even if they occurred after the end of quarter 3. We will further on comment on the market development and thereafter present BICO's quarter 3 financial performance as well as deep dive into our business areas performances. This will be followed by a presentation of the development of our strategic priorities, strategic agenda and financial targets. And these sections will be in listen-only mode. After the presentation, we invite you to our Q&A session. And the Financial Hearings host will be back with further instructions. Before presenting a summary of the quarter, I would like to recap shortly on one of our main events this year, namely our Capital Markets Day, which took place mid-September. The main purpose for the Capital Markets Day was to launch our updated strategy, which, in essence, entailed a new vision and mission. Our 4 strategic priorities and financial targets were reiterated. Our key priority, commercial excellence, has been reinforced with 5 focus areas, and we also launched a new business area structure with Lab Automation, Life Science Solutions and Bioprinting. From this quarter, they also constitute our reporting segments. If you haven't watched yet, just click on the QR code to access the recordings from the digital sessions, and they can also be found on our website. Let us now move into the quarter. For quarter 3, we can conclude a soft market for instrument sales, primarily in Academia and Diagnostics segments due to CapEx constraints and fewer project starts in Lab Automation. All in all, this hampered our quarter 3 sales performance. It's important to highlight that Lab Automation, i.e., Biosero has a project-based business with significant fluctuations in revenues between quarters. Hence, it's more relevant to look at year-to-date figures, where we have delivered 26% organic growth. We continue to see a strong trend and demand for integrated lab automation solutions, and the decline in sales also impacted profitability, which was partly offset by strict cost control. We delivered sales of SEK 496 million and an organic growth of negative 13% compared to a very strong corresponding quarter last year. Jacob will give you more details on the financials later on in this presentation. All business areas were profitable in quarter 3, reporting a total adjusted EBITDA for the group of SEK 40 million, generated an adjusted EBITDA margin of 8%. The operating cash flow for the quarter was SEK 45 million, thanks to the development in net working capital. And as mentioned on the previous slide, we also launched our updated strategy. Our new General Counsel, Andreas Joersjö, was announced in July, and he joined us in October. His previous experience and commercial mindset will further contribute to developing our legal function. In addition, a few but important events occurred after the end of the quarter. Last Thursday, we announced that we have entered into an agreement to divest Nanoscribe. We have purchased -- repurchased convertible bonds, and we have also announced further rightsizing and launched a sharpened commercial agenda in CELLINK. I will now hand over to Jacob to comment on the first 2 events, which occurred after the quarter.

Jacob Thordenberg: Thank you, Maria. We announced last week on November 21 that we have entered into an agreement to divest Nanoscribe, which is a company in our Bioprinting business. Nanoscribe based in Karlsruhe, Germany, is a producer of hardware equipment used in the microfabrication segment with customers mainly outside the life science industry. As per LTM Q3 2024, Nanoscribe recorded SEK 230 million in sales and a gross margin of 54% and adjusted EBITDA margin of 12% and a working capital level in relation to LTM sales of 24%. BICO acquired Nanoscribe in May 2021, and the total acquisition value was SEK 250 million in cash and circa 301,000 BICO shares. Additionally, between 2021 and 2023, circa SEK 132 million has been paid in earn-outs. The acquisition rationale at the time was to access nanoscale printing technology as a complement to the Bioprinting offering. The enterprise value on a cash and debt-free basis amounts to EUR 28.6 million, corresponding to circa SEK 323 million. Following net debt and working capital adjustments, the equity value amounts to EUR 26 million, corresponding to circa SEK 294 million. The divestment is estimated to generate a capital gain of approximately 10% above book value for Q3, subject to timing of closing of the transaction and FX movements. The final financial impact will be reported in the interim report for Q4 2024, and Nanoscribe will be treated as discontinued operations in BICO's financials from Q4 2024. The rationale behind the divestment is in line with the updated strategy where Nanoscribe has been concluded noncore due to its significant footprint outside life science industry. Net proceeds from the divestment following transaction expenses will be used to reduce long-term debt. This is a good segue into the next slide on repurchasing of convertible debt. But before moving on to that, I would like to conclude and refer to what we communicated during our Capital Markets Day in September. We continue to receive serious inbound interest for many assets in our portfolio, and BICO will continue to review our portfolio of assets to maximize execution on our updated strategy and shareholder value. Now let's move on to the next slide. First, to give you some background, in March 2021, BICO issued senior unsecured convertible bonds with a total nominal amount of SEK 1.5 billion. On November 22, BICO repurchased convertible bonds with a total nominal amount of SEK 118 million at a purchase price of 83.6% of the convertibles' nominal amount. The total purchase consideration for the bought back convertible bonds thereby amounted to SEK 98.7 million. Following the buyback, BICO's holdings of the convertible bonds totals a nominal amount of SEK 118 million. The rationale behind the buyback was to optimize BICO's capital structure, i.e., reduce long-term debt, which was made possible by our strong liquidity position. BICO will continue to evaluate the bond market and may, from time to time, repurchase further convertible bonds in the market, if deemed attractive. I will now hand back to Maria.

Maria Forss: Thank you, Jacob. And this means that we have reached the third and final event, which occurred after quarter 3 that we would like to highlight. Yesterday evening, we announced further rightsizing and launched a sharpened commercial agenda for CELLINK. The launched plan focuses on long-term stability and profitability, and this entails a sharpened commercial agenda and further rightsizing to achieve a sustainable cost structure. The measures taken will result in a solid platform to scale from and lay the foundation for sustainable profitable growth. It will also entail an increased focus on the technologies where CELLINK has a leading market position and to optimize synergies with other BICO companies, which is in line with the group's updated strategy. The rightsizing is expected to result in redundancy of approximately 20% of the employees across the CELLINK organization, and redundancies are subject to union negotiations. All in all, these 3 events show that we are focused on delivering on our updated strategy and on our 4 strategic priorities. I will now move on into the next section, market development. This section was introduced in quarter 1 this year and gives more flavor to the market development, and I'll also comment on sales by geography. The market environment continues to be challenging and uncertain with regards to demand as well as macroeconomic and geopolitical factors. We are a few weeks post the U.S. election, which took place after the end of the period. And BICO will monitor and stay proactive in terms of any potential negative impacts from tariffs or other trade barriers. Our Asia, including China, direct exposure is, however, limited, representing only 6% of sales in quarter 3. And this is a decline with 12% units compared to the corresponding quarter last year, which also impacted our sales levels. The slower market in China is also reported by many of our peers and is indirectly impacting our business. For quarter 3, we can conclude the pattern we have seen for some time, i.e., that customers are holding tight to their CapEx spendings. And this has impacted our sales levels compared with those of our peers, who are less dependent on instrument sales. However, we see improved sales development in our companies that are more focused on consumable sales. As you can see on the map, the distribution in sales changed during the quarter due to the significant drop in Asia and foremost China. Sales in Europe have increased in relation to North America due to fewer project starts for Lab Automation during the quarter. And despite the short-term challenges that BICO faces, we believe that we are right positioned with our updated strategy, and we focus on commercial effectiveness. It's now time for me to hand over to Jacob again for a summary of our financial performance.

Jacob Thordenberg: Thank you, Maria. Yes, I will now comment on the third quarter of 2024. All numbers are presented in Swedish crowns. I would also like to remind you that from the first quarter of this year, BICO reports in functional reporting and comparable numbers have been adjusted. Furthermore, all organic growth figures are in constant currency. As Maria mentioned, BICO delivered sales of SEK 496 million with an organic growth of negative 13%, and I will comment more on sales on the next slide. Adjusted EBITDA amounted to SEK 40 million and EBITDA was SEK 37 million for the quarter. We also have a separate slide where I will present the Q3 EBITDA development. Gross margin for the quarter amounted to 53%, which is an improvement compared to previous quarters and can be explained by the product mix with less project-related business in Lab Automation. The net loss for the quarter amounted to negative SEK 248 million. On the next slide, I will comment on sales for the group for the third quarter. As mentioned, the third quarter generated sales of SEK 496 million, corresponding to a negative sales growth of 16% and a negative organic growth of 13% compared to a very strong corresponding quarter last year. Year-to-date sales amounted to SEK 1.540 billion, corresponding to a negative organic growth of 4% compared to last year. In the quarter, the market has continued to be soft for instrument sales, primarily in the Academia & Research and Diagnostics segments due to continued customer CapEx constraints. Additionally, we have, during the quarter, had less project starts in Lab Automation, impacting our sales negatively. As mentioned in our CMD, one of the rationales of including Biosero in a separate business area was to increase the transparency of BICO's financial profile, as Biosero has a different business model and financial profile compared to our instrument companies due to its project business with significant fluctuations in revenues depending on project starts. Primarily, this relates to Biosero having a percentage of completion revenue recognition model, which creates significant revenues when a project is started and when instruments for the projects typically are acquired. And as mentioned, in this quarter, we had fewer project starts impacting revenues in the quarter negatively. Furthermore, for the quarters to come, Lab Automation will have tough comparable figures due to the large order of $28 million won end of 2023, which had a significant positive effect on first half 2024 financials. Maria will comment in detail on the business areas to give you some more in-depth information, especially with regards to Lab Automation and the project-based business model. Lastly, and like many of our industry peers, we have seen improved sales in our companies that are more focused on consumable sales. And if we move on to profitability. Adjusted EBITDA for Q3 amounted to SEK 40 million, corresponding to a margin of 8%. EBITDA amounted to SEK 30 million, also corresponding to a margin of 8%. All business areas were profitable in the quarter. The margin drop of 8 percentage is explained by weaker sales development compared to last year and, as previously explained, driven by continued weak market in the Academia & Research and Diagnostics segments due to continued CapEx constraints as well as less project starts in Lab Automation. This decrease in sales was partially offset by better cost control, product mix and lower cost for personnel. As always, and worth repeating, staying on course with cost control is always a priority across the group. And if we move on to the next slide and our cash flow. The cash flow from operating activities for the quarter amounted to SEK 45 million. This includes a positive effect from changes in working capital of SEK 33 million. Out of this, SEK 17 million was related to increases in operating receivables. Inventories decreased by SEK 19 million, continuing the positive trend of decreased inventory, and operating liabilities increased by SEK 31 million. Investments in tangible CapEx amounted to SEK 10 million and investments in intangible CapEx amounted to SEK 17 million. For the second quarter in a row, we didn't pay out any earn-outs. Total estimated remaining earn-out payments amount to SEK 8 million. Total cash flow during Q3 amounted to negative SEK 1 million and cash reserves by end of September amounted to SEK 682 million. This slide shows the development in net working capital between Q3 2023 and 2024. During this period, net working capital has decreased from SEK 550 million to SEK 456 million and has been stable between 20% to 24% of sales. To conclude, BICO has, for the past quarters, showed that the actions implemented in 2023 to improve working capital were successful. We have continued to work with this diligently during this year as part of our operational excellence activities, and BICO's levels of net working capital are now in line with industry peers. Maria will now comment on our 3 business areas performances.

Maria Forss: I will guide you through our business areas for the third quarter, but first, I would like to repeat the rationale behind our new business area structure. This was introduced during Capital Markets Day. And on this slide, you can see the former business area structure, which we reported on since quarter 1, 2022, namely Biosciences, Bioautomation and Bioprinting. To better reflect the updated strategy and our commercial focus, we decided to introduce new business areas. And here, you can see the new business area structure, which we presented at the Capital Markets Day. As Lab Automation is one of the cornerstones in our updated strategy, we have decided to introduce Lab Automation as a new business area, which will comprise of Biosero, our market-leading company with integrated lab automation solutions. In addition to being a cornerstone in our strategy, this will also increase the transparency of BICO's financial profile, as Biosero has a different business model and financial profile compared to instrument companies due to project-based business, as Jacob had mentioned. Additionally, we introduced Life Science Solutions as a new business area, where we will offer instruments, selected workflows and complementary offerings such as consumables, software and services. Our third business area, Bioprinting, we kept intact, and this holds a differentiating position in the portfolio, creating opportunities for the lab of the future. Let's now move on to see how the business areas performed. The revenue for business area Lab Automation was impacted by fewer project starts during quarter 3 compared with previous quarters, which also affected the profitability levels compared with corresponding quarter last year. And it's important to highlight that Biosero has a project-based business with significant fluctuations in revenues between quarters, hence, looking at an individual quarter is less relevant. The business area reported net sales of SEK 101 million in quarter 3, and the organic growth in the segment was negative 25% and the adjusted EBITDA, SEK 7 million, corresponding to a margin of 7%. Less project starts is the main reason for the deviation in the isolated quarter. And for reference and more relevant, when looking at the first 9 months of 2024, the business area delivered an organic growth of 26% compared with the corresponding period last year. So we continue to see a strong trend and demand for integrated lab automation solutions. However, the sales cycles for large orders of pharma are currently longer. If we move on to Life Science Solutions. In quarter 3, this business area's net sales amounted to SEK 238 million. The organic growth was negative 12% and adjusted EBITDA SEK 30 million, corresponding to a margin of 13%. The business area had weak development in the company's SCIENION and ECHO, where the former continued to be hampered by slower diagnostic market and the latter was impacted by the slower Academia & Research segment. Profitability levels were kept at positive double digit, which was the result of the strict cost control. Actions to decrease the cost base and strengthen the commercial offering are in place for SCIENION and positive effects have gradually begun to materialize. Let's now move on to the results for area Bioprinting. The Bioprinting business reported net sales of SEK 159 million in quarter 3. The organic growth in the segment was negative 3% and the adjusted EBITDA, SEK 24 million, corresponding to a margin of 15%. MatTek's products, which are mainly consumables, showed healthy demand during the quarter, while MatTek sales level was impacted by continued lower demand from Academia & Research. And it's important to highlight that the corresponding quarter last year was a very strong one, both from sales and profitability perspective. As mentioned earlier, BICO has entered into an agreement after the end of the quarter to divest Nanoscribe. And we have also mentioned that CELLINK has announced further rightsizing and launched a sharpened commercial agenda. And before we move on into the Q&A, I would like to comment on the development of our strategic priorities, present our strategic agenda, and comment on our financial targets. So if we move on to the next slide, I will give you a brief update about the development on our 4 strategic priorities. Commercial excellence, which is our key priority, has been reinforced with 5 focus areas. And during the quarter, 2 global skills teams focusing on lead generation and sales excellence were launched. We have also established teams across the group, developing common processes and tools for digital marketing, cross-company lead generation, and designing a global partnership development program. Commercial excellence will continue to be our highest priority, and we will continue to roll out initiatives. For the strategic review, BICO has, after the end of the quarter, entered into an agreement to divest Nanoscribe and the net proceeds will be used to reduce our long-term debt. To further reduce debt, it was announced also after the end of the quarter that BICO bought back convertible bonds, as Jacob had commented upon. As we communicated during our Capital Markets Day and also mentioned by Jacob in this presentation, we continually assess the strategic fit across our portfolio of assets, and we consider options which are positive for shareholder value. And from this context, we continue to see inbound interest for many of our assets. To further support people and culture, 4 new core values

Jacob Thordenberg: Thank you, Maria. The financial targets have been valid since 2023 and were reiterated during our Capital Markets Day since they are still relevant, and we want to deliver on these existing targets before setting new ones, which we intend to define when the current targets have been achieved. I will now comment on the development on a rolling 12-month basis. For the growth target, the outcome was negative 4.1%. The outcome is below target given the soft market for instrument sales, primarily in Academia & Research and Diagnostics segments due to CapEx constraints. For the profitability target, the outcome for adjusted EBITDA was 5.8%. The outcome is below target and negatively impacted by the slower sales. For the debt target, we achieved 4.8% for adjusted EBITDA. The negative cash flow in 2024, combined with a weaker market in terms of sales has increased the ratio over time. I will now hand back again to Maria for some final remarks.

Maria Forss: Thank you, Jacob. So our updated strategy was launched by the end of quarter 3. And with the divestment of Nanoscribe, repurchase of convertible bonds, the further rightsizing and more focused commercial agenda for CELLINK, we are in the beginning of the execution phase. When looking at the financial targets and considering the tough market we operate in with spending and CapEx constraints, weaker demand from China, we're confident that our updated strategy long term will support us in achieving our financial targets and that we're moving in the right direction. This was our final slide before the Q&A session, and I'll hand over to Financial Hearings host for further instructions.

Operator: [Operator Instructions] The next question comes from Rickard Anderkrans from Handelsbanken.

Rickard Anderkrans: I have a few, please. Starting off with the CELLINK additional restructuring. It would be interesting if you could quantify the restructuring impact on a group level, both from sort of top line impact from product pruning, but most importantly, maybe on the OpEx side. And when do you expect that business area to be profitable? And the follow-up question on that is how much similar type of restructuring and cost cutting do you have left across the group at this point?

Jacob Thordenberg: Right. That was -- I counted it to 3 questions. So top line impact, cost and similar cost rightsizing activities. And for the top line impact, I believe that we have seen most of this impact in the past quarters. And what we intend to do now is to do further rightsizing given that we now believe that we have reached sort of a stable level of sales in CELLINK. And to put that into perspective in terms of group costs, it has not that material impact. So we're talking about roughly a saving of SEK 40 million on an annual basis. And when it comes to similar activities, there are no other sort of rightsizing activities currently active in the group.

Rickard Anderkrans: Okay. Very helpful. Do you anticipate that there will be a need for additional rightsizing activities from here?

Jacob Thordenberg: I mean we should never exclude that, but I wouldn't say so. I would say that our main focus right now is to focus on operational excellence and achieve more efficiencies across the group rather than sort of further rightsizing. But we will continue to work in our operational excellence program, finding synergies between the groups -- between the companies, et cetera. So we will definitely work hard to stay in cost control, of course, but also find more efficiencies, but not necessarily additional rightsizing activities.

Rickard Anderkrans: That's clear. So NIH funding exposure is less than 5% on the group level in looking at the Academia government segment. So what data points or signals are you looking for to tell if we can see an improvement in that market heading into next year? And sort of it would be interesting to hear if we could have any insights on the timing, any -- when budget renewals or any other key data points to look out for, for that end market in academic segment to improve?

Maria Forss: When it comes to NIH funding, usually when researchers apply for grants, they are provided grants that are between 1 and 3 years long. And we are, through our CRM system and through our diligent work with customers, all the time monitoring what's happening in that part of the market. And we will see what happens with the new administration with Trump coming in place. The messages so far have been that they should be driving efficiencies. And hence, we are well placed with our portfolio that is driving efficiency in the lab for the future. So that's what we know for now.

Rickard Anderkrans: All right. And in Q1, I believe you mentioned some positive signs from Europe and North America. I guess that's not really the case anymore. And it would be interesting to hear what parts of the business deteriorated compared to the wording in conjunction with Q1?

Jacob Thordenberg: Could you repeat that question, Rickard, because I'm not sure we see the same pattern here. So could you repeat it?

Rickard Anderkrans: In Q1, in the CEO letter in Q1, you mentioned -- there was a mention of some positive signs in Europe and North America. And I was just following up if that doesn't seem to be the case anymore, and it would be interesting to hear what parts of the business have sort of deteriorated throughout the year compared to some of the positive signals you mentioned?

Jacob Thordenberg: But I wouldn't call it sort of parts of the business deteriorating. I would rather call it that there has been sort of an optimism around sort of a market recovery end of 2024, and that is not only applied for BICO, but sort of the industry in general. And I think what many have seen, including BICO, is that the market has continued to be soft. And I think it's rather that, but our text or sort of our comments in Q1 was sort of positive signs that we saw in the market, but we have, unfortunately, like many of our peers, continued to see a soft market.

Maria Forss: And we can also comment upon the fact that, that part of the business that is more focused on consumable sales is now showing a better gradual increase than the more instrument-focused side of the business. And this is also in line with what our peers have reported and usually what you see in this type of macro environment that consumables starts to improve first, and then in the next wave, instruments are usually coming.

Rickard Anderkrans: Perfect. Very clear. And final question for me on Lab Automation, could you roughly quantify how much of the $28 million order announced last year has been recognized in the P&L so far? In the press release, it was stated that sort of the vast majority of the project will be carried out and invoiced during '25. So just following up a little bit on that order. And also if you could add and describe sort of the pipeline for Biosero projects at the moment.

Jacob Thordenberg: Yes. So when it comes to the order won in 2023, I won't give you sort of a split on how much of that has been recognized in the first half of 2024, but a significant share of the revenues from that order was recognized in the first half of 2024, given to what I mentioned earlier in the call that when we buy instruments, typically, we also then have significant revenue recognition. When it comes to the pipeline, and Maria can add on, we continue to see a strong trend for Lab Automation and a solid pipeline of projects. But Maria, do you want to give some further...

Maria Forss: I think, again, it's worth reiterating the fact that a single quarter is not relevant. We should look over time, and we had a growth year-to-date of 26% in that business area. And given that many of these projects are large projects, they go over a lot of quarters, and that means that when there is pressure on cost control also in the pharma industry, that means that they will also take longer time to complete procurement and purchase orders than normally. And in quarter 3, there were less project starts, and that was one of the reasons why we separated out the Lab Automation business due to its lumpiness and the project character. So we continue to see a strong demand for lab automation solutions in the market, and we are only beginning of the lab automation era.

Operator: The next question comes from Ulrik Trattner from Carnegie.

Ulrik Trattner: Great. Another question on Lab Automation. I know it's a project-based business and the lumpiness attached to it. And you make a lot of margins, as you mentioned, when you're starting a new product and buying instruments. Now you're stating, Maria, here in the CEO letter that you're seeing a slower number of starts of new projects. Should that in turn be interpreted that Q4 will most likely continue on the same trend on the margin side that we see in Q3? Or related to the previous question here, have the activity picked up sequentially during the quarter? We're now beyond sort of the midpoint of this quarter. So what are you currently seeing?

Maria Forss: As you know, we never guide moving forward. But as Jacob presented during the presentation, we had very strong quarters in quarter 4 last year and also quarter 1 this year when it comes to Lab Automation.

Ulrik Trattner: Okay. And additional question on the CELLINK rightsizing and cutting 20% of the employees. Could you quantify how many employees this entails, as well as this is subject for union negotiations. So where -- this SEK 40 million in savings, where are we at in terms of timing of seeing these realized?

Maria Forss: So 2 questions. I'll start with the first one. When it comes to 20% of the workforce, and as you can see in the annual report from last year, CELLINK has roughly 100 employees. So it's roughly 20 colleagues that we're talking about. And given that this is part of union negotiations, it's most of the staff are based in Sweden, which means that we will start to see these effects late quarter 1, early quarter 2.

Ulrik Trattner: Great. And last question on my end. I note the big improvement in cash flow, and I know that you're happy with the level of working capital in percentage of sales. So if we were to focus on the CapEx part instead, and we have reached some type of new lower level in CapEx spend. Is this sort of the maintenance level that we should be expecting going forward as well?

Jacob Thordenberg: When it comes to sort of tangible CapEx, I would say, yes. I mean we are not a tangible CapEx business. I think the other question is, of course, how much we will spend into capitalized R&D. And that is something that we're currently looking into and sort of forming a clear road map also for 2025 on how much we are to spend on R&D projects and where to allocate capital.

Ulrik Trattner: And would you say that, that would materially change the current dynamic of CapEx? Or is it just the magnitude of smaller adjustments?

Jacob Thordenberg: I don't expect any material changes, no.

Operator: There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

Maria Forss: Thank you for all the questions, and thank you, everyone, for joining us today. Before we end, we would like to update you on our financial calendar. Our next earnings call that we will host will be for our year-end report, which will take place on February 19, 2025. So together with Jacob, I would like to wish everyone a great Tuesday. Thank you, and goodbye.