C Rad AB

STO:CRAD B

Earnings Call Transcript

[Basak Karakus, executive]

My name is Basak Karakus, and I am your moderator for today's session. We have an exciting agenda ahead, filled with valuable insights and updates and I am delighted to introduce our CEO, Cecilia De Leeuw; and our CFO, Christoffer Herou, who will guide us through the financial results and provide insights today. Cecilia will kick off today's webcast by providing an overview of the financial highlights from Q2, shedding light on our progress and achievements during this period. Following that, Christoffer will delve into a comprehensive financial review, providing valuable analysis and key figures.

Before we start, I would like to remind you that we will not be taking any questions during the presentation, both verbally or through the chat. We encourage you to save your questions for the Q&A session that will follow the presentations. During the Q&A session, I will unmute your microphones, and you will have the opportunity to ask your questions directly to Cecilia and Christoffer. [Operator Instructions] On the final note, I'd like to remind you that a recording of the webcast will be available on our website shortly after we end this live session. Without further ado, let's get started. Cecilia, over to you.

[Cecilia De Leeuw, executive]

Thank you, Basak, and it's great to be here today in the middle of the Swedish summer. And before I go into the Q2 numbers, I'd like to remind you of the world we act in. Cancer is one of the world's biggest health challenges and unfortunately, growing. Our customers are mainly hospitals and clinics and we are active in the field of Surface-Guided Radiation Therapy or SGRT, and are well established in the market. What keeps us on our toes is to treat more patients safely. And what do we mean by that? The radiation dose needs to be delivered to the tumor with high precision, not to damage healthy tissue. This is where our groundbreaking technology comes in. Our SGRT technology and the underlying modern algorithms provide a precise, efficient and safe experience for the patients and the staff in the clinic. In addition, our products speed up the workflow during the setup and treatment of the patient, which increases efficiency and hence, more patients can be treated.

We go to market in mainly 3 ways: direct, with our industrial partners such as Elekta, Accuray and Varian and proton suppliers such as IBA, Mevion and Hitachi and, of course, our strong network of distributors. Often, it is a combination of these One would think that it's a given to use SGRT in radiation therapy. The additional investment is only some 5% of the total investment to equip the cancer treatment room. Our system is integrated with all the linear accelerator providers and major proton suppliers. C-RAD is acting in a highly regulated area, which also means that the entry barriers for newcomers in SGRT is high and the reason for the limited number of players.

So with that, let's move to the result and some highlights from the second quarter. And I am pleased to share that we have had another strong quarter of revenue growth. During my first 6 months as CEO, we have put a lot of focus on profitable growth, and we are starting to see that in the result and in improved EBIT. Revenues were up 44% in comparable quarters. We had an increased order intake with a growth of 11% and continue to build up our backlog, which is now at an all-time high of SEK 679 million. That is 36% up from last year. Our sales and services teams have been busy with customer demos, reference visits and in general, capturing the high interest in our technology.

The most important European MedTech trade show is ESTRO. This year, it took place in Vienna, and the show was a great success and actually our busiest ever. We did live demos to potential customers and ESTRO also gives us an opportunity to conclude business discussions when we meet face-to-face. One big difference from earlier years was that most of our visitors already had a good insight into the value of SGRT. Another event that generated a lot of interest at ESTRO was that together with our important partner, Accuray, and their CEO, Suzanne Winter, I did the European launch of our breast cancer solution VitalHold. And as already stated, our focus during this quarter has been on growing the top line and at the same time, managing costs. And I am pleased that we can display that in an EBIT of SEK 7.4 million for the quarter, corresponding to an EBIT margin of 8.2%. Compared with the first half of the year, we have a total EBIT of SEK 13.8 million versus less than SEK 1 million in Q2 last year.

And with that, let's look into a few highlights displaying the high interest in our technology. And the uptake of the surface tracking technology is really exciting and important. And for quite some time, we have been talking about SGRT becoming the standard of care or being part of the standard practice in the clinic. We see more and more proof of this. And this quarter, we received 2 large orders that will have SGRT on all their sites. The SEK 23 million order from Cancer Care Associates in Australia, which we mentioned in the Q1 reporting, already have their first site up and running. The second order of SEK 9 million by our long-term partner, MVZ, show their great trust in our technology partnership and our further stride in enhancing the cancer treatment.

So let's take a closer look into the markets and the sales performance. Order intake for the first quarter amounted to SEK 118 million, a growth of 12%. In constant currencies, order intake increased 2%. EMEA grew by 29% to almost SEK 53 million, and we continue to see growing interest across the countries, both advanced and developing markets. In APAC, order intake increased with an exceptionally strong 52% to SEK 56 million and we are positively impacted by the large Australian order of SEK 23 million and by China continuing to getting back to normal. I am pleased with our global resilience of global growth of 12% despite Americas having a challenging quarter. Order intake in the Americas was SEK 9 million. And clearly, that is below my expectation.

As highlighted in both our Q4 and Q1 report, the cost increases in the U.S. due to inflation is leading to a slower uptake in investments. We experienced customer decisions taking longer time, rising costs due to inflation is also impacting the construction of new clinics. And this had a substantial impact this quarter. One way to counter this slowdown is to increase our focus on retrofits, and that is equipping already existing linear accelerators with our SGRT technology. This is a relatively smaller investment decision as SGRT is only some 5% of the total system, as I mentioned earlier. Our focused marketing is also generating a strong pipeline. Over time, the increased activity levels in Latin America is promising for the Americas region as a whole.

Let's have a look at the first half year. Order intake grew 12% to SEK 209 million for the first 6 months. In constant currencies, order intake increased 4% and we continue to see significant demand and a 24% growth in EMEA, both with new systems and retrofit to existing accelerators. APAC is continuing its strong performance with 36% growth. We are market leaders in both Australia and China, 2 of the markets positively impacting the APAC performance. The cost increases and the slowing down of investment decisions in the U.S. is softening the first half performance in the Americas.

Let's take a look at the distribution of orders by product category. We had growth in both products and for services. Products is the lion's share of the business, but I'm really happy to see that service agreements is increasing faster with 23% to SEK 23 million and this is in line with our strategy to grow services. It is not only important for the recurring revenue, but also due to the improved customer experience and a way for us to get even closer to our customers. And as a reminder, our business is subject to a very distinct seasonality pattern. And as displayed in this graph, the second half of the year is typically stronger than the first half. The main reason is that our customers typically have annual budgets aligned with -- to the calendar year, and the fourth quarter is normally the strongest. However, last year was unusually strong due to the Italy order of SEK 46 million.

Let's take a look at the impact the order intake had on our backlog. And with order backlog, we mean it represents the order that has been received, but not yet delivered or invoiced. We have an all-time high order backlog of SEK 679 million at the end of the quarter, which is, as I said, an increase of 36% compared to the same time last year. Out of the order backlog, more than half or 57% is products and 43% is services. And the conversion rate, that is the time from receiving an order until delivery is made is 6 months for products this quarter. However, this depends on several factors and varies between periods. For example, when the clinics are ready to receive the system. The services contracts can be up to 8 years, while the most common contract period is 3 to 5 years.

Let's then move into revenue per market. Overall, we had another strong quarter with high revenue growth of 44% and 29% in constant currency. Revenues in EMEA increased 43% to SEK 44 million and APAC more than doubled or increased by 116% to SEK 35 million. One large factor for the impressive growth in APAC is that we are delivering from the strong backlog from multiple countries in the APAC region and that China is continuing to recover. The Americas decreased by 24% to SEK 12 million, and the rising costs are also impacting construction of new treatment facilities and hence, delaying when the clinic can receive our system. If we look then at the first half, we started off the first half of the year very well with 47% revenue growth compared to the first half of '22. EMEA and even more so APAC is performing really well with 45% and 92% growth, respectively. Americas is growing 4%, and that is despite the challenging market situation slowing down investment decisions.

And finally, before I hand over to Christoffer, let us touch on the legal dispute with a former employee. End of this quarter, the Patent and Market Appeal Court partly awarded a former employee compensation for an invention used by C-RAD. This is the fourth case in a series of cases where C-RAD has been successful in all other cases. According to our legal counsel, the ruling is both surprising and unique. And this is further displayed in the fact that the Patent and Market Appeal Court is opening up for appeal to the Supreme Court. So what is the patent all about then? It is used for back projection of light on to the patient. This is a minor part of the product and mainly used during setup of the patients. Not all clinics use this back protection feature, as you can see the same information on the screen where the patient's actual and intended position is visualized. C-RAD would appeal to the Supreme Court latest by July 28. And with that, over to you Christoffer for a closer look at the financials.

[Christoffer Herou, executive]

Thank you very much, Cecilia, and good morning, everyone. It's great to be here today to present my second interim report as the CFO at C-RAD, and to be able to share the financial information from our last quarter. We are proud to have reached a new all-time high in order backlog, a revenue growth year-to-date of 47% and another quarter with improved EBIT. At the same time, we also have items and processes to improve, and I look forward to further contribute to this. The revenue of almost SEK 91 million corresponds to an increase of 44%. With this, we are continuing to show strength in the conversion from order backlog to revenues also in this quarter. Year-to-date, we see a strong growth of 47%, amounting to a revenue of SEK 175 million. The gross profit margin remains healthy with 63%. Some fluctuations in gross profit margin between the quarters is to be expected depending on the product mix and the revenue split between different sales channels during the quarter.

As you can see, the operating expenses have increased compared to last year. We consider that the growth in order intake as well as revenues shows that the investments we have done in strengthening the organization has started to pay out. The EBIT for the quarter of SEK 7.4 million and SEK 13.8 million year-to-date shows that we, during this year, have taken substantial steps in our way towards profitable growth. The geographic split in revenues between our markets has changed a bit during this quarter as APAC had an outstanding quarter and Americas had a slower quarter. It's satisfying to see that services share of the revenue is continuing to increase and now amount to 20%. As Cecilia mentioned previously, growing services is, in many ways, an important part of our strategy.

During the last years, we have seen a steady increase in the services share of our total revenue. This is a trend we foresee continuing to increase over time as both the installed base and the attachment rate for services contract continue to develop. The revenues coming from products had a growth of 40% compared to last year and services showed an increase in the revenues with a magnificent 67%. At the same time, as we are delivering the strong revenue growth, we are able to keep up our healthy gross margin of 63% in the current quarter and 64% year-to-date. This results in a gross profit of SEK 57 million in the current quarter.

The gross profit increase year-to-date of 46% corresponds well for the year-to-date revenue increase of 47%. For the second consecutive quarter, we are pleased to see an improvement in EBIT to SEK 7.4 million, which corresponds to an EBIT margin of 8.2%. This is to be compared to the EBIT level of SEK 0.8 million from last year. And year-to-date, we see a steady EBIT improvement of almost SEK 13 million. The overall trend is that the revenues are increasing, but that we also have been able to increase the gross margins at the same time. This is mainly due to a larger portion of services business in our revenues. The operating expenses of SEK 50 million in the current quarter are more or less flat compared to the previous quarter. The increase to the level of SEK 40 million last year is explained by a higher number of employees of 83 at the end of this quarter compared to 70, 1 year ago.

As mentioned, the growth in order intake and revenues shows that the investments in our organization have paid off. With this organization, we are looking forward to drive the business, continue the conversion of our all-time high order backlog to revenues, gross profit and EBIT. In the graph to the right, you can follow the dotted lines to see that the revenues are increasing at a higher rate than the operating expenses. This is important on our path forward achieving profitable growth. The cash flow in our company fluctuates between the quarters. We are not satisfied with the level of negative cash flow in this quarter. Even though we are in a growth phase, where negative development of the working capital could be expected, the development that we see in this quarter is not our way going forward.

Behind the negative working capital, the major impact is coming from an increase in accounts receivable. As said, we are in a growth phase with increased revenues, so from that perspective, an increase in accounts receivable is to be expected. But I have also identified that we have some internal processes, which needs to be improved as well. We have now initiated an internal project to execute on process improvements. We are also looking into how to improve terms and conditions in our customer contracts. Some of the actions taken will have positive effect short term, while other actions are expected to show improvements medium or long term. Even though the decrease in cash in the current quarter on the overall level, we still have a stable cash position with SEK 83 million in cash balance and an equity-to-asset ratio of 73% at quarter end. And with that, I would like to hand it over to you again, Cecilia.

[Cecilia De Leeuw, executive]

Thank you, Christoffer. We had a solid second quarter, and I'm very pleased with our strong revenue growth and that our focus on profitable growth is starting to show in our numbers. In the first 6 months, we improved EBIT from SEK 1 million to SEK 13.8 million. Spending time with our customers and learning how they use our product in their clinics is very important to me and to C-RAD. Not only does it provide unique insights into the daily life and needs of the staff in the clinic, but it also helps us evolving our road map and our priorities. By increasing the efficiency in the treatment workflow, we enable the clinic to treat even more patients. Ultimately, this results in the precise targeting of the tumor while minimizing radiation exposure to healthy tissues, safeguarding the overall well-being obligation.

SGRT is rapidly becoming a given in the clinics and the treatment workflow. And I'm excited to see that our 2 large orders for the quarter will have SGRT on all their sites going forward. We have an all-time high order backlog, including the 2 major orders this quarter from Australia and Germany. The cash flow was negatively impacted mainly by accounts receivable. This has a very high focus, and we have initiated an improvement program, as you just heard from Christoffer. Still, our financial position is very strong. In conclusion, we will continue to deliver on our strategy for profitable growth. We at C-RAD have an important role to play in making SGRT becoming standard of care, and I look forward to our continued stride to bring SGRT to more patients around the world. And with that, it's time for questions. Over to you, Basak.

[Basak Karakus, executive]

Thank you, Cecilia, and Christoffer. Yes. Now let's move on to the Q&A session. But before that, I can see that one of our participants have typed in questions in the Q&A field. [Operator Instructions] With that, okay, let's see. Yes, I cannot see any raised hands, but I'm sure you have some questions. [Operator Instructions] Okay, one of our anonymous attendee an [ Amir Ahmed, Anders Jilken ] you have some questions. [Operator Instructions]

[Unknown Attendee]

Can you hear me?

[Basak Karakus, executive]

Yes, absolutely.

[Unknown Attendee]

Great. I'm with 2 small children that's why I chatted. My first question is what kind of OpEx categories do you have in Q4, which you don't have in the rest of the quarters?

[Basak Karakus, executive]

Do you want to take that, Christoffer?

[Christoffer Herou, executive]

Yes. So Q4 -- I've been here for 2.5 months. I don't have the Q4 numbers under my skin, so to speak, but I know that they were a lot of one-off costs coming up in Q4 last year. And as I mentioned now, we see that we are -- have the same level of costs in quarter 2 now than what we had in Q1 this year. So now we are on a more, in my opinion, foreseeable and stable level regarding that.

[Cecilia De Leeuw, executive]

Yes. And maybe I can add also that in Q4, we had the change of the CEO and CFO. So there were costs related to that. And also, we had a bit of an imbalance between the investments that we made, the forward-leaning investments in sales, services and R&D versus the top line. And that is something that now going forward, we put a lot of focus on when it comes to the profitable growth.

[Unknown Attendee]

Got it. And my second question is if this case goes with the [indiscernible] can the ruling become worse? Or can it be only better or the same?

[Christoffer Herou, executive]

So now the time line for that appeal that is the 28 of July. And I mean, we can only have knowledge about our actions into that deadline. So as previously communicated, we have taken a decision in our Board to go to the Supreme Court, and we cannot speculate what the other party might do in this process.

[Cecilia De Leeuw, executive]

And actually, we -- if I may add, we believe that we have a very strong case. And as I mentioned before, it's unusual that the -- that we get this advantage to bring up the case in the Supreme Court, according to our legal advisers and that further displays that it's an unusual and unique case, which also has been the advice of our legal advisers.

[Unknown Attendee]

Okay. Got it. So from my understanding, maybe I'm wrong here, when the order comes to Elekta or Varian, let's say, it comes day 1 they -- and that order includes an SGRT, they don't send the order to you, C-RAD, immediately. They wait with that a few months or quarters. Is that something you recognize? Or do you immediately get the word? I'm just -- my question, I guess, is, is there some sort of lag effect from the Linac providers?

[Cecilia De Leeuw, executive]

I mean, it really is case by case. We have lots of different models in how we -- what happens between the order and the delivery. So as I mentioned earlier, sometimes it's a new build, for example, and then we have one situation, other cases, it's a retrofit. And then actually, it's -- the order typically comes from the hospital as such. So it really depends, and it depends between markets also.

[Unknown Attendee]

Got it. And just my last question for now is, I guess, the situation in the Americas or specifically the U.S., do you have any sort of insight if the total market for SGRT or Linac in general is becoming cooler? Or do you see that, for instance, Vision RT is taking orders that you're not? How should we think about this?

[Cecilia De Leeuw, executive]

So the interest -- and as I said earlier, it's not about us losing market share. I didn't exactly say that, but it's not about us losing market share, it's very much due to the fact that the cost increases are delaying the decisions and this is -- we're not alone in the market to see that in this industry. And I think what we can say also is that in the U.S., they're a bit quicker to act on cost increases. And again, that is slowing down. But the interest and the -- the interest that we see in SGRT is absolutely not cooling down on the contrary. But as I mentioned earlier, one way for us to counter the slowdown and the delay that the cost increases have on the decisions from the clinics and the hospital is for us to work with something that has a little bit of a lower threshold such as retrofitting or bringing SGRT to existing Linacs, that is a smaller investment and also a quicker process.

[Unknown Attendee]

Got it. Actually, one more question. So when you view -- you've been CEO for 6 months now, and the decision to increase the OpEx during 2022 dramatically was obviously not under your steering. Now that you've taken a look at the total organization, are you satisfied with the capacity? Or do you see pockets here and there that needs to be filled?

[Cecilia De Leeuw, executive]

Very good question, [ Amir ]. Thanks. I think there was a very conscious decision during 2022 to invest in the organization, in R&D, services and sales. And that is for the reason that we have a huge unmet demand in the market that we want to capture. And these processes take quite some time. Last quarter, we talked about an order from Nordsøtrawl, and that is -- that was a quick one. It's a 1-year process. So we have to be acting early to capture the demand, but with that said, we constantly oversee this. And the task for me and Christoffer is to really manage the timing here and do the investments in the right pace. So that is the key focus forward, and that is what we also mean by profitable growth.

[Basak Karakus, executive]

Thank you, [ Amir ]. So [ Anders ] you can -- hopefully, it was the correct pronunciation. [Operator Instructions]

[Unknown Attendee]

Okay, I hope you can hear me. Great to see that. I just had a question because I see that the workforce has increased by 18%, so I just wonder in what areas you have hired new people and also in what geographical areas, if it's just in Sweden or also abroad?

[Christoffer Herou, executive]

Just to start with that, the increase that you mentioned, that is then compared to end of June last year. So the last quarter, if we start in that end from the last March until last of June, then we have 3 employees so to speak. So that is less dramatic.

[Unknown Attendee]

Okay. Yes, because that was little scary when I saw that. Okay. Okay.

[Christoffer Herou, executive]

But to compare with 1 year ago. Those 13 that yes we have touched upon before that, that's a combination of sales employees, employees in R&D and also within service.

[Cecilia De Leeuw, executive]

And [ Anders ], if I may add, just as an example, the U.K., for example, is a market that we were pretty weak in. And there, last year, we hired a sales guy and he has done really good work, and that is really starting to pay off in the U.K. market, for example.

[Unknown Attendee]

And we hope all our guests to see the share price going north now. Been waiting long time for that.

[Basak Karakus, executive]

Thank you, [ Anders ]. I'm looking at, again, the chat field, our anonymous attendee. I think he or she left. So I cannot see any raised hands. So then that was the final question for today, I think. This concludes our Q&A session. Just one final check. Yes. Oh, [ Amir ], you raised your hand again or...

[Unknown Attendee]

Yes, correct. So if no one else is going to ask questions. I have one more. So during 2022, the revenue or the total market for SGRT, if you view it as C-RAD plus Vision RT increased quite dramatically, like specifically, it was flat a few years again, C-RAD plus Vision RT. And they suddenly took a huge bump in 2022. What happened during 2022? I mean, obviously, standard of care, et cetera, I understand this, but this should obviously not happen suddenly, right? It should happen gradually. If you can help me understand this.

[Cecilia De Leeuw, executive]

Yes. So if I just look back at what has happened over the last years. The uptake has actually been quite steep. And I think one potential positive aspect here is that there were a couple of clinical papers that came out, which is something that is important in our industry. And that has also, I think, increased the interest and uptake of SGRT. There were a number of large [ yield ] financed countrywide tenders, for example, the one that I mentioned earlier in Italy, for example, that most likely positively impacted the numbers. So I think multiple things, but also the general uptake of the market is pretty strong. Thank you, [ Amir ].

[Basak Karakus, executive]

Thank you, [ Amir ]. And yes, that was the final question for today, I think. Yes. So thank you, again, Cecilia and Christoffer for providing us with a comprehensive understanding of C-RAD's performance during the second quarter. And on behalf of C-RAD, I would also thank everyone for attending today's webcast. For those who may have missed any part of this webcast or would like to revisit the information shared, a recording will be made available on our website shortly. Thank you once again for joining us today. We appreciate your continued support. Together, we are making a difference in cancer care. Stay tuned for our future updates and have a wonderful day and summer. Thank you.

[Cecilia De Leeuw, executive]

Thank you so much.