15% beat on EBIT driven by gross margin

Investment phase holding back FCF

India order expected to drive growth in H2’18

Q2 summary
Boule Diagnostics (Boule) reported a solid Q2 report with 3% organic sales growth and an EBIT of SEK 19.8m (ABGSCe SEK 17.3m), equal to an EBIT margin of 18.4% (ABGSCe 16.2%). The earnings beat in Q2 was mainly driven by a higher-than-expected gross margin (48.8% vs. ABGSCe 46.9%). We believe the strong gross margin in Q2 was due to the product mix, with a slightly higher share of consumables in Q2 than we had expected, and also to some degree the geographical sales mix. In Q2, Boule delivered fewer instruments in Q2 (962 vs. ABGSCe 1,050), but at a higher ASP (SEK 38.9k vs. 37.0k), resulting in 4% lower instrument sales. However, the miss on instrument sales was more than compensated for by the stronger-than-expected consumables sales in Q2 (SEK 60.8m vs. ABGSCe 57.7m).

FCF generation held back by investments
Boule generated FCF (excl. M&A) of SEK 2.3m in Q2, marginally up from SEK 1.9m in Q2’17. Reported FCF was SEK -20.4m, including the acquisition of laser technology in Q2 of SEK 22.7m, which will be used in the next generation of 5-part segment products. Capitalisation of R&D increased slightly (SEK 5.9m vs. SEK 5.5m in Q1’18) as Boule is working on updating and broadening its product offering. The net cash position at the end of Q2 amounted to SEK 93.8m, down from SEK 117.3m after Q1’18.

Uptick in sales growth for H2 expected
A large order of 650 instruments to India was announced in Q2, with plans to deliver during Q3 and Q4, which will help to drive sales growth. We forecast 8.1% and 13.9% sales growth for Q3 and Q4 respectively, up from 3.4% in Q2 and a decline of 6.7% in Q1. However, we believe the shipments to India will put some pressure on the gross margin in H2, compared with the current run-rate (T12m) of 48.9%.