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

Okay. We will now begin. So good morning, everyone. Welcome to C-Rad's presentation of the Q2 report. My name is Priscilla Kazumba, and I'll be moderating today's webcast. The report will be presented to you by Tim Thurn, our CEO; and Henrik Bergentoft, the CFO. The presentation will address the first 3 quarters of the fiscal year 2022. Tim will start off with a short introduction and comments on the financial highlights, followed by an analysis of the sales development before finishing with his comments on the key events. Henrik will guide you through the financial review before he hands over the microphone back to Tim. We will conclude the presentation with a short overview of the market. [Operator Instructions] If you wish to watch the recording later on, we will have the webcast available on the C-Rad website after the presentation. Therewith, I hand over the word to Tim.

Great, Priscilla. Thank you very much. Let's get started with an introduction in the financial highlights. 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 SEK 260 million in revenue at an operating margin of 14%. We are closing the third quarter with an all-time high revenue of SEK 83.5 million, translating into 32% of growth. Order intake was approximately on the same level as last year, giving us a solid order backlog of approximately SEK 500 million going into the fourth quarter. The strong growth in deliveries, along with a stable gross margin generates an operating income of SEK 14.6 million or a margin of 17.5%. Let's take a deep dive into the market and our sales performance there. For the first 9 months, we are delivering order intake growth across all regions, with a very strong performance in the APAC region growing orders by 58%. Order intake is overall in the third quarter somewhat behind my expectation, while order intake in the EMEA and Americas declined, the progress in Asia continued throughout Q3. C-Rad is in an excellent position in all important growth markets in the region we presented through our own organization and progressive distribution network and our OEM relationships. Our investment in the Indian market continued to deliver results and we are building a healthy project pipeline. We have established a network of partners in the country managed by a C-Rad team out of Delhi. During the next month, the reports will be present at the most important conference in India to demonstrate our solution to potential customers. Also, our cooperation with the Australian health care provider GenesisCare develops very positive and strengthens our installed base in the region. Let's take a quick look at the distribution of orders by product category. Looking at the third quarter, it displaced for our industry, very usual volatility between the quarters. But I think looking at the 9-months period gives us a fair view on our opportunity. Orders for our most important product category, the positioning products grew with 21%, certainly a good result, which supports our early assessment of surface tracking being on its way to become standard of care. And the second point that I want to make, the lifecycle business continues to grow at a high pace. We see increasing interest from new customers across the globe, but especially in EMEA and Americas to sign up for service contracts. But also there's an increasing population renewing their service contracts after the initial service contract has expired. This is the ultimate confirmation of a successful relationship between the customer and C-Rad over the lifecycle of the product. This chart is displaying the order intake by quarter over the past 3 years. Our business reflected in revenue, especially in order intake is subject to a very distinct seasonality pattern, whereas usually the second half of the year is significantly stronger than the first 2 quarters. This is since many customers are hospitals and clinics, which have annual budget cycles that are aligned to the calendar year. We saw substantial revenue growth across all geographies during the third quarter as a result of an order conversion of products and projects that were won earlier in the year and in Chinese market that continues to recover. An outstanding result really from the Americas, primarily North America, the largest market for radiation therapy equipment worldwide, delivering a growth of 63% and 49% for the quarter and for the 9 months period respectively. Also encouraging progress in EMEA after a somewhat affected first half, we are delivering a strong revenue growth again in Q3. The year opened with a challenging situation with the return of the pandemic and subsequent lockdowns in China that entailed negative effects on our revenue as we were not able to deliver and install our systems in the cancer centers. Hence, it is encouraging returning to revenue growth again in the region. We saw first indications of a recovery already during the second quarter, and this situation has further improved during the third quarter. We are certainly not yet back to pre-COVID levels, but see a steady progress in the recovery. Now zooming into our service business and the service revenue. We are very closely monitoring the contribution of the service revenue as a function of the total revenue, which is for the first 9 months, it amounted to 17% as compared to 13% during the same period last year. This is a trend we foresee continuing over time as both the installed base and the adoption of service contracts continues to develop favorable. We see a huge potential in the service business, established companies in our industry, we call service business contribution of 40% to 50% of the total revenue, very encouraging and shows the potential we have within services. Now looking into the key events. I'm pleased to report the progress in our partnership with the Linac Accuray, which was announced in October last year. On the ASTRO Conference last week, the trade show, we jointly demonstrated a breast cancer treatment package on the Accuray Radixact system is a fully integrated and automated surface-guided radiation therapy solution. Breast cancer remains a significant women health issue and more precise treatment technologies can have a major impact on extending and improving the quality of patient's life. This is another clear indicator of surface tracking being viewed as an important contributor in the fight against cancer. In October, we announced the decision of a country-wide tender in Italy that was released earlier this year. C-Rad through our local distributor Tecnosan has been participating in the tender that was ranked first in the surface tracking lock and third in the gating lot. The tender decision was announced and is now subject to an appeal period that is ending by the end of November. We are expecting to receive the purchase order right thereafter. In the same tender, Elekta was ranked first in the linacs lot. I think the center shows again the rising importance of surface tracking to deliver advanced radiation therapy, clearly pointing towards the technology becoming standard of care. Tecnosan and C-Rad have worked together over the last close to 10 years. This excellent cooperation led to the successful adoption of surface tracking in Italy where C-Rad became market leader over time. I also want to give an update on the upcoming changes in senior management here at C-Rad. Henrik Bergentoft is going to leave C-Rad by mid of November. Lars Levin will succeed him in the position as an interim CFO. Lars is already part of the C-Rad team and is currently getting prepared to take on the position upon Henrik's departure. As probably most of you are aware, I'm going to leave C-Rad by the end of the year as well. Cecilia de Leeuw will succeed me in the position. We have a very close dialogue and are currently working on preparing the handover that we take place during December. And perhaps, at this point, I want to take the opportunity to also add the positive comment I'm very excited and proud of what the C-Rad team has achieved during the last years. We made immense progress to build a company with a global presence and to make a technology become standard of care, a technology that really makes the difference for the patients in need of cancer care. So a big, big thank you to the entire C-Rad team, our customers and partners as well as our shareholders. And then as I hand over the microphone to Henrik, who will guide you through the financial review.

Thank you so much, Tim. So let's start off by having a closer look at our profit and loss statement for the third quarter and the 9 months period. Tim already provided excellent comments on the revenue side, so I will move on to the costs. Starting off with external expenses that for the quarter amounted to SEK 16.6 million, an increase from SEK 12.4 million last year. The increase is driven by several factors. Last year's operating expense were significantly impacted by pandemic with neglectable traveling and no physical marketing events taking place. External consultants have been used to a greater extent in our R&D projects as compared to last year, also reflected in the capitalized development costs. C-Rad has measurable cost in foreign currencies, primarily U.S. dollars and euros, and the weakening of the SEK has increased cost by approximately SEK 1.7 million for the 9-month period, with the main effect in the third quarter. Personnel expenses for the quarter amounted to SEK 24.3 million, an increase of SEK 18 million last year. As with an external expenses, the weakening of the SEK has increased personnel cost by approximately SEK 2.4 million for the 9-month period, again, with the main effect in the third quarter. The average number of employees amounted to 74 during the third quarter compared to 64 corresponding period last year. At the end of September this year, the number of employees in the group amounted to 79 compared to 65 last year. This includes the announced enforcement of the sales organization in our strategic markets. The main composition of other income and expenses related to fluctuations in the exchange rates and thus, the revaluation of our balance sheet items. Capitalizations during the quarter amounted to SEK 2 million and are related to continued development of the positioning products. The increased capital ratio, say, compared to last year is due to more efforts being put into development as compared to maintenance and also that external consultants have been engaged to a greater extent compared to last year. This slide displays our revenue and our gross margin over a longer period of time. For the third quarter, specifically, the gross profit margin came in at 64%, same gross profit margin, 64% for the 9 months period as compared to 62% last year. Fluctuations in the gross profit margin can be expected between periods as it is dependent on the product mix and the variation of different sales markets or big sales channels in our different markets. The improving trend over time is mainly due to a larger portion of direct sales and that a growing portion of services in our revenue has a positive impact on the gross margin. This graph is based revenue and operating profit over the last 6 years. And as seen, there is a clear positive trend over time. That said, there is a seasonal pattern in the U.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 annual budgets aligned to the calendar year. As the larger part of C-Rad cost base is fixed, fluctuations in revenue have a direct impact on the quarterly operating profit. Volatility in order intake and revenue between quarters is to be expected in our business. Here's a look at our balance sheet and our cash flow with a couple of comments to be made. The negative cash flow in the third quarter comes from a negative working capital due to mainly 2 factors: one being the fact that a vast part of deliveries in the third quarter were made towards the end of the quarter, meaning that the positive cash flow effect of those deliveries will come in the fourth quarter and also that we have increased our inventory levels to secure delivery capacity in the current global situation with shortage of components. Still, we end the quarter with a cash position of SEK 95 million and on top of that, an unused credit facility of SEK 20 million. The company is completely debt-free and has a stability of 76%. So ending the financial presentation with a look at our order backlog. And as I think most of you know, the order backlog represents orders that have been received but not yet delivered or invoiced. The backlog amounted to SEK 493 million at the end of the quarter, an increase with 33% from last year. Roughly half relates to products and the other half relates to service contracts. And from the service contracts, SEK 41.6 million, representing 18% of the order backlog of service contracts is to recognize this revenue in the coming 12 months period as service contracts are recognized revenue over the contract period. The service contract 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. And now back to you, Tim.

Thank you, Henrik. I would like to give a short update on the company and the business that we are working in. Our vision at C-Rad is to provide superior treatment in radiation oncology to all patients. And we get there through our vision 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. Cancer is among the leading causes of death worldwide. Three methods have been established to treat cancer, which is surgery, drug therapy or chemotherapy and radiation therapy. C-Rad is 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. As said, I mean, we position the product for patient safety as well as efficiency. With the upcoming treatment techniques, they deliver an opportunity to further improve the efficiency and reduce the time that is required to treat the patient. At the same time, that might create a risk for patient safety. And here, the C-Rad solution helped to ensure that the dose is delivered with highest precision to the patient or to the tumor. And all this comes as an additional investment. If we are looking at the entire treatment room, additional investment for the C-Rad equipment is only 5%. The fundamental pillar of our growth journey is the adoption of our technology. We believe that the technology is on its way to become standard of care. And there is a few good examples that align our assessment. Well, I think we spoke about the Italy tender earlier today. And I think that is a very -- makes it very visible how I will see on the importance of surface tracking being an integrated part of such a huge linacs project. And another example is proton therapy, which can be considered as the spare head of precision radiation therapy. And we can say essentially all new treatment centers are choosing the technology provide a safe and efficient workflow. If we look from another angle at the technology, we have seen that the adoption has also -- the clinical adoption has also been increasing over the past years. If we look 5 years back, 2015, in that period, surface tracking was primarily used for breast cancer patients only. Certainly, a very important indication and certainly one of the largest indications of patients that receive radiation therapy. However, over the years, the technology and the clinical research has avoid to support using surface tracking also for many other indications. And if we talk to our customers today, many of them use our technology for 70 or more percent of the patients, if not for all of their patients. So also here, a very encouraging development, taking the technology from a niche solution to true standard of care. C-Rad is focusing its activities in what we call the advanced markets. The advanced markets account for roughly 70% of the global radiation therapy market, which means roughly 15,000 linacs worldwide, 70% is around 10,000 linacs. If we assume in the deduction of around 80% of those linacs being equipped eventually the surface tracking, that leaves us with around 8,000 linacs. If we look today, we are just a little bit north of 3,000 linacs that are equipped with surface tracking technology. So meaning there's still a huge potential to develop the market and adopt the technology worldwide. C-Rad has sold approximately 1,200 systems worldwide. We are looking at an opportunity to bundle our technology together with the new linacs sold, but also to upgrade existing linacs. The dominant part of our business is related to new linacs, meaning the customer is purchasing our technology in conjunction with the new treatment machine. With the current sales volume of new linacs to the advanced radiation therapy market, we assess the opportunity to be approximately SEK 1 billion. Even though it is, at the moment, a smaller part of our business, we believe, as the technology becomes standard of care that more customers are inclined to retrofit our technology to existing linacs provide the machine isn't equipped with surface tracking already. We looked into the service business earlier, which gives us a great opportunity for future growth. On top of this, the global market is growing with 6% to 8% and with a significantly higher growth rates in some of the Asian markets where C-Rad has a market-leading position. So looking at the development over the last 5 years, we have developed revenue with roughly 18.4% on an annual basis. And 2018, we reached breakeven. And already during last year, we had an operating profit margin of -- sorry, of 14%. Looking at the clinical advantage of surface tracking technology. First of all, there are other possibilities to position the patient, but there are some distinct advantages of using the surface tracking technology, which are, for example, that the system operates those free, which means there is less impact and less side effects for the patient during the treatment. It is not invasive, which is clearly translating into an ease of use. It is market less, which again underlines the patient comfort. C-Rad has been particularly strong in developing the technology to integrate in-depth surrounding system. And therewith generate less impact on the daily workflow for the operators, which translate into usability advantage. And last but not least, the power of patient compliance. When we talk to our customers, many of the customers are using this technology really on the best part of their -- majority of their patients. So all in all, a very strong value proposition for our customers. So our growth strategy is very well defined and based on the 3 pillars of product excellence, sales excellence and service excellence. When we look at the product, I think the product in itself has proven its functionality in the multitude of clinical research papers from customers across the globe. However, there's still work to be done to further develop the product to improve the software, integrate the software, this new machines, but also to extend the functionality as well. From a sales perspective, our focus is to roll out the technology now in our target markets. And our efforts are to get the message about the benefits out to our customers, so that they can adopt the technology. We spoke earlier about the service business, which is very important for us, along with the product sales comes to service sales, and we are constantly striving towards developing a relationship with the customers and eventually signing up the service contracts, or the systems that are installed at our customers. And perhaps I close this presentation with the main reasons from my perspective, why to invest in C-Rad. First of all, what we do provides really value for the society in the fight against cancer. C-Rad has already approved and recognized product. With our direct sales organization, our distributors, but also with our OEM relationship, we have a comprehensive market access in the most important markets. And surface tracking is becoming standard of care, and this is unleashing a significant growth potential for this company. And last but not least, we have a very stable financial platform. The financial calendar foresees right now an invitation to the presentation of the Q4 report, which is going to be published on January 26 beginning of next year. There is a conclude presentation, and we open the Q&A session.

Thank you, Tim and Henrik for the great presentation. So now for the Q&A session. [Operator Instructions] We already have one question. It's from [ Gonzalo ]. So Gonzalo, I will unmute your microphone.

Hope you can hear me.

Yes. We can hear you fine.