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

Okay. I think we can start now. Good morning again, everyone. Welcome to C-Rad's presentation of year-end report. My name is Bosha Karakush, and I will be moderating today's webcast. Today's webcast will be presented to you by our CEO, Cecilia de Leeuw; and our CFO, Lars Levin. And the presentation will address the last quarter of the fiscal year 2022. In the first part, Cecilia will start off with a short introduction and comment on the financial highlights in Q4, followed by an analysis of the sales development before she finishes with commenting on the key events. And Lars will guide you through the financial review before he hands over the microphone to Cecilia, who will summarize and comment on the year 2022. [Operator Instructions] At the end of the presentation, I will turn on your microphones. And it's not -- we will not be taking any questions in the chat, so your microphones will be muted throughout the presentation. Also, a recording of the webcast will be available on our website after the presentation. That said, I would like to hand over to microphone to Cecilia.

Thank you, Boshak, and hi, everyone. My name is Cecilia de Leeuw, and I took over as CEO for C-Rad on December 21. So I truly had a flying start. C-Rad is, as most of you know, are active in the field of radiotherapy, which is 1 of 3 ways to treat cancer. The other 2 ways being surgery and chemotherapy. In fact, approximately 50% of all cancer patients are treated with radiotherapy as many patients get a combination, for example, surgery and radiotherapy. The customers are mainly hospitals and clinics. Our main product is in the field of surface-guided radiation therapy or SGRT, and the product is well established in the market. For the patient, SGRT can improve the quality of life as the solution minimize the radiation of healthy tissue. We have mainly 3 ways to go to market, direct with OEMs and our network of distributors. Often, it is actually a combination of these. C-Rad has been around since 2004, reached breakeven in 2018 and is now a fully global company headquartered in Uppsala. Let me move into the results. So starting off with some financial highlights. And first, all in all, we had a very strong Q4 and also 2022 as a whole was strong in many ways. Our order intake and revenue is the best ever in the company history. Full year, we are now above SEK 300 million in turnover. For the first time, exciting. The last -- the large Italian order announced in Q3 was confirmed in November. Even without this all-time high order, our growth compared to Q4 last year was 28%. Our order backlog has grown from SEK 425 million to an impressive SEK 616 million, and this gives us stability for the future. The operating profit excluding one-offs was SEK 10.5 million in the quarter and SEK 26.1 million in the full year. The operating margin, excluding one-offs, was 10.5 -- the operating margin excluding the one-off decreased to 10.6% in the quarter and 8.6% for the full year. The decrease compared to previous year is explained by the forward-leaning investments decided already in the first quarter in sales, but also in services, product development and also in research corporations. However, we have an underlying healthy profitability. The cash flow for the quarter was on the healthy level of almost SEK 32 million, an increase of almost SEK 19 million. With that, let's look into the market and sales performance. So starting with the order intake. For the full year, we are delivering growth in all regions, except for APAC. This is mainly due to COVID restrictions in China. Order intake for the fourth quarter amounted to an all-time high of SEK 216 million or SEK 217 million, actually, almost, an increase of 63%. You can strongly here see the effect of the Italian order, which amounted to SEK 46 million in the Q4 and all in all, a strong quarter -- a strong year for EMEA. Americas is picking up again in Q4 with a 30% growth and 16% for the full year. In APAC, we had a very strong Q3 and the fourth quarter came in weaker than last year. However, looking at the full year, APAC delivered a strong 25% growth. In the end of the quarter, we saw a positive development in China opening up after COVID. Let us now look into the order intake by product. So let's first take a look at the distributions of orders by the product category and our most important product category, the positioning products, grew with 93% and 32% for the full year, or actually 46% for the full year. This is a very strong result, largely impacted positively by the Italian order. Life cycle business or services, as we call it, continues to grow. We see an increasing interest to sign up for service contracts from new customers across the globe and especially in Americas and EMEA. Also, there is a rising number of customers that renew their service commitment after the initial period, contract period has expired. We have strengthened our teams in EMEA, U.S. and Australia and invested in tools to digitalize our field support. And this is important to us as we want to secure our successful relationship between our customers and ourselves, C-Rad, of the life cycle of the product. And looking into the seasonality and this chart displaying the order intake over the past 3 years, and our business is both in revenue and especially in order intake, is subject to a very distinct seasonality pattern. And as you can see, it's typically the fourth quarter that is significantly stronger. And the reason for that is that many of our customers, most of our customers are hospitals and clinics, and they work on an annual budget cycle aligned to the calendar year. Moving to revenue by market. So we are closing in on the fourth quarter, the full year 2022 with revenue growth in all markets. In Americas, we continue to see the impact of the strengthened organization and there are some fluctuations over the quarter depending on the timing and the installation on the customer side. EMEA had an impressive quarter, delivering on orders taken earlier. APAC had a strong quarter with 38% growth, mainly because of the order conversions of products won earlier in the year and the Chinese market that continues to recover. Finally, let's look into the services business. And we are closely monitoring the contribution of service revenue as a function of the total revenue, which in the full year amount to 16%, and that is to be compared with 13% of last year. And this is a trend that we foresee continuing to decrease over time as the installed base and the adoption of our service contracts continued to develop favorably. We see a potential to grow the service business further. That ends this part, and I will take you through the key events. So looking at the key events for the quarter, already mentioned that we have been selected as the main supplier for the Italian order, and that was confirmed in November. I started in December 21, taking over from Tim Thurn, who left after almost 10 years with C-Rad. Henrik left as CEO in -- CFO in November, and Lars Levin took over after him as an interim. Kit Staff was appointed as CFO in January, and will start the second quarter of this year. So with that, I will hand over to Lars for a closer look for -- at the financials.

Thank you, Cecilia, and hello, everyone. I will now give you a brief summary and more details about the financial performance as well as on the cash flow and our financial position. Let's start off with the P&L statement for Q4 and the full year 2022. Revenues amounted to SEK 99 million in the quarter with a stable gross profit of SEK 65 million and a gross margin of 65%. Revenues for the year -- for the full year amounted to SEK 301 million, also with a gross margin of 65%. Operating profit decreased to SEK 6.2 million in the quarter, down from SEK 14.9 million prior year. Operating margin was 6.3% versus 9.3% the prior year. Excluding one-off costs linked to changes in the group executive management team, operating income was SEK 10.5 million and operating margin was 10.6%. Operating profit, excluding one-offs for the full year, decreased to SEK 26 million, down from SEK 36 million prior year. Operating margin, excluding one-offs, was 8.6% versus 13.8% prior year. The decrease in operating income, excluding one-offs of just over SEK 4 million in the fourth quarter, is entirely explained by our forward-leaning investments in our sales operations, something that we communicated already in the Q1 report last year, and in product development and clinical partnerships. These investments in the organization increased our costs in the quarter for areas underlying profitability is still good. And as you have already noted, these costs has already started giving back, reflected in the order intake. And breaking down the costs. Both other external expenses and personnel expenses increased. Other external expenses increased to SEK 26 million in the quarter from SEK 14 million prior year. Personnel expenses increased to SEK 34 million from SEK 20 million prior year. The increase of the cost is explained by several factors. First of all, I have already mentioned forward-leaning investments in the organization. Weak Swedish krona also had a negative impact on costs, both on other external expenses, SEK 1.1 million, and on the personnel expenses, SEK 1.5 million. When comparing with last year's figures, one must also keep in mind that the external costs then were affected by pandemic with very little traveling and no physical marketing events taking place and therefore, lower than normal. Capitalizations during the quarter amounted to SEK 4 million compared to SEK 1 million prior year. This is related to the continued product development and the increase is due to more efforts being put into the development of our positioning products. That said, we now move over to the next slide and look at our strong and stable gross margin. What you see is the development of a gross margin during the last 6 years. The gross profit margin was 65% in the quarter versus 66% in the prior year. For the full year, the gross margin was also 65%. Our gross profit naturally varies and fluctuations can occur between periods, dependent on the product mix and the variation of sales channels in our different markets. However, the last years, the gross margin has been very stable and above 60% for 8 quarters in a row. Including trend over time, it's mainly due to a larger portion of direct sales. Growing portion of services in our revenues does also have a positive impact on the gross margin. Turn to the next slide and our cash flow. Cash flow was strong in the quarter, and the cash flow from the operating activities amounted to SEK 32 million and an increase by SEK 19 million from last year. Working capital contributed positively with SEK 23 million in the quarter. This is mainly due to deliveries that we executed at the end of Q3 and were paid by our customers in Q4. For the full year, the working capital had a negative impact on the cash flow, minus SEK 22 million. This is explained by a stock buildup to secure the delivery capacity in this current global situation with shortage of components. Summarizing the cash flow. We leave the quarter and 2022 behind us with very stable cash position of SEK 122 million. We turn to the next slide and for a quick look at our balance sheet. As usual, our financial position is very solid, which of course, is a great support to our important business. On top of our strong cash position of SEK 122 million at year-end, we also have an unused bank overdraft facility of SEK 20 million. We have no interest-bearing debt. The equity ratio was plus 70% at year-end. We can move on to the next slide and look at our order backlog. Order backlog represents orders that have been received but not delivered an invoice. And obviously, as you can see, the order backlog is progressing very well. At the end of the financial year '22 backlog amounted to SEK 616 million, up 45% versus prior year. The total order backlog, 58% relates to products and 42% to services. Products increased by 68% versus prior year and services by 22%. So to round off the financial review, we are progressing well. The underlying business is strong, and we are clearly in a good place as we are going into 2023. With that comment, I hand over to you, Cecilia.

Thank you, Lars. Well, it has been indeed an intensive first month for me as CEO. I have spent a lot of time meeting my new colleagues, partners and customers. And I'd like to take the opportunity to thank them for welcoming me into a world -- there we go into -- for me to welcoming me into a world working with cutting-edge technology that can improve lives. One would think that it's a given to use SGRT in radiation therapy. In addition, investment is only some 5% of the total investment. And the benefits of ensuring radiation of the tumor only and by that enhancing the quality of life for the patient as well as making the actual work during setup and treatment in the hospital faster. SGRT has the largest uptake, and we continue to see an increasing interest in what we call the advanced markets. In addition, the unmet demand in developing markets, for example, India is high. And we have the opportunity, long and midterm, to serve more customers and patients. So far, despite the challenging market environments, we see investments continuing. And let me see here. Here we go. So summing up the financials of 2022 and the key takeaways from our report, we have had the best ever order intake and revenue as well as good cash flow. The underlying profitability is good. However, the one-offs and growth initiatives has weakened the result. Despite the challenging environment, C-Rad has continued to invest in its product portfolio and sales organization. This has helped us to achieve a record high order intake for the fourth quarter as well as strong sales and good cash flow. So in conclusion, with our solid financial position and our strong order backlog and the fact that our investments are starting to show effect, we have a solid base going into 2023. I look forward to our continued strive to bring SGRT to more patients around the world. We at C-Rad have an important role to play in making SGRT becoming standard of care. And with that, over to you, Boshak.

Thank you very much, Cecilia and Lars. We will now open the floor for questions. [Operator Instructions]. Okay. Erik Cassel has a question. Yes, please go ahead, Erik.

So I have a couple of questions for you today, mostly around the order intake situation. First off, on Italy. My interpretation is that later last year, the Italy tenders were sort of split into fractions based on the different regions. And I learned from Elekta that they're going to recognize orders across 2 quarters. So I was just going to ask you if there's any more potential order intake volumes coming from Italy into the next quarter as well? Or if all of the potential volumes for Italy has been recognized already?

In terms of orders, that is, Erik?

Yes.

Okay. So I think this is my first 4 weeks as CEO. Let me take that and come back to you. So the question, Erik -- yes, the question, Erik, was if we also recognize orders now in 2023?

Yes. Yes, basically. Because as said, it was split into different regions. So I was just wondering if this was for one of those regions or all of them at the same time. And then I also was curious if you know the split between you and Vision RT in this tender. And also if Varian's in-house solution managed to capture any volumes now or if they were excluded from the tender process altogether.