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

Good morning. My name is Basak Karakus. Today's webcast is presented to you by Tim Thurn, our CEO; and Henrik Bergentoft, our CFO. The presentation will address the first quarter of the fiscal year 2022, but also the CEO speech as part of our virtual Annual General Meeting. In the first part, Tim will give a short introduction and comment on the financial highlights in Q1 followed by an analysis of the sales development before he finishes with commenting on the key events. And Herrick will guide you through the financial review before he hands over the microphone to Tim, who will summarize and comment the year 2021. [Operator Instructions] So please take note that we will not be taking any questions in the chat. A recording of the webcast will be available on the C-RAD's website after the presentation. And therewith, I hand over the microphone to Tim.

Great, Basak. Thank you very much. Let's get started with a short introduction and the financial highlights. C-RAD is active in the field of cancer treatment. Our customers are hospitals and clinics 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 more than SEK 260 million in revenue and an operating margin of approximately 14%. We are starting the year with a strong momentum in order intake with measurable growth in all regions, totaling to SEK 81.5 million, a growth of 23% in quarter, yet another quarterly order intake record. Record revenue decreased by 6%, whereas we see continued growth in all regions with the exception of China which was affected by the pandemic and related lockdowns. As the consequence, operating income dropped significantly SEK 0.2 million. With order intake exceeding revenue, order backlog continues to grow with 33% especially in our service sector. Let's take a closer look at our sales performance. It is very encouraging we can deliver measurable growth in order intake in all regions. A huge unmet demand for contact here in the APAC region creates an underlying demand for high precision radiation therapy equipment. This in combination with C-RAD strong presence and an excellent market position in the region creates a momentum reflected in order intake growth of 34%. It should be noted that also order intake was affected by the lockdowns to China. With significantly reduction in biddings from March onwards, last year C-RAD established its presence in India, a very vibrant market with a strong desire to provide state-of-the-art radiation therapy at high growth rates. I believe a very good potential for C-RAD in the mid and long term. Continued growth in our largest region, EMEA, as well as the Americas was 19% and 18% respectively. In the U.S., we were able to secure yet another order from MD Anderson with multiple C-RAD systems to be installed in their newly built proton facility. Another large order has been one from the University Hospital in Germany. Looking at the product categories, the Life Cycle Business essentially tripled compared to previous year, healthy growth for our laser business, and our largest category shows a stable result in comparison to the previous year. This again relate to a large extent to the drop in order intake in China, which is essentially contributing primarily to our sales of lasers and positioning products. In conclusion, a very strong momentum in order intake confirming the interest in our products and solutions. Our business reflected in revenue but especially in order intake, is subject to a very distinct seasonality pattern whereas usually the second half of the year is significantly strong in the first 2 quarters. This is since many customers are hospitals and clinics which have an annual budget cycle aligned to the calendar year. Looking at the revenue. Total revenue decreased compared to last year over 6% due to the unfortunate return of the pandemic in China that has contributed to stalled installations and delayed payments. Strict lockdowns in major cities have affected customers and our long-time distributor in China that in consequence to less deliveries as compared to previous quarters. Looking at the APEC region excluding China, sales has grown with 13%. So also here a very healthy development. Americas continued the positive trend with revenue growth of 64%. EMEA grew was 10%. APEC decreased with 45% with China being the region significantly decreased revenue compared to last year. The Life Cycle Business continues to grow with a high pace of 47% over last year's first quarter. Let's zoom in a little bit on the service business or the Life Cycle Business as we call it. Life Cycle Business is primarily the sales of service contracts and it continues to grow rapidly in order intake by 195%. I mentioned service revenue grew with 47% to approximately SEK 10 million in the quarter, constituting 18% of the total revenue where it was 12% in the previous year. This is an important driver behind the improved gross margin. Let's comment on the key events during the period. We succeeded to expand our cooperation with MD Anderson network. I touched upon this a little bit earlier in presentation. MD Anderson has multiple installations with the C-RAD surface tracking system at various site basically in the larger Houston area. Now the team at the newly built proton center has decided to adopt the C-RAD solution as well. This is a huge success for us and underlines our dominant performance specifically in the PT sector and the success we had with MD Anderson team to implement their surface tracking program. Another large order can be reported related to the University Hospital in Regensburg where the customer decided for the C-Rad solution to implement surface tracking. It is very encouraging to see this commitment in my view another confirmation that the technology is on its way to become standard of care. An important milestone on the journey was taken by the publication of the report by the AAPM. A dedicated task group by the American Association of Physicist in Medicine was assigned to provide technical guidelines within surface imaging. The conclusion of this report was that the clinical use of surface imaging has increased dramatically which demonstrated utility for initial patient positioning, real-time motion monitoring, and beam gating in a variety of anatomical sites. Similar workgroups on European but also on domestic level are working on similar guidelines to enable centers to adapt the technology seamlessly. I would like to comment a bit more on China. As we are all aware, the measures taken by the Chinese government have a significant impact on the population as well as public life. The situation is affecting also our team, our customers and our distributors. The number of biddings or tender procedures has significantly decreased since the lockdowns were implemented. This affects order intake as customers are placing significantly less orders. With people being in lockdown, hospital operation is reduced to minimum and installations are by and large stalled, which is creating an adverse impact on deliveries and [ therefore ] revenues in the region. Well, it's not certain how long and to which extent the current measures will be maintained. We believe it's temporary. Also we believe that this market has a huge unmet demand and the commitment were meant to invest in cancer care. C-RAD is in a strong position and is market leader in the surface tracking space in China. Therefore, we have decided to continue to invest in this market and strengthen our commercial organization to support direct sales, our OEM relationships and also our distributors. And if we expand a bit on the strengthening of our commercial organization, we have a very firm belief that surface tracking is on its way to become standard of care. We are very positive about the potential for our technology in the mid- and long-term perspective. To further enhance future growth, we have decided to strengthen our commercial team by adding roughly 1/3 more salespeople in strategic markets in Europe, North America, and as I mentioned before in China. We believe that C-RAD has a great opportunity out there. There is a demand for high precision patient positioning equipment, and the demand is expected to grow. We want to engage with more customers and by that drive adoption with a higher pace. And with, I hand over to Henrik who will guide you through the financial review.

Thank you so much, Tim. And we will start by taking a closer look at our P&L statement. So revenues for the quarter decreased by 6% to SEK 56.3 million in the quarter. In constant currencies, the decrease was 10%. And as Tim already commented on, the decrease completely it relates to the current situation in China. Our gross margin came in at 64% for the quarter and further comments to follow on the next slide on that metric. External expenses for the quarter amounted to SEK 14.9 million and are in line with the level of the fourth quarter of 2021. The increase compared to last year mainly relates to increased travel and physical market activities as the pandemic has eased up in several markets besides China, of course. Personnel expenses for the quarter amounted to SEK 21.2 million, also in line with the fourth quarter of 2021. The driver behind the increased cost compared to previous year is an enhancement of the organization primarily within sales and services. The average number of employees was 69 during the first quarter 2022 compared to 57 last year. And at quarter end, the number of employees in the group amounted to 70 compared to 57 last year. Operating income for the quarter amounted to SEK 0.2 million and a margin of 0.3%, a significant decrease from last year. Gross margin and operating expenses are in line with recent quarterly levels, whereas the lower revenue is the one factor explaining the decrease in operating income. Net results after tax in the quarter amounted to minus SEK 1.2 million. The tax expense refers solely to the reversal of deferred tax assets for the Swedish entities and does not affect cash flow. So this slide is displaying our gross profit margin and revenue over a longer period of time. And as already mentioned, the gross profit margin in the first quarter 2022 came in at 64% as compared to 61% last year. Fluctuations in the gross profit can be expected between periods as it is dependent on the product mix and the variation of sales channels in our different markets where a larger portion of direct sales was the main driver behind the improved gross margin compared to the same quarter 2021. In addition, the growing portion of service in revenue has a positive impact on the gross margin. And as clearly shown by this graph the gross margin has a positive trend improvement over time. This slide displays our revenue and our operating profit over the last 6 years, and as seen there's a clear positive trend over time. That said there is a seasonal pattern in C-RAD's operations. The second half of the year is usually the strongest period both in terms of order intake and revenue. This is due to the fact that a large number of customers are hospitals and clinics, which have an annual budget lined to the calendar year. As the larger part of C-RAD's cost base is fixed, fluctuations in revenue have a direct impact on the quarterly operating profit as seen now in the first quarter 2022. Volatility and order intake in revenue between quarters and markets is to be expected in our business also onwards. This slides displayed our balance sheet at the end of the first quarter and our cash flow during the first quarter with a couple of comments to starting off with the cash flow. The negative working capital is a result from a higher inventory level. And that is a deliberate measure to be able to secure capacity to deliver onwards in the challenging times of supply chain, but also negatively affected by delayed payments from our customers in China. Still we ended the quarter with cash position of SEK 150 million, and on top of that an unused credit facility of SEK 20 million. The company is completely debt free and we have a solidity of 76%. Order backlog and as I believe you all know, the order backlog represents orders that have been received, but not delivered nor invoiced. The backlog amounted to SEK 451 million at the end of the quarter, an increase of 33% compared to the same period last year. From the total order backlog, SEK 229.5 million relates to products and SEK 222.1 million related to Life Cycle Business or service contracts. And out of those, SEK 38 million representing 17% of the order backlog for Life Cycle Business will be recognized as revenue within the coming 12 months period. As service contracts are recognized as revenue over the contract period. The service contracts can be up to 8 years while the most common contract period is 3 to 5 years. That marks the end of the financial presentation.

Yes, we're closing the first part of our presentation, but before we start -- I mean Tim starts presenting the second part, I would like to remind you that at the end of the presentation, we'll be taking the questions. But Henrik, can you please make sure that your microphone is turned off while Tim is presenting? We have some -- received some messages regarding that. So yes, thank you. Now I'm handing over the microphone to Tim.

Thank you, Basak. Great. Let's move on. Our vision is to provide superior treatment in radiation oncology for all patients. How do we get there? C-RAD mission is to be the preferred partner to ensure safety and efficiency in advanced radiation oncology, helping to cure more cancer patients and improve their quality of life. I would like to sum up some of the highlights that from last year. In the beginning of the year, the Stockholm Appeal Court confirmed C-RAD's entitlement to a patent application and the verdict was published on April 23rd. So this is now the final and definite decision and verdict in that particular case. During spring, C-RAD opened an office in Delhi to better serve the Indian and the South Asian market. The region has a huge demand for state-of-the-art radiation therapy equipment, making it one of the fastest growing markets worldwide. Another legal case at the patent and market court was rejected the claim from a former employee for compensation for an invention. That decision was published in July, has been appealed by the counterparty and further progress in the case is pending. More in spring -- sorry, more in fall, towards the fall C-RAD announced that the Catalyst+ HD system has successfully been validated with Elekta newest linacs, the Elekta Harmony. The Elekta linear -- all Elekta linear accelerators are now certified for compatibility with the full capabilities of the Catalyst family of products. Another event also in fall, C-RAD and another U.S.-based linac vendor, which is Accuray, signed an agreement to develop an interface between the C-RAD system and Accuray Radixact system with the purpose to enhance the treatment specifically for breast cancer patients. And just before Christmas, C-RAD received a purchase order from the Belgian company IBA regarding the supply of C-RAD surface tracking solution for 2 Chinese proton centers. The net order value of amounted to SEK 20 million. So if you look at the financial highlights last year focusing on all the intake revenue and the result. So order intake grew with 13% last year. Revenue grew with more than 20%, 21% during 2021. And we generated operating income of SEK 36 million or 13.8%. I think all in all we have shown that the interest in our solution is picking up quickly. We have shown that we can grow this organization, we can scale up this organization in a profitable way during last year. So if we look at the C-RAD technology, C-RAD is among the vendors that help our customers to improve cancer care. Cancer is among the leading causes of death worldwide. 3 methods have been established to treat cancer which is surgery, it's chemotherapy or drug therapy, and radiation therapy. We are focused and active in the field of radiation therapy and our products are used to improve patient safety and increase efficiency. The demand for our products is driven by the worldwide implementation of high precision treatment techniques. C-RAD saves lives and increases efficiency. The C-RAD technology is used for supporting stereotactic treatments. With the implementation of this high precision treatment protocols, the number of treatment fractions can be reduced significantly from around 30 with conventional treatments to around 10 fractions for stereotactic procedures. At the same time, we improve the patient safety. The C-RAD system contributes to ensure that the patient and only the tumor is treated with radiation and reduces the risk of radiation damages. And all this comes at an additional investment of only 5% of the total investment to equip a cancer treatment radiation room. I think one very important pillar of our growth journey is the adoption of the technology and it becoming standard of care. And there are several indications that we see that support our assessment that the technology is becoming standard of care. I want to frame some examples. The proton therapy which is kind of the spare head of precision radiation therapy, we see that essentially all new centers on the upcoming centers are selecting surface tracking as part of the patient positioning portfolio. Another example, we have mentioned before a tender that has been published last year in Spain where the government went out to shop for 85 linacs. As part of this tender, surface tracking was made mandatory, meaning that all the linac accelerators need to be equipped with surface tracking. And I think that is an important confirmation and important steps in the right direction to make the technology standard of care. If we look at the market and the potential in the market, there are roughly 12,000 linacs installed worldwide. We believe that approximately 9,000 of these 12,000 are installed, what we call, advanced markets. Now if we say the technology is becoming standard of care, so it might not necessarily be 100% of the 9,000 accelerators being equipped with surface tracking. It might be 75%, it might be 80%, it might be 85%, somewhere there. But the point that most management or surface tracking is on its way to become standard of care, gives us still a huge growth opportunity with the current market penetration of just above 20%. So there is another 60% or more to grow. The other point is if we look at the performance, C-RAD's performance over the last years, we have been outperforming the market. And the underlying driver of the adoption of this technology is what we see in the lower right corner. There is a very strong trend to -- in a transition from conventional treatment fractions or treatment schemes toward so called high precision, which is stereotactic treatments or hypofractionations. In order to deliver this in a safe and efficient way, the C-RAD solution is selected. If we take more the clinical angle of the adoption of the technology, we see that 5 or 6 years back the technology was primarily used for breast cancer treatments. If we talk to our customers today that have already selected the C-RAD technology, we see and hear that currently they use it for more than 70% of the patients that are treated at this center for -- used C-RAD for more than 70% of the patients that are treated at the center. So it has clearly developed from a niche solution for a certainly very important indication, breast cancer towards a solution that can be adopted more or less on all patients. Also a very encouraging development. Based on that, we look at the market potential. And when we look at the market potential, we are essentially looking at 3 pillars. One is adopting the technology to new linacs sold. Then, of course, there is a huge installed base. There is an opportunity for retrofits. And as we saw earlier, the service business is becoming a more relevant and important pillar for our business already today, but even more moving forward. So the potential for new linacs, we see the potential to be SEK 1 billion on an annual basis to equip new linacs, the surface tracking technology. If we look at this upgrade packet or retrofit packet, currently 20% of our sales is done as retrofits, meaning the linac is already installed a few years old, but the customer decides to adopt the technology. So that is around 20% of our revenue last year. And then the service contracts, it was 13% during last year, but we also saw a steep upward leaning curve in the revenue development. So all in all, this determines the market potential that we see for the technology and for us moving forward. To close with the reasons for an investment in C-RAD. Certainly, C-RAD creates value for the society in the fight against cancer. C-RAD has a proven and well-recognized product in essentially all parts of the world. With our comprehensive market access, in many cases we can work directly towards the customer or through partners. And it is very important to see that the surface tracking technology is becoming standard of care. And this unleashes a significant growth potential for us. And last but not least, I mean C-RAD has a very stable financial platform, which helped us also in this turbulence times, for example, to build up stock levels and secure our supply chain. And I would like to close my presentation with a statement about last year where C-RAD has strengthened the organization during 2021, primarily in the service organization. In addition, we have continued to invest in new product developments to intensify our cooperation with the OEMs. And the latest example is the integration and the validation of the Catalyst+ system with the Elekta Harmony linac. I would like to take also the opportunity to thank all our team members, our customers and our partners for their commitment and the trust that they put in C-RAD last year. It is great to see the progress that C-RAD made. We ended the year with a high level of interest in the marketplace for our solutions, and we are in an excellent position and well prepared to continue in 2022 working towards our goal of making surface tracking standard of care. The year 2022 has certainly begun with turmoil in the world scene where C-RAD has exposure to China, but less to the tragic situation in Ukraine and Russia where we have no local C-RAD employees and so far limited business activities. But despite the turbulences, we remain confident that surface tracking is on its way to become standard of care. And hence, our plan to increase our sales activities is another confirmation of our firm belief in our solutions and the potential it holds. Thank you very much. If you want to learn more about C-RAD, join one of our next quarterly reports. But otherwise, more short term, we have -- we are attending at the ABG Annual Life Science Summit, which takes place this year on May 18. So please join us for that presentation. And therewith, I hand over the microphone back to you, Basak, for the Q&A session.

Thank you, Tim. Yes, I think right now -- yes, I can see people are raising their hands right now. So I'm going to unmute. Yes, Erik. You can just please go ahead.

I have a couple of questions today, and I'll take them one by one. But starting off, conditions in APAC, obviously still a concern. But just to sort of understand the timing of these issues for Q1. I believe that most -- for most companies, this was something that was felt in late Q1 from, say, mid to end of March. But if the timing was the same for you, I mean the impact seemed very significant. It was just that short of a period. But so could you provide any color on the sort of timing of the slowdown that affects in Q1? And then also if the sort of impacts are still persisting into Q2 and then to what sort of extent?

Yes, Erik. Very good question. Thank you very much. So to start with, I mean, if we speak about the APAC region, I would like to emphasize, I mean, it is really a very local topic for China only. I mean if we look at the entire APAC region ex-China, we had growth both -- quite significant growth both on the order intake side and also on the revenue side. So I think the concern is really isolated to the Chinese market. So I think what we have seen is that in the beginning or, let's say, half way into the first quarter, the installations went down -- the number of installations went down. The pace of our distributor being able to perform installations and therewith also accepting new deliveries from C-RAD went significantly down. What we have seen, and that is more towards the end of the first quarter, you're absolutely correct, that the new biddings essentially stopped towards the end of March. And there were very limited biddings now in April as well. So this is an ongoing situation. And as the lockdown in major -- I mean, it's not only Shanghai -- in major cities went into the lockdown, this situation become even worse because customers were just not going out for their biddings. So I mean then the question is or the second part of the question was, how is that going to develop? I mean I don't dare to speculate how the lockdowns are going to be released and when they are going to be released. But I think it is very clear that the interest from the customers are there -- is there. Customers are interested in the technology. Nothing has changed from that perspective. It was just not the opportunity for them to go out in the tender or bidding process. So I think we are very much depending on the development of the lockdown. And as soon as they are released or relaxed, we are expecting business to pick up again in China as well.

You sort of touched upon my next question as well about the sort of visibility. But I noticed that Varian felt sort of confident enough to reiterate full year guidance and say that the sort of mixed installations here in Q1 and perhaps also in Q2 should come in, in the later part of the year. But just like thinking about the installation plans you have and the sort of capacity for catch-up in H2, do you still feel confident that you could perhaps recover this missed installation in H2? Or will sort of installation capacity be a constrain in that sort of sense?

So I mean, yes, 2 parts for the answer here as well. I mean, first of all, I mean, whether or not we can recapture everything in the later part of the year really depends on how long the lockdown is going to stay in place. And I mean I hope that other companies have better possibilities to predict that. However, I would like to emphasize that the model that we have implemented and also partly driven with -- or during the pandemic where we have, to a large extent, trained distributors and partners to deliver also services for us allows us now in times of peaks, installation peaks, to use that resources to support us in the installation process. So overall, I'm rather confident that as soon as the situation relaxes and the market opens up again that we can recover the installations.

And then also a questions on the sort of increase of the commercial team, which you said would be about 1/3. So just thinking about what sort of costs do you think -- do you expect to add here? And it would also be quite interesting if you would be able to go into a bit more detail on this sort of rationale and the need of beefing up the commercial team, so to say, say in terms of regions, et cetera.

Yes. No, absolutely. I mean, look, I mean, I think it boils really down to the standard of care or the technology becoming standard of care. I mean we have had many proof points. I mean, as a matter of fact, also now during this first quarter where, again, ex-China which is a very isolated issue, we have seen that the market is developing very well. I mean the C-RAD solution is well accepted by the customers. We have been winning important customers like MD Anderson for example. So I think overall, we are on a journey where our future success very much depends on how quick are we going to roll out the technology to our customers. And I mean the principle basically by strengthening our sales organization that we are able to have more customer contact, either direct or together with our partners, which might be OEMs or distributors, but more customer contact to push the technology faster into the market. I think there is a huge untapped opportunity or untapped is maybe the wrong word, but where we see potential is with the installed base. Maybe not in all markets, more in the private market, but upgrading the installed base. So there are opportunities for us by strengthening our sales organization to drive the adoption even faster compared to now. So that is the rationale to increase the sales organization. If we look at the regions, I mean for obvious reasons, I don't want to be too specific here now. But I think there are certain markets in Europe where we are yet under presented -- still underrepresented. I think there is opportunities. Customers are looking for the C-RAD solution, are interested to talk to C-RAD learn more about the C-RAD solution. And that are the markets that we want to address. But then also North America, it's a huge market. It's reflecting roughly 45% to 50% of the global, of the world, market. We still have -- even though we have grown the organization and even though we have this collaboration with Elekta, which is working very well, there is still a huge untapped potential. And by strengthening our organization, we want to get a larger share of the pie. And then when it comes to China, I mean China has been growing significantly. I mean over the last years, we had over 30-plus percent growth rates. We believe that the current situation is a very temporary thing. We believe that the market will open up. We see a strong interest from the customers. We see the clinical results that are being published. We see the presentations that are done about the C-RAD technology at the conferences in China. So people are excited. People are enthusiastic. People want to adopt the technology. And now it is a matter to get in touch in contact with more customers in a shorter period of time. So and then perhaps I think that was the first part of your question. The cost side, we will not disclose any details here now. However, our objective is and continues to be to grow the organization profitable. Of course, it takes investments in order to build up the sales organization, but we believe it's well worth the investment. Now -- investing now into the sales organization and harvesting the fruits yes, shortly thereafter.

And then just a last question from my end, and then I'll jump back into the queue. I'm just trying to understand the sort of order intake situation a bit further. I mean service has had a very strong quarter but it was a bit weaker for products to decline year-over-year despite fairly supportive FX, but the comps was then again fairly challenging. But I just want to understand how reflected the sort of order intake is of the market situation right now and for the coming quarters. I mean you had these 2 slightly larger orders that total at about SEK 19 million, SEK 20 million that both included the sort of multiyear service contract, which both helped lift Americas and EMEA, which is not something I can expect to happen every quarter, even though I would like to. But I guess what I'm trying to ask and say, if we look at some sort of normalized order intake situation, do you see any softening of demand from customers on the order intake side as well, perhaps for APAC, but then again for other regions as well? Or is there still a solid momentum all around?

Yes. No, I mean, absolutely not. So we cannot see that the momentum is going back or falling back. And also here, I mean, it is very much related to China. I mean, order intake did not develop the same extent as expected also in China, even though it was more towards the end of the quarter that the biddings went down, but it had an effect, and we saw this effect in our order intake. China is a market where we predominantly do not sell service contract. It is very much focused on product sales and a positioning product and also the laser business. And that's why, I mean, basically what China fell short is also reflected in the order intake for positioning products predominantly. So that is one aspect. But the other aspect, and I think, I mean, if you look at the last quarters, the order intake for the positioning products came in very strong. And there is always some volatility over the year over the regions as well. And I think we simply need to lift this effect that at a certain point in time, I mean, service is coming strong in other quarter, maybe the order intake for the positioning product is coming in very strong. So there is a normal bid in volatility to the model we cannot see any changes in the interest in the market. And I think the confirmation or the steps to continue to invest in our sales organization. I mean, we are pretty bullish about the market. We have quite some expectation on the market. We see a huge potential. We see that the market is developing in the right direction. So it is now a matter of accelerating the growth by putting in the resources to make it happen. Do we have any other questions?

Nothing I think -- I mean I cannot see any other raised hands in the chat area. No.

Okay. Good. Then I would like to thank everyone for attending today's webcast, and wish you all a good day.

Have a good day.