Elekta AB (publ)

Good morning everyone, and warm welcome to the presentation of Elekta's Second Quarter 2021-22. My name is Cecilia Ketels, and I'm Head of Investor Relations at Elekta.

With me here today in Stockholm, I have Gustaf Salford, Elekta's President and CEO, and our CFO Johan Adebäck, who will be presenting their results. And Today's agenda, start off by Gustaf presenting some of highlights of our development, then Johan will give you details on the financials, and the presentation end with Gustaf's view on Elekta's outlook.

After the presentation, there will, as usual, be time for your questions. But start with, before we start to remind you that some of the information discussed on this call contains forward-looking statements and this can include projections regarding revenue, EBIT results, cash flow as well as product and product developments, and these statements involve risks and uncertainties that may cause actual results to differ material from those set forth in the statements.

And with that Gustaf, I hand over to you Gustaf.

Thank you, Cecilia and good morning for many as well to everybody on the call. So I would like to take the opportunity to present resent the highlights from the quarter.

But first I would like to start with talking a bit about our strategy ACCESS 2025 and it's build, as you see here on four pillars. It's about accelerating innovation with the customer utilization in mind, results about driving partner integration across the cancer care ecosystem.

We should be the customer lifetime companion, and we're also about driving adoption of cancer care and radiation oncology across the globe. But I think it's very, very important to also emphasize that the resilience and process excellence activities have been absolutely crucial during the last year to neighbor last to continue to support the customers and patients also doing very, very challenging market conditions under COVID and it's almost now 5,000 fantastic employees and colleagues around the world that are implementing this strategy and making sure that it's delivered in a sustainable way.

And in the coming presentation, I would like to connect this strategy ACCESS 2025 to the activities we have been driving in the quarter. So if we look at the Q2, we were able to accelerate innovation, and I think it's some, it's very exciting progress around this, when you look at expanding software projects into later phases and also a larger software engineer base around the world to address our customers increasing need for streamline clinical workflows, automation and productivity.

At the recent Astro, we presented the latest technology updates for Unity, a clear step towards comprehensive motion management and I'll get into this way more datas later in the presentation. We also received clearance for artificial intelligence module for [indiscernible] contouring, very promising step.

And under the second pillar, if we moved to being the customer companion, we are experiencing that during the quarter, many markets opened up. We got better access to our customers, we're able to meet them both at the ASTRO [ph], but of course also ASTRO, We continued to build and drive our value added services, a very promising area on strengthening our dealer to station offering as well as organization around service.

And we will look at partner integration. We continue to develop our partnership with Phillips, especially around software portfolio and we acquired some software assets designed to stream nine accelerate radiation on quality workflows.

We developed other partnerships around patient reported outcomes. For example, we have a recent agreement between our Taiko Health [ph] and the Netherlands Cancer Institute NKI to develop the next generation on digital patient monitoring and management systems.

The fourth pillar is about driving adoption of radiotherapy cross the globe. And we had opportunities to present a late this Lynn Harmony [ph], both in the US at Astro and also at the Shine [ph] International Import Expo CIIE [ph] for the first time and received a lot of interest and demand.

And doing the quarter we also strength our present in the important markets of Turkey by acquiring our neuro distributor. We launched sustainability linked bond framework in the quarter to give more people around the world, access to Cancer Care in underserved markets.

But after that strategic updates, I would like to turn to our financial performance in Q2. Our orders grew with a strong 12% in the second quarter and the growth for the first half was more modest 3%, but if you adjust for the largest deal ever in [indiscernible] in Q1 last year, the underlying growth would be 14% for the first off.

And if you look at the revenue development, then you will come back, you and would come back more to that in later part the presentation. But we have managed to supply chain challenges well in the quarter, and after a very strong finish of the quarter, we arrived at an overall growth rate of 7%.

And the growth came mainly from mature markets that grew with double digits. I was also very pleased after hard work we see a gradual increase of a growth and operating margins compared to the previous quarter.

And if we look a bit more on our markets and the order development, overall we drove the strong order growth I mentioned in mature market, but also in India and China. We are experiencing softer development in many emerging markets because they're still impacted by the pandemic and its consequences on cancer care investments and installations.

The growth in Americas was mainly driven by the US and Canadian markets that were returning to more normal conditions. In a EMEA, we had a very strong, double digit growth in Europe that's really recovering, but it was almost fully offset by order declines in the Middle East and Africa.

In APEC, India, China and Japan grew strongly, but we saw softer development in most other markets in the region. And I would like to highlight a couple of important and very exciting orders into quarters and if you look at the Ghana and there's a press release out as well on it received a large order from the Gordon international children's cancer research center, very exciting project where elect as a true partner when it comes to unity, linear accelerator, select the studio software and service.

We've also received a launch order from the Northwest hospital Altam [ph] in the Netherlands, including Unity, Linux software and multi-year service orders. And we'll just so odd said, university hospital in Denmark is ordering its sift and unity machine in the quarter as well as more Linux.

But if we take a bit of a longer perspective on the impact of COVID on our business and recovery, and we looked at it at the 12 months rolling development, you can see that there's a continued gradual recover towards pre-pandemic levels. Orders have been growing double digit over the last quarters when adjusts this largest deal in Q1 last year, or revenue is still impacted by a longer logistic chains, component shortages and later installation dates, but it had new recovered very nicely over the last quarters.

I'm also very pleased to see our installed base, continuing to grow into Coulter with 5% enabling more cancer patients to get access to radiation therapy across the globe. But if we come back to one of the strategic pillars in more detail, acceleration of innovation, we continue our investments in personalized precision, elevated productivity and integrated informatics in the culture.

And it's based on our customers increasing demand for streamline, workflows, automation and productivity. That's really supporting this acceleration of our digital transformation program by expanding our software innovation products and also software engineering base.

And if thinking about software at the counts for round a fourth of elect revenue, and we expect its importance to increase and also the growth through increase going forward. And some of the examples were had in the quarter was that requires workflow software from Phillips and it's designed to streamline accelerate radiation and quality workflows and we'll also receive the us clearance for a softer model around AI out the contouring that I mentioned before and not there very exciting area that's developing very false at the moment is of course service and our increased focus on service and installed base and a roll out of cloud and SaaS solution is progressing very well with strong customer demand.

Today we can offer cloud solutions to more than 3,000 customers and we also see this strong growth coming from the installed base and yes, to give you some customers samples in this area, in the US, we had on-call Oklahoma or a cancer specialist and research institutes that have connected their sites to cloud solutions. In the UK we recently added leaders in equality care to SaaS customers and it's really about the entire treatment workflow that can now be run through Elekta access, our SaaS solution would it go to help employees to increase quality of care and reduce cost and streamline the resources.

In Singapore, we strengthened our partnership with Parkway hospital groups would installation of our cloud solutions in their radiation oncology department. That's a truly mixed vendor and multi modality site that's the true strength of Elekta.

This value added services is a very exciting area and we will be key growth drivers for Elekta going forward. But of course, I would like to give you an update on Unity.

It's really about seeing the difference and it has been a fantastic journey to be part of this Unity development over the last couple of years after we received CE and FDA clearance and now we have more, as you know them, one on assistance ordering when I have more than 50 systems installed and units is really allowing our customers to see what they couldn't see before and there's so many different clear advantages of Unity. And as you see on this slide, if you starts on the left, you see the foremost and we discussed that a lot is of course the visualization capability, and it's truly a groundbreaking system enabling best to treatments of cancer.

Signal [ph] is the procession to see the tumor and organ at risk in real time and type to treat with radiation therapy. There is an interesting study on daily adaptive radiotherapy on tumors with unity in the head and neck area where you can adapt the treatment to the shape of the tumor, the shrinking tumor throughout the treatment.

And this is enabling more precise treatments and sparing more healthy tissue and organs at risk. And to the right, you see something very, very exciting.

It is the single largest study on MRI guided radiation therapy in the literature with 943 patients. You also see a pancreas study and pancreas is an important area for MRI guided adaptive therapy and we now have studies on the deliberative or delivery of curative doses to pancreatic tumors.

So more to come in these areas. And I think these clinical studies are examples of very, very important steps that we in our customers are taking on our clinical evidence as well as reimbursement journey.

But it's also about technology development on the fantastic platform that Unity is and I would like to share with you some of the latest updates on Unity that we released at Astro, and this launch means that we now have three additional imaging options on our imaging capabilities, and that helps the conditions of providing the best personalized treatment to the patients. And in total, we now have 14 imaging options to choose from, and this is very close to the 20 plus options that we have in the diagnosis department and that it's unique to radiation therapy industry.

But it's also about the important step and this helps us to take the steps towards comprehensive motion management and that's about the namely best visualizations by reducing motions and resulting in better and sharper imaging drew and emotion. But it's also about driving productivity by false to imaging technology that can accelerate image acquisition by 30%.

So if you're now turn from our innovation and acceleration of innovation to sustainability, we have a very strong sustainability and transparent sustainability agenda that's fully linked to our strategy. And recently we established our sustainability linked bond framework to compete completely transparent on our ambition and journey towards closing the radiation therapy access gap.

The quarter increase in installed base in underserved markets will surround 40 units, which means around 14 million additional people, with access in these countries to radiation therapy. This means that we are on track with our targets within the sustainability linked bond framework or reaching 825 at the end Linux at the end of fiscal year 24, 25.

So with that I would like to hand it over to Johan to give an update on Q2 financials in more detail?

Thank you, Gustaf. We'll now go through the financial starting with net sales and EBIT margin development.

In the second quarter, total new sales net sales grew 7%, the solution sales increasing 8% and service up 5%. Growth was broad-based with strong performance in [indiscernible] and Linux.

As result solutions was 61% and service 39% of sales. Our EBIT margin came in at 14.4% for the quarter significantly up from the first quarter.

And we go through the drivers in more detail later in the presentation. For the first half, total net sales also grew 7% with solution sales increasing a strong 10% and service up 4%.

Also here, growth was broad based. Solutions was 58% and service was 42% of sales in the first half of the year.

EBIT margin for the first off, came in at 10.9%. Let me move to sales from a regional perspective and start with Americas.

Here sales increased with a strong 24%. The growth was seen both in North and South America with a good double digit growth rate in the US and strong development in Canada.

Turning to Europe, Middle East and Africa, sales increased by 6%. Europe had strong development.

However, the good European performance was offset by negative development in Middle East and Africa. Finally, Asia Pacific decreased 2% as the pandemic related challenges continued.

But for example, Australia and Japan had good growth and the strong underlying development of installations in China continued. Gross margin came in at 48.6% down from last year and up from a first quarter.

We saw positive effects from volume and product mix while the negative effect from supply chain, logistics and service costs continued in the quarter. Conditions in the freight markets continue to be challenging, we both significantly increased costs as well as long lead times.

Foreign exchange also had navigate negative effect on gross margin. The negative effect from high supply chain, logistics and service costs compared to Q2 last year were approximately 300 basis points.

The main part of this is pandemic driven and expected to be temporary. FX impacted loss margin negatively with around a 100 basis points.

The increase in gross margin compared to first quarter came from positive effects from high volume and project mix, relative small impact from supply chain, logistics and service costs and effects and a negative impact from the high portion of solution sales in the quarter. EBIT more decreased, mainly due to the lower gross margin.

The net FX impact on EBIT in the second quarter was negative, approximately 70 million Swedish krona and negative approximately 20 million for the first six month. Net financial items improved as we now have a lower gross debt level than last year and our financial position continue to be very strong with a net debt to EBITDA level of 0.6.

The income tax rate -- income tax rate in the quarter was 24% in line with our forecast for the year. EPS improved to one Swedish from open 0.98 in Q2 last year.

Let's move into expenses which were basically unchanged versus Q1 last Q2 last year. Selling expenses increased by 14% reflecting the more normal market conditions resulting in higher travel and marketing costs and also both ASTRO and ESTRO taking place in the quarter.

However, compared to last quarter, our Q1 expenses decreased slightly. Admin expenses increased by 8% from low COVID impacted levels last year and we have some one-offs in the quarter.

Compared to Q1 admin costs increased with 3%. Net R&D decreased 90% versus last year and were 24% against loss courter.

Let me give some more details on R&D. As discussed on our capital markets in June, we are accelerating our R&D investments and growth R&D has increased to 12% of net sales on the relative 12 month basis.

In the second quarter more R&D projects entered phases where we capitalize, which resulted in a higher capitalization level compared to the first quarter. We also saw a decrease in amortizations in the quarter as a unit related software amortizations have ended.

The increased capitalizations and decreased amortizations, both contributed to the lower net R&D expense. Let me also comment on working capital performance.

Networking capital increased in a quarter to minus 2% of net sales and continue to be in line with levels we have seen the last two years. Due to the difficult conditions in freight markets, we are shipping earlier to mitigate with longer shipping times and to make sure our products reach customers in time for installations.

This means we are carrying more inventory than normal and inventory increased in the first half of the year. The change in other liabilities was mostly due to a year and related accruals that were paid in Q1.

Moving on to cash flow, cash flow after continuous investments came in at minus SEK360 million for the first six months and we had a rolling 12 month cash conversion of 71%. This was lower than the very strong performance last year, but more in line with historical cash flow performance.

Cash flow after continuous investments in the second quarter was minus SEK17 million. The low cash flow was mainly due to the lower EBITDA, increased networking capital and investments in R&D as discussed on the previous slides.

With that, I hand it back over to you Gustavo,

Thank you, Johan. And I'd like to say couple of words about our outlook for the next quarter and a current quarter Q3.

So what we expect and what we see right now is that we see a continued market recovery and leading to continued strong demand in most parts of the world. However, we also see that the supply chain challenges will continue for capital quarters and will potentially have an impact on revenue and margins.

Throughout the end of the quarter, we've seen increased risk of component shortages for in our linac production, but we're managing it well, but we've seen the risk increase a bit in the last month and weeks here. But we see the very strong long-term markets trans to support thing, the growth and investment in high-end radiation therapy equipment and margin expansion.

And you see a lot of examples around the world of this in Europe with a European beating cancer plan, also in the US and in China on many other countries that are now driving national programs to invest in counsel care and radiation therapy. So if we take the little longer look, the midterm outlook on 2024, 2025 we're truly see that we can grow with more than 7% net saves CAGR over the period.

We should also deliver a margin expanse in the EBIT margin expansion over the period and we will have a capital allocation policy of more than 50% of annual net profit in dividends. So to summarize the second quarter for Elekta, we experienced a strong order growth throughout the business and a recovering market, mainly driven by mature markets.

We saw our installations to be continued on a more normalized level driving growth, especially in North America, Europe and China. We did a lot of progress in our innovation on collaborations and partnerships, focusing on software and comprehensive motion management for Unity.

We saw the gross margins improved from the low levels in Q1 due to volume increase and improved project mix. So thank you for listening in, and with that, I hand it over to Cecelia.

Thank you. Gustaf.

Concerning this sharper imaging option that's unique that Gustaf talked about, I would like to inform you that if you're interesting in hearing more about this, that will be webinar on the topic on December 7. It will be hosted by our distinguished scientists, Kevin Brown, and you will hear Dr.

Longy [ph] from Nigra talking about his experience with this new image option. You can find this webinar on our website or your just email ER and we will send you a link to register to this webinar.

So with that we open the line for questions, please operator over to you.

Have a couple questions for today for your. First off I would like some details on the supply chain and component issues, you're talking about how should we think about the development of the coming quarters are we to expect that the worst supply chain issues are behind us, but that the component problems could intensify and in case how much of a problem could this become thank you for the question for now think the logistics challenges has of course been built up and we followed up close all of course, over the last quarters the safe ride rates has gone up with five 600% if you take a rate from.

From say China to a Northern Europe and it takes much longer as well it's almost a double the time and there's port congestion and we all know that, but what you can see in the index is the price levels it's actually going down. So that's at least an indication than that we've maybe seen the worst on the logistic challenges around the world and we also learnt a bit more how to deal with it.

I would say because we have a manufacturing hub in China, as for linear accelerators and we also have one in the UK here in Europe. So we have options when, how, and when we ship so, as you mentioned, I foresee that that will improve it's more that how false the improvement will take.

The cost levels are still very high. So we experienced that in this quarter, as well as you see in the gross margins.

But if you take the component challenges for like that hasn't been a big challenge of the last. Couple of quarters, but now we see bigger shortages for smaller components for a next, for example, that's where we worked day and night to get told off, but we're competing of course, with many other industries for these components.

As well so I think we manage it very, very well, but I see a heightened risk for component shortages over the next couple of quarters and then at some point in time, it needs to be in balance again, of course. So it's a bit though shift there from logistics to components for Elekta.

Okay. Thank you.

I, so and then obviously a very strong quarter for the US but you do mention that you were held back by, short dissolved contractors so firstly, how large was this shortage effect on sales and secondly, do you expect this to be sort of a lasting constraint or should we just see installations rolling into two, three and making that a strong quarter of instead.

If you look at I'll start, then I hand it over to you on, but if you look at Elekta US revenue on a rolling 12 month basis throughout the pandemic, we have been very resilient compared to many other companies in the industry, but those in MedTech. So we've been able to install and deliver service throughout the pandemic.

We are still holding back that to some extent, some customers want a bit later installations. It takes a bit longer time due to COVID, but as we see, the cancers that are detected now, it's they have pushed back.

So there's a huge council care that the healthcare systems in Europe, in US in China it needs to take care of. So I foresee that there would be a big push to do more installations in these markets to take care of these undetected cases does what at some point in time would be required, council care.

So I think I'm still positive on Canada did and the pull from the market, but there is of course, a bit of friction in COVID impacted markets and the logistics change takes a bit longer compared to a normal level and maybe you want, you want to,

It's difficult to quantify exactly how much that impact is, but it's clearly so that in the US, in particular, there's a shortage of people to work including in this field so I think that's also COVID related impact we're seeing so, but it's difficult to have a forecast on when it will be reduced. But I expect, well maybe in the coming quarters that will I would expect that to be improve at least.

Okay, thank you and then sort of follow up on installations. Can you comment anything on the visibility you have of unit installations right now?

Are you seeing improved hospital access or are installations being postponed and then is the dynamics different to the rest of the linac portfolio?

No, I wouldn't say an installation. So unity is so much different than we had a very strong installation on volume in the office.

So I would say we're managing to install Unity's and round the world in a very good pace. And we have a strong backlog log to work with and get the installation.

Some, I think in a fantastic example, whilst in Japan, where were decided Chiba treated their first patient in the quarter. And that was a very encouraging for that market.

So, we see the installations going well for unity. So I don't see in a different dynamic there really compared to regular regularly in same.

Okay, perfect. And then can you say anything about how the orders,

I think we need to let some other in the other can you please see a step put yourself in the back of the queue and then we'd take your questions after that. Okay.

Thank you.

Right. To get good morning and thank you for taking my questions.

So first one and it will be on that the US.

Hello. I think we lost you.

Maybe we can take the other person the next one in queue the third one. And then we come back to you at Cheuvreux.

Okay. Operator, can you put the next one?

Good morning and thank you for taking my questions. One is just kind of the R&D capitalization and amortization, just wondering Johan, if you can give us a little bit of guidance of how we should be thinking through all the development here for the remainder of the year, and then maybe also into next year, obviously quite a big step up in the capitalization rate in particular.

So he can help us think through whether that's sustainable or not, and for how long that would be helpful. And then my second question is apologies.

I, caught this in the prepared remarks tonight maybe you did put out a press release and I just Gustaf, did I hear you say that you acquired some software from Phillips? And if so, what software is this?

And can you give us some color, any desire to do more deals like that? Thank you.

Hi, Veronica. So I'll start with the R&D, so obviously, we've asked, we talked about on the capital markets day, we are accelerating our investments into R&D and if you look on Q1, we saw a clear increase in gross R&D spend at that in that quarter.

We are now in the phase where more of the increases is feeding into projects, which are capitalizable, so that's really what's driving the high capitalization level in the second quarter looking at second quarter. Looking at amortization again in line with what we presented at the capital market stay, they reduced in the second quarter as some older projects related to unit came off from amortization.

Looking forward, I'd say we will that we've continued gross…