C-Rad AB (publ) (CRADB) Earnings Call Transcript & Summary

Welcome, everyone, to C-RAD's presentation of the interim report for the first quarter 2020. Like always, we start with a few administrative announcements. All participants will be muted during the presentation. And also, like always, the webcast will be recorded and the recording will be made accessible in the Investors section of the C-RAD website after the webcast. Today's webcast is presented to you by Henrik Bergentoft, our new CFO; and me, Tim Thurn, the CEO. Henrik joined us in March, so it's his first quarterly report and his first presentation at C-RAD. Henrik, why don't you start with a short introduction?

Thank you, Tim. As said, I've been the CFO of C-RAD for 2 months. So this is my first quarterly report, and I am thrilled to be a member of the executive team of C-RAD. It's a company with a great growth potential going forward and a growth potential that comes from actually being a major contributor in improvement cancer treatment and quality of life. So great feeling to be here. My background is from other small-cap context where growth and technology essentially has been on the agenda. So look forward to carry on that tradition within C-RAD. Thanks for the honor.

Great, Henrik. Thanks. So we have changed the format of our presentation a bit. The webcasts are usually very well attended from existing investors, but also a group of people is attending that has not followed C-RAD for long. So in the first part, I will give a short introduction, then I will comment on COVID, followed by an assessment of our sales results, and then I finish with commenting on the key events. Henrik will guide you through the financial review before I will finish the presentation with an update on the market. At the end of the presentation, there will be a Q&A session. You can post your questions through the chat function and we are happy to answer them before we close the webcast. C-RAD is active in the field of cancer treatment. Our customers are hospitals that fight cancer with radiation. In modern, high-precision radiation therapy, accurate tumor alignment is crucial for a safe and successful treatment. C-RAD positioning products are supporting this process and are fully integrated in the clinical workflow. Over the past years, C-RAD has been growing significantly and generated, last year, a profitable result at about SEK 200 million in revenue. Our mission summarized the overall goal. C-RAD's cutting-edge solutions ensure exceptional high precision, safety and efficiency in advanced radiation therapy, helping to cure more cancer patients and improve their quality of life. C-RAD has sold about 400 systems, whereas about 400 -- sorry, has sold about 500 systems, where about 400 systems are installed is in what we call the advanced markets of radiation therapy. Those countries are marked in orange in this map. With offices in Sweden, Germany, France, Belgium, Florida and China, we are serving our customers through our sales and service organization. Looking at the financial highlights in this quarter, it was certainly a turbulent quarter, whereas the world was first hit in China and Asia in the beginning of the quarter, whereas Europe and especially the U.S. were affected in the second half of the quarter. Despite the challenging market situation, order intake totaled to SEK 47.7 million, essentially on the same level as 2019. Revenue grew with about 10% to SEK 51.8 million resulting in an order backlog of SEK 261.5 million. With somewhat increased operational expenses, the operating profit is essentially on the same level as 2019, generating a positive net result of SEK 0.4 million. We have issued a press release to give an update on the implications to our business due to COVID-19. I will not repeat the entire press release; however, take out a few essential points. We can conclude that customers' demand and availability is affected whereas coming quarters are expected to be volatile. To what extent cannot be quantified nor estimated at this stage. C-RAD has a very solid cash position. We do believe that COVID does not have a negative impact on the demand for our products in the long run. We expect the rapid adoption of our technology to continue. Let's take a closer look at the results of our sales activities. Looking at the order intake in Q1 compared to the same period in the prior year, the total is, as mentioned, essentially on the same level whereas I think what is really important is to note the strong growth in our main segment, the positioning products, which grew with 25%. This segment accounted for 86% of the order intake in the first quarter. We believe this is a very good result. After exceptional strong first quarter last year from a service perspective, we see order intake of SEK 4.4 million in 2020. Positioning products are, to a large majority, generating revenue during the coming 12 months, whereas service agreements are in average for a 3- to 5-year period. The order intake for the HIT laser continues to be weak with a decline of 42%. I would like to mention that the distribution products, the activities around selling distribution products, has stopped in October last year, and therefore, the expected order intake can be 0. Looking at the order intake by market. America had a very strong decline compared to last year, partly related to the large service contract that I mentioned earlier but primarily because the shutdown this year due to the COVID was executed consequently and activities in March were very, very limited. On the positive note, we received the first order as part of the cooperation with Elekta during the quarter. Both EIMEA and APAC came in very strong. In China, the government was very [ consequent ] in handling the COVID issue and we saw that towards the end of the quarter, activities resumed. It should also be noted that Japan is delivering results after a weaker 2019. This is very much in line with our expectation. Revenue overall grew 10% year-over-year. Especially the growth in the Life Cycle Business shall be noted with 70%. As most of our service contracts are running over a longer period of time, the volatility in order intake does not directly translate into volatility in revenue. Even though the total service revenue is still below 10% of the total revenue, it is an encouraging trend. And for other companies in our industry, service revenues are a very significant revenue stream, and we are working on that. Looking at the market. America grew with 62% driven by projects in the U.S., Lat Am or Latin America, and also Central America. EIMEA had a positive development with 16%. And in APAC, we saw a small decline after a lower order intake in 2016. Looking at the trend. We can conclude that the first half and especially the first quarter is usually weaker than the second half of the fiscal year. The trend is very positive and comparing the full year order intake in '17 with '19, we grew globally approximately 40%. Looking at the order intake and revenue by region. America, I think since 2019, we see a positive momentum due to the expected changes in the reimbursement system. Also, the cooperations with Elekta yielded the first results now in the first quarter this year. And I want to mention at this point that we appointed Brian Loar as President, North America, in January to handle the activities through our direct sales organization, but also to manage the cooperation with Elekta locally. The EIMEA region showed very strong growth year-over-year, 300% since the first quarter 2016. We can say that C-RAD is the market leader in key markets here in the EIMEA region. Also, the APAC region had a very dynamic journey with 400% growth during the same period. The main markets here for us are China and Japan, whereas we are the market leader in China with 6 out of 10 of the national cancer centers are currently using C-RAD during radiation therapy. The trend in order intake and revenue results is very encouraging and displays the interest from customers in surface tracking, specifically in our technology. Our earlier assessment of a significantly growing interest in the market for our surface tracking solution continue to be unchanged. And I think this is really most important. This is the underlying driver. With the commitment of the treatment machine vendors toward positioning technology, we are convinced all steps are supporting our early assessment. This technology is on its way to become standard of care. Moving over to the key events. C-RAD carried out a new share issue to support the growth journey with also an expansion in the product portfolio. I'm happy to see that there has been a big interest among the larger institutions and that there are major investors willing to support our continued growth. It is also very encouraging to see that the professional community topics around surface tracking enjoy more attention. Different meetings are taking place. So for example, a dedicated meeting in Swansea Bay in Wales, a customer of ours conducted a seminar on their own initiative for other customers but also for potential customers. The number of participants shows the great interest in such topics. Also, the British Institute of Radiology had a dedicated meeting in February where several speakers from customer users presented their research findings. On the R&D side, we also made good progress during the first quarter. The new Catalyst+ was released in March. Catalyst+ is a new versatile hardware platform for the C-RAD system. Besides improved performance, compelling design, we succeeded to reduce the cost notably. The product has been released and market introduction follows in step, in line with us obtaining regulatory clearance for the markets. The first units to Europe and Australia have been shipped end of March. Installations are ongoing to the extent possible, but we are confident that the first systems will go into clinical operation during the second quarter. We released also our cAccessory product. This is a new primarily software-driven module to track resources more specifically in mobilization devices in the hospital. Usually, patient setup requires different devices to support the patient during treatment. It is important to ensure that the right devices are used, the right settings are implemented and the position of the device is validated. The now-released version uses RFID technology. The software is integrated into the C-RAD c4D software platform. This does not only allow to provide a great user experience in terms of integration, but also offers the opportunity to sell this module as an upgrade to existing customers. So therewith, I hand over to Henrik, who will guide you through the financial review.

Thank you, Tim. So starting off with a summary of the key financial metrics for the quarter. Reported order intake amounted to SEK 47.7 million, essentially same level as last year but minus 3% in constant currencies. Reported revenue amounted to SEK 51.8 million compared to SEK 47.3 million last year corresponding to a 10% growth. In constant currencies, the growth was 7%. Gross margin came in at 58% as compared to 59% last year. Operating income amounted to SEK 1 million corresponding to a margin of 1.9% as compared to last year where the operating income was SEK 1.2 million with a margin of 2.5%. The cash position at the end of the quarter amounted to SEK 87.9 million compared to SEK 29.5 million at the beginning of the year. The order backlog amounted to SEK 261.5 million, a growth of 30% compared to last year's SEK 201.2 million. This next slide gives you a more detailed look at the P&L statement. As said, reported revenue grew by 10% to SEK 51.8 million with variations between the regions. Deliveries in China were impacted by COVID-19 being the main explanation for the decrease in revenue of 18% in the APAC region. Revenue in Americas grew with 62% spearheaded by strong performance in Latin America, whereas North America was hampered by the consequences of COVID-19 to a larger extent. In EIMEA, several deliveries were made despite the shutdown due to the pandemic, generating a revenue growth of 16%. The gross profit margin was 58% during the first quarter 2020. For the full year 2019 and the first quarter 2019, the gross margin was 59%. The gross margin will be presented in a historical context on the following slide. Operational expenses for the quarter amounted to SEK 11.4 million compared to SEK 10.3 million last year. This includes a positive outcome in a court appeal on trade secrets, returning fees previously paid by the company amounting to SEK 1.7 million. Hence, underlying level of operating expenses are approximately in line with second part of 2019. Here, actions are being taken to onwards lower costs to mitigate the possible decrease in revenue due to the effects of COVID-19. Personnel expenses for the quarter amounted to SEK 18.9 million compared to SEK 14.8 million last year. The main increase is due to a nonrecurring cost of approximately SEK 2 million related to changes in the U.S.-based executive team. The remainder of increase relates to a higher number of employees, which amounted to 61 in average during the first quarter 2020 compared to an average of 55 during the corresponding period in 2019. To safeguard its cost base, the company is assessing pandemic-related government fundings in countries C-RAD that is operating in. The exchange rates for both the euro and the dollars, which are the company's main trading currencies, increased during the quarter. The revaluation of balance sheet items resulted in a positive, not yet realized, exchange rate difference of SEK 0.9 million included in the other operating income capture. Capitalization of the development costs during the quarter amounted to SEK 1.8 million and are related to continued development of our positioning products. The total capitalized development cost amounts to SEK 14.7 million at the end of quarter 1 compared to SEK 22 million same period last year. The lower amount is related to the write-down of the GEMini project, which was done in the fourth quarter of 2019. All combined, operating income for the quarter amounted to SEK 1 million corresponding to a margin of 1.9% compared to SEK 1.2 million and 2.5% in Q1 last year. As commented on, the operating income includes nonrecurring items of negative SEK 2 million in personnel expenses and a positive SEK 1.7 million in operating expenses, i.e., a net of minus SEK 0.3 million. The net results after tax in the quarter amounted to SEK 0.4 million. Tax expenses refers to reversed deferred tax assets for the Swedish entities and hence, does not affect cash flow. This next slide shows revenue and gross margin displayed over a longer period of time. So as you can see, the gross profit margin of 58% in the first quarter is in line with the last 2 full years' average gross margin. Fluctuations in the gross profit can be expected between period as it is dependent on the product mix and also a variation of sales channels in our different markets. The purpose of this slide is to put C-RAD's growth journey into a context where investments have been made in the organization to support that growth, generating an increase in total operating expenses. This graph outlines operating expenses and revenue for the last 3 years where we can see that these investments are, in fact, paying off in the sense that the revenue trend line has a steeper upward-leaning curve as compared to operating expenses; equally meaning that the average yearly operating expenses in relation to sales is going down as a function of the growth that the company is producing. This next slide shows operating profit and revenue combined over a longer period of time. As seen, the business of C-RAD is volatile, especially between the quarters and is expected to be so also going forward since larger single order has an effect in the quarter when they are delivered. However, the trend line clearly shows that C-RAD is on a growth journey. But the company, also since mid-2018, has reached an important milestone in the sense that the company is on the verge of delivering also profitable revenue growth. Now leaving the P&L statement then moving on to the balance sheet and starting off with cash flow. So during the quarter, the company conducted the directed rights issue with the issue of 2.5 million B-shares amounting to SEK 108 million in additional capital, fueling the company with SEK 102 million net of issue related costs. Following the rights issue, a bank loan of SEK 20 million was fully amortized and the company ceased to use factoring. In summary, the above generated a cash flow from financing activities of SEK 72.8 million. Operating cash flow for the quarter amounted to minus SEK 12.1 million. The negative operating cash flow is due to significant late deliveries in the quarter, partly related to the finalization of the new product Catalyst+ towards the end of the quarter. Total liquid funds at the end of the quarter amounted to SEK 87.9 million. This slide summarizes the balance sheet, but I want to make a couple of comments. On the asset side, I want to highlight 2 things. One is that current receivables is high due to a high level of accounts receivables related to late invoicing already commented on in the cash flow section. Secondly, and again, is the cash position of SEK 87.9 million, which following the rights issue, is at a very solid level from a historical perspective. On the debt and equity side, I want to highlight that again following the rights issue, the solidity is at a historically high level of 77%. And also that the company, after the repayment of the SEK 20 million loan, now is debt-free. Final slide of the financial presentation presents a true and real asset for the company which is the order backlog. The order backlog represents orders that have been received but not delivered and invoiced. The backlog amounted to SEK 261.5 million at the end of the quarter, an increase of 30% compared to the same period last year. From the total order backlog, SEK 137 million relates to products, representing a growth of 17%, and SEK 125 million refers to Life Cycle Business, i.e., service contracts, a growth of 48%. SEK 20.9 million of the order backlog for Life Cycle Business is planned to be recognized as revenue within 12 months since service contracts are recognized as revenue over the contract period. The service contract can be up to 8 years, but -- while the average duration is 3 to 5 years. And this marks the end of the financial presentation. Now back to you, Tim.

Thank you, Henrik. So let's take a look at the market overview. So basically, there are 3 ways of how cancer is treated: surgery, basically as part of the surgery procedure, the tumor cells are cut out; alternative is drug therapy, chemotherapy or radiation therapy. So C-RAD is focusing its activities only on the radiation therapy vehicle. It can be said that 50% to 60% of all cancer patients in high-income countries will go through radiation therapy. So that might either be a combination therapy, in combination with a drug therapy with chemotherapy or combination with a surgery, or it might be only radiation therapy. And at the same time, in looking at the less developed countries, it's only roughly 25% of the cancer patients that actually have access to radiation therapy. So there is still a huge potential for the radiation therapy segment to grow. Looking at some reports and overall development of radiation therapy or the expectations of radiation therapy over the next years. Here, a projection until the year 2025 where the annual growth is calculated to be 7.8%. Looking at the radiation therapy market more in detail. There are roughly 12,000 linear accelerators installed worldwide, whereas 70% or 75%, roughly 9,000 accelerators, are installed in what we call the advanced markets. And out of this 75%, we expect another 75% of the accelerators to be equipped with surface tracking, with motion management in one way or the other. Motion management, according to our opinion, is on its way to becoming the standard of care and with the current market penetration of only 20%, there is still a huge potential for C-RAD to grow. Looking in the years back, we can also conclude that C-RAD has been outperforming the market. What is the underlying driver? If you take a look at the table on the lower right corner of my slide here, the conventional therapy, this is essentially the way how cancer patients are treated nowadays. Conventional therapy has several advantages, but when it comes to high-precision radiation therapy then we are looking at SRS and SBRT and then also this hypofractionated in the last full year is also to be considered as a high-precision radiation therapy. Looking at the trends, 2016 versus 2030 now, we see that the conventional therapy is expected to go down from about 60% to just below 30%. So there is a strong decline in the conventional therapy. And at the same time, an incline on SRS, SBRT and also on the hypofractionated. SRS is expected to essentially double and hypofractionated treatment is expected to grow with more than 50%. So basically, there is a clear trend in the direction of high-precision radiation therapy and that will also require an accurate patient alignment. And that is where the C-RAD products come into the play. Looking at the cancer indications for male and female patients. Prostate and breast for females are the most common cancer indications worldwide. Lung is basically #2, especially in the Asian region, this is a very common cancer indication. So the C-RAD systems are designed to support the treatments of those most common cancer indication but as it is a very versatile platform, there are many other indications where C-RAD technology can be applied. Looking at the value proposition. Essentially, there are 2 areas. One is to increase treatment efficiency for our customers, meaning being able to treat more patients within a given time frame. And then on the other side, it is also the accuracy, mainly increasing or improving the positioning accuracy. So usually, this is something to be balanced. And if you take a look at the chart on the lower right corner, there are different ways how patient positioning can be done. And this is always a trade-off between time and accuracy. Looking at the laser, that's an area where C-RAD is also involved in, it is a very fast way of setting up the patient. The time is very short but also the accuracy, it is not a very accurate system or a very accurate way of setting up the patient. And that might be fine for certain indications and for certain treatment techniques. But as there is a shift in radiation therapy towards high-precision treatment techniques, more accurate patient-positioning methods are required. Looking then at the other end of the scale, we have something which is called cone-beam CT. They are similar in other technologies which essentially take images of the patient. They are considered to be very, very accurate. However, the time it takes to position the patient is also fairly long. So -- and surface tracking or motion management, that's our main business, the positioning products. It's an excellent compromise in the sense of it is a very accurate method, and it is a very fast patient-setup possibility. So looking at the interest in the global scale, I mean, in Asian markets for example, where there is a very high patient load, customers might be interested to improve the treatment efficiency with the purpose of giving access to radiation therapy for a larger number of patients. In other markets, the focus is perhaps more on the accuracy side, where one is chasing really the last millimeter. All in all, for all customer groups, the C-RAD system has a value. And therewith, I want to finish my presentation. Here, we have the financial calendar. But I open up for the Q&A session. And as I said, please feel free to post your questions in the chat function, and we will go through them and answer the questions.

So the first question is related to the order intake in the U.S. Can you please elaborate on order intake in the U.S.? Yes. So I think what I said in the earlier part of the presentation, what we have seen is that the COVID was hitting the U.S. very strong and especially, the hospitals were very restrictive in terms of closing down their activities. So that had a severe impact on C-RAD and also on other companies. How is the collaboration with Elekta? The next question. As mentioned in the presentation, the first order came in, in line with our expectations now during the first quarter. So the teams are working well together in the field. There is still, of course, a certain alignment process, but I see that they are running in the right direction, and the cooperation is constantly improving. The next question is related. If I could comment on the news that was published by Elekta with regards to the sale of their German subsidiary, Medical Intelligence. It is not related to C-RAD. For me, that step was not a big surprise, but I think I should not comment more in-depth about the activities that Elekta is conducting. However, what I can say very clearly is that this step has no impact on our collaboration or our activities with C-RAD (sic) [ Elekta ]. So looking at the next question, so what is the gross margin for the Catalyst+? I mean we are not commenting on this in detail for good reasons. But I think I mentioned in part of my presentation that the cost is notably lower than on the Catalyst system. So hence, we are expecting improved gross profit. So how can the U.S. be so much more affected by COVID than other regions given that they were hit last? Do you see any wait-and-see effect from Catalyst+ in the U.S.? Well, I mean, this wait-and-see, I think we can show that this basically has passed. At least on a global scale, we see that the positioning product this quarter was -- the growth of the positioning production and order intake was 25%, which I think is basically a continuation of the trend that we saw already starting in the second half of last year. So I think this wait-and-see situation has passed and that is not impacting the business anymore. Now I think the U.S. is very much result of the restrictions that were implemented as part of the COVID-19 pandemic. Hospitals were very quick in shutting down the activities, stopping all procurement processes. And that's typically -- or, let's say, the overall market situation in the U.S. is slightly different than what we see, for example, in Europe or also in large parts of Asia. It's a private market and the private hospitals are much more agile to react on external factors than governmental hospitals or governmental-funded hospitals are usually operating in. So I think what we see in Europe is that the effect hit the hospitals much slower and that's also why we saw the positive development in the EIMEA region. How do you explain higher order intake but lower revenue in the APAC given COVID-19? So I mean the lower revenue was partly related to the fact that in the beginning of the quarter, we were not able to deliver to certain markets in Asia simply because they were closed, the hospitals were closed. But as I mentioned, in the second half of the quarter, this activity has resumed. I think in general, I mean, and if you take China as it is the largest market, therefore, I think the Chinese government was very, very effective in the way how they handled the situation. It was a short intense period of time. But after that, they were also very quick in order to resume the activities. So the next question is related to any further informations regarding GEMini. I can repeat what we said earlier, what we commented earlier on, we had this write-down end of last year in the fourth quarter of the development effort. The focus of our organization is on the positioning products, not on GEMini. As I commented also last time, I mean, we are supporting the ongoing activity but very clear also that the focus is on the business with the positioning products. Can you please clarify the clinical process and regulatory path forward for Catalyst+? Yes. Brief and just in a nutshell. But I mean essentially, the health care market or the med-tech market is a very regulated market. And unfortunately, most of the countries have their own regulations. So essentially what it means is that the companies need to go through a clearance process with the respective government. This is something what we are used to. This is nothing unusual. So in those countries where we want to sell the product, we need to have this regulatory clearance completed. We started with Europe, under the CE mark, because that was our largest territory. That was the focus. The U.S. is the next market. And other markets will follow. So basically, the implementation of Catalyst+ is going to be gradually. The launch in the different market depends on the regulatory clearance. And there are certain markets, Europe is, for example, very straightforward. I think the process in some of the Asian markets, for example, is a bit more complex, also maybe in Latin America, it takes more time, and it can be up to 2 years for a product. Was the growth of 25% for the positioning products due to delivery to the Belgium order? I think the 25%, that relates to the order intake. So the Belgium order was booked still in the fourth quarter last year. So no, I mean, this was projects that were generated and converted into orders during the first quarter of this year. So here, there are a few questions that have already been addressed. So I'm just going through the list now. Can you comment on the COVID-19 effects you see as per today in every region? No forecast, just a situation here now. So basically, a forecast. So well, I mean, I think I indicated already that China resumed. They were very effective in handling the pandemic. I think then Europe and the U.S. were hit at a later stage. I think we commented on that. But I'm not making now any comments or statements on our expectation how long this will take. I think -- I mean, looking at the numbers that are publicly available about the situation, I think that is basically also what affects us and the measures in these various countries affect us. So as soon as they are released and let's say, the markets are open, the activities can resume also for C-RAD. Great, so that was the last question. So then I would like to thank everyone for taking the time to attend our webcast today. I wish everyone a nice day on a nice afternoon, and perhaps we see some of you during our annual meeting at the end of this week here in Uppsala. Thank you very much.