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

Welcome, everyone, to today's webcast as part of the presentation of the Q3 report. This webcast is presented to you by Henrik Bergentoft, our CFO; and me, Tim Thurn, the CEO. In the first part, I will give in short introduction about C-RAD, take you through the financial highlights, followed by an analysis of the sales slides and 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. This webcast is usually very well attended from existing investors, but also a group of investors that have not followed C-RAD for long. Therefore, we will finish the presentation with the market overview and C-RAD's position within this market. Like always, you can post your questions through the chat function, and we are happy to answer them before we close this webcast. The recording of this webinar will be made available on the website in the Investors section after the live broadcast. Okay. Let's get started. 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's positioning products are supporting this process and are fully integrated in the clinical workflow. Over the past years, C-RAD has been growing significantly in terms of revenue and profit. Last year, revenue exceeded SEK 200 million. Our mission summarizes our 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 had sold close to 600 systems, whereas the large majority is installed within the, what we call the advanced markets of radiation therapy. These countries are marked in orange on this map. With offices in Sweden, Germany, France, Belgium, Florida in the U.S. and in China, we are serving our customers through our sales and service organization. In other markets, C-RAD is represented by distributors. Especially, in China and North America, C-RAD is cooperating closely with the Swedish vendor of linear accelerators, Elekta. This cooperation gives us great exposure to the market and is by now yielding results. Looking at the financial highlights from the third quarter. The COVID-19 pandemic continues to have an impact on the world economy and so on our business, especially in North America and also in parts of Europe. Despite implications caused by the pandemic, order intake went up noticeable in the quarter and exceeded SEK 80 million. We closed the quarter with a total revenue at about the same level as the same period 2019, still partly impacted negatively by the pandemic since installations and deliveries have been delayed. Operational expenses were measurably lower than last year, generating a record high quarterly profit of SEK 5.4 million and a net result of SEK 3.8 million. Taking a closer look at our -- the result from our sales activities. We are closing the third quarter with a total order intake of SEK 80.5 million compared to 40 -- sorry, SEK 69.7 million in the same period last year, a positive order intake development of 15% year-over-year. It is encouraging to see that the sales of our positioning products across all regions grew by 18% again. Looking at the full year, we see a very similar picture. Service business was somewhat slow in the beginning of the year, but now it is obvious that customers started again to sign up for service contracts. Order intake in this category grew with impressive 76% in the third quarter and remained about on the same level as previous year for a full 3-quarter period. The focus of our sales efforts is on the positioning product and related service contracts. The decline in our laser business of 27% is from a fairly small level in -- during the third quarter. As a note, the sales of the distribution products has been stopped in the third quarter of 2019. So that's the result for the reason why we have no order intake during this year in this category. I think we can be very satisfied with the overall development of the order intake, especially in light of the circumstances that we are exposed to. Asia, inclusive of Australia, continues to deliver very good results. Order intake grew with more than 60%, both in the third quarter and in the period from January to September. Whereas this trend includes a few large wins such as the products in Australia and we'll come back to them later in the presentation, it shows the growing adoption of surface tracking in these dynamic markets. Order intake in Europe decreased by 12% during the quarter. We saw variations in the purchasing activity between the different countries, largely correlating with the local situation of the pandemic. The South European countries were significantly more affected than Central and Northern Europe. In the third quarter, we see that the business activity is resuming in North America and contributing to an order intake in the region than is somewhat exceeding previous year's results. The first half year of 2020 was very much hampered by the pandemic, whereas it is very positive to see that customers are reengaging in service projects. The cooperation with Elekta in North America is contributing to the total and shows results. In the United States, an update to the reimbursement system for health care providers has been released during the quarter. Whereas not all the details are entirely set, it is already now obvious that the system, new system, incentivizes cancer centers to adopt high-precision treatment techniques. C-RAD's view on this development is very positive, both for the patients, but also for the future of the company as our products are predominantly used for so-called stereotactic treatment, where positioning accuracy is crucial for the treatment outcome. The positive development in orders over the past quarters has translated into a strong growth in revenue in APAC, but also in EIMEA. The very weak order intake in the beginning of this year impacted revenue for region Americas. As mentioned earlier, order intake in the third quarter has been picking up and will strengthen our sales and revenue in the region again. Total revenue decreased by 5% for the full period -- full year period. Again, growing order intake, especially in the positioning products, is not yet entirely reflected in the revenue growth. But I think it is very encouraging that strong revenue growth in -- to see the strong revenue growth in the service business with impressive 41%. It is obvious that C-RAD has been very much affected by the pandemic, but we also see that the business is recovering. We cannot predict the future development of the pandemic and its implications to our business, but I believe we have adapted very well to the new situation and managed to develop our business despite the circumstances. Let's take a look at the key events during the reporting period. In mid-2019, C-RAD engaged in a distribution partnership with the Swedish vendor of linear accelerators, Elekta. The distribution agreement enables Elekta to bundle C-RAD products in their quotations to the customer. The partnership was launched in America and has now been expanded to China. China is a very important market with a large installed base and very high growth rates in terms of new Linac installations. A key win from a strategic perspective is the project in Shanghai at the Shanghai Proton and Heavy Ion Hospital. The project is an important milestone for us to strengthen our position in the fast-growing proton and particle therapy market. The state New South Wales went out with a tender for surface tracking. Together with our partner, Gamma Gurus, we were successful to convince and to get customers excited about the C-RAD solution. Whereas several smaller orders have been booked in the past quarters, C-RAD received a large order for 2 sites with a total order value of SEK 11 million, including multiple positioning systems during the third quarter. This is a great success for C-RAD and we are excited to be the selected partner for this large-scale rollout in the market. Then I would like to comment on the change of leadership in C-RAD North America. Brian Loar was the former President of C-RAD, Inc., that's our North American entity, left C-RAD in the beginning of the fourth quarter to pursue an opportunity outside the radiation oncology market. The process for a new recruitment in U.S. is ongoing, and his duties will be managed by internal resources until the replacement has been established. I want to emphasize here, C-RAD's strategy for the North American market is unchanged. We will continue to work with the established sales model based on our direct sales force and the Elekta cooperation. And this leads me to hand over to Henrik, and he will guide you through the financial review.

Thank you, Tim. So starting off with a more detailed look at the P&L statement line by line. Total revenue for the quarter amounted to SEK 52.6 million, a decrease compared to last year of 5%. In constant currencies, the decrease was 3%. The strong order intake in Asia during the year has led to a significant growth in revenue of 50% during the quarter. In North America, order intake was very low during the first half year as a consequence of the pandemic, resulting in low revenue during the quarter and a decrease of 74% compared to last year. The recovery in order intake in the region will materialize in future revenue as revenue recognition is dependent on hospitals and cancer centers actually being able to receive and install the equipment. Revenue in EIMEA grew with 14% in the quarter, confirming that treatment centers and hospitals to a greater extent now are able to install equipment, but still impacted by the pandemic. Revenue for the full period decreased by 5% that amounted to SEK 147.3 million. Gross profit. The gross profit margin was 60% during the third quarter compared to 59% during the same period 2019. Fluctuations in gross margin can be expected in shorter period as it is dependent on the product mix and sales channels. External expenses. Expenses for the third quarter amounted to SEK 10.5 million as compared to SEK 13.6 million last year. The reduced cost is a consequence of active and natural cost reductions during the pandemic. Less spending on marketing and travel are the main drivers behind the cost decrease. The company will continue to carefully monitor its cost depending on how market conditions develops in light of the pandemic. For the full period, operational expenses amounted to SEK 30.2 million as compared to SEK 38.6 million last year. Personnel expenses for the third quarter amounted to SEK 14.7 million compared to SEK 16.6 million last year. C-RAD has taken various measures to lower personnel expenses in order to mitigate lower revenue coming from volatile market conditions due to the pandemic. Among other measures, the company has taken benefit from different short time allowance programs available in countries where the company operates. The cost reduction measures implemented explains why personnel expenses are, in fact, lower compared to last year despite a slightly higher average in number of employees. The average number of employees during the third quarter amounted to 58 compared to 57 in the corresponding period 2019. At the end of September, the number of employees in the group amounted to 56 as compared to 59 last year. Capitalized development costs amounted to SEK 1.4 million in the quarter compared to SEK 1.5 million last year and are related to continued development of the positioning products. For the full year, SEK 3.8 million has been capitalized compared to SEK 3.7 million in the corresponding period last year. At the end of September, total capitalized development costs amounts to SEK 14.6 million as compared to SEK 22.7 million last year. Revenue and cost combined, operating income for the quarter amounted to SEK 5.4 million compared to SEK 1.7 million last year, corresponding to a margin of 10.3% compared to 3.1% last year. The increased operating income, despite the decrease in revenue, is generated by lower operating expenses related to the COVID-19 pandemic. As said, the cost decrease is a mixture of active decision and also a natural decrease due to less travel and marketing activities. Net results after tax in the quarter amounted to SEK 3.8 million compared to minus SEK 1.4 million last year. Tax expenses of SEK 1.5 million refers only to the reversal of deferred tax assets for the Swedish entities and does not affect cash flow. The reversal of the tax asset is due to a positive result in the Swedish entities. Total deferred tax assets amounts to SEK 21.2 million at the end of the period. Next slide, please, which displays revenue and gross margin over a longer period of time. As said, the gross profit margin was 60% during the third quarter 2020 compared to 59% during the same period 2019. We can expect fluctuations in the gross margin in the shorter period as it is dependent on the product mix and sales channels, but for this quarter 3 is on a good, solid average. Next slide, please. This slide is putting total operating expenses in relation to revenue for the past 4 years. And 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 this growth, hence, generating an increase in total operating expenses. The graph outlines operating expenses and revenue for the last 4 years. And 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 expense in relation to sales is going down. It should, however, be noted that 2020 certainly is impacted by the pandemic, both with regards to lower revenue and also lower operating expenses. Next slide, please, showing operating profit and revenue over a longer period of time. As seen, the business of C-RAD is volatile between the quarters and is expected to be so going forward, since larger single orders have an effect in the quarter when they are delivered. However, the trend line clearly shows that C-RAD is on a growth journey with the company also since mid-2018 has reached an important milestone in the sense that the company is delivering profitable revenue growth. Despite the challenges that the pandemic has presented, C-RAD has still managed to deliver a positive operating income during 2020 and even a record-high operating profit in this third quarter. Next slide, please, displaying cash flow for the third quarter and the first 9 months. Total liquid funds at the end of the quarter amounted to SEK 94 million. In addition, the company has an unused credit facility of SEK 20 million. Operating cash flow for the quarter contributed with SEK 13 million where changes in working capital contributed positively with SEK 5.4 million. In February, a directed rights issue was undertaken with an issue of 2.5 million B shares, 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 seized to use factoring. Furthermore, warrants have been converted into shares during the period of SEK 2.9 million. In summary, the above has generated a cash flow from financing activities of SEK 68.9 million year-to-date 2020. Next slide, please, displaying our balance sheet at the end of the third quarter with a couple of comments to be made. On the asset side, I want to highlight 2 things. One is that inventory is on a relatively high level, which is a deliberate decision that during the pandemic have a buffer to maintain delivery capacity. Secondly, and again, is the cash position of SEK 94 million, which is at a very solid level from a historical perspective. On the debt and equity side, I want to highlight that the solidity is at a historically high level of 75% and also that the company, after the repayment of the SEK 20 million loan in quarter 1 and the seizing of factory, now is completely debt-free. Next slide, please, displaying our current order backlog and the development of the same over the last few years. And the order backlog represents orders that have been received but not yet delivered and invoiced. The backlog amounts to SEK 305.8 million at the end of the quarter, an increase of 33% compared to the same period last year. From the total order backlog, SEK 160.6 million relates to products and SEK 145.2 million relates to life cycle business or service contracts. SEK 26.4 million of the order backlog related to life cycle business will be recognized as revenue within 12 months, as service contracts are recognized as revenue over the contract period. The service contract can be up to 8 years, while the most common contract period is 5 years. And by that, I hand over to you again, Tim. Thank you.

Henrik, thank you very much. So as promised, I would like to give a bit of a market overview and start with this slide, highlighting the distribution of the radiation therapy market worldwide. So if we look at the, what we call, advanced markets comprising North America, East Asia and Western Europe, we see that roughly 9,000 linear accelerators are installed in this region. So C-RAD has the firm belief that surface tracking, our positioning products on its way -- are on its way to become standard of care. With the current market penetration of around 20%, there's still plenty of potential for us to grow in these regions. If we point your attention to the table in the lower right corner, I would like to give a bit of an overview on why we believe that the surface tracking implementation is developing and is on its way to become standard of care. We see here the trend in radiation treatment techniques. Whereas the conventional technique is, based on this study here from 2016, still the dominant treatment technique with roughly 60%, but it is expected to go down to around 28% until the year 2030, and going to be replaced by high-precision treatment techniques such as SRS and SBRT, but also hypofractionated treatments. Here, we see a very strong trend to develop this from 21% up to 39%, also for the hypofractionated treatment, is a very strong development forecasted here. So in these high-precision treatment techniques, they require accurate positioning, accurate alignment of the patient and that is exactly what C-RAD is providing to the market. And that is the underlying reason for the rapid development of our products and the implementation of our products in the market. So looking at the C-RAD value proposition, essentially, there are 2 aspects to it: treatment efficiency -- to improve treatment efficiency and to improve treatment accuracy. If we look to the diagram in the lower right corner here, patient positioning can be done in various ways. And this is always a compromise of time and accuracy. And this compromise does not necessarily need to be a negative compromise in many cases, and that is dependent on the clinical indication, either/or method is more favorable. However, I would like to mention that the current standard, which is lasers, and on the other end of the scale, we have cone beam CT which is on the one hand very accurate, but at the same time, also very time consuming. Laser positioning is a very fast way but also with very limited accuracy. So if we look at the C-RAD SIGRT solution, that is our positioning products, this is an excellent compromise between high accuracy and a fairly quick setup of the patient. And that is really the motivation for many customers to adopt this technology into their clinical workflow. And we found some studies really providing evidence of the increasing adoption of our technology to the clinical workflow. What we see here on the left side is the chart displaying the distribution of different disease sites treated through radiation therapy across a number of treatment centers. And essentially, what we can conclude is that there is more variations from year-to-year, but essentially the distribution is unchanged. And our assessment is also that there will not be a significant change in the distribution over the next years. But the interesting piece is, looking at the adoption and comparing the year 2015 and today, 2020, you see that 5 years ago, the clinical implementation was primarily on breast treatments, which was accounting for roughly 20%, 25% of the fractions delivered with radiation therapy. Looking at 2020, however, we see that more than 1 disease site, namely 5 disease sites, are basically treated with the usage of surface tracking. So this is accounting for a bit more than 70% of the fractions delivered in the radiation therapy department. So we see a very steep up slope in terms of adopting surface tracking to treat more patients with our technology. And again, this is another driver of showing how the implementation is developing and underlying our assessment that our technology is on its way to become standard of care. So that was what we had prepared for today's webcast. Looking at the financial calendar, we have the publication of the year-end report scheduled for January 28, 2021. So like always, there is now the possibility to ask questions. Please use the chat function of the webinar software to address your questions, and then we are happy to go through them.

So the first question is related to the proton order in Shenzhen that we published a press release that C-RAD has signed a letter of intent some time ago. And the question is, if the order intake will -- if this project will be recognized as order intake during Q4? As said, I mean, we have signed a letter of intent. And in order to issue the final purchase order, so-called supply evaluation is taking place. This is an ongoing process. And as soon as this process is finalized, we are expecting to receive the order. Then the next question is, if we can give an estimate on how much of order intake in U.S. and China that will be generated through Elekta agreement going forward. I'm not going to make any forecast here, any predictions. I can say, and I said it already, that the agreements actually in both countries are yielding results. And yes, for us, it is an important partnership. It simply helps to have exposure to the market in these fairly big countries with a lot of customers, with a lot of cancer centers, it helps to get exposure to these customers. So it is an important component in our strategy moving forward. The next question is regarding the -- one of the last slides where I probably showed the adoption of surface tracking in radiation therapy. The question is why radiation treatment is not used for prostate cancer. Perhaps I was inaccurate or did not succeed to get the message on spot. I mean, there is radiation therapy, of course, also used for prostate cancer. However, the advantages that surface tracking gives or provides for an accurate patient setup and monitoring during treatment are more relevant -- or less relevant for prostate cancer. And the reason for this is that the surface, we are looking at the surface of the patient and the surface is fairly far away and the prostate is moving independent from some motion that we can see and recognize on the surface. So there are many indications, as I said, the adoption to around 70% of the clinical indications where customers can benefit from having surface tracking. But there are also a few indications where the benefits are not that significant. The next question is related to the gross margin. And the question is, why do we see a slight decline compared to Q2 2020? I defer to Henrik to answer this question.

Yes. Thank you. The answer to that question is what we disclosed in the presentation. It depends on the product mix and the sales channel mix. And in this particular case, if we use distributors for certain deliveries, that will have an implication on the gross margin. So -- but by and large, gross margin will fluctuate depending on the product mix and sales channels used.

So the next question is related to the math behind the comment that the average delivery time is coming back down to 5 months. It means that what you had in the order book pre-2020 is longer than 1 year.

Yes, thank you for that question. And to explain this, this has a lot to do with the pandemic and that the comments that we made about revenues is, to some extent, lower because we are unable to do deliveries and installations. So what it means is that more recent orders, end users have had more visibility in their capability to receive and install equipment, while it's a fairly low conversion rate in the quarter. But as you -- as correctly calculated here, all the orders in the backlog are still sitting there, mainly due to pandemic-related issues.

So the next question is related to the C-RAD product we offer to Elekta customers who buy their Harmony accelerator. Yes, I can say, I mean, our objective is to offer the C-RAD products essentially to all customers and that is also to customers that decide for an Elekta Harmony. So the next question is related to our estimate in terms of growth for the next year. Do you have any goals? I mean C-RAD is not disclosing any details or detailed numbers here. However, what we can say along the lines of what we communicated also in the report, the adoption of surface tracking is rapidly increasing. I mean, we had a bit of a hit back during this pandemic time. But I mean, overall, we are still absolutely convinced that surface tracking is on its way to become standard of care. We have seen that also from a clinic perspective, the adoption not only in terms of the number of centers, but also the clinical cases where surface tracking is a useful tool to improve patient care is increasing. So all these are positive indications for a positive development and for us succeeding in this market. Then there was another question. Due to -- or related to the acquisition between Siemens and Varian. So Varian... [Audio Gap]