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

My name is Basak Karakus, and I am your moderator for today's session. I'm pleased to introduce our CEO, Cecilia De Leeuw; and our CFO, Christoffer Herou, who will present the financial results and answer your questions today. Cecilia will begin by providing an overview of the financial highlights in Q1, followed by an analysis of sales development. Next, Christoffer will provide a financial review before he hands over the microphone back to Cecilia, who will summarize. Before we start, please note that we will not be taking any questions in the chat, and all your microphones will be muted throughout our presentation. After the presentation, we will have a Q&A session. I will turn on your microphone, and you will be able to ask your question directly to Cecilia and Christoffer. Finally, I'd like to remind you that the recording of the webcast will be available on our website shortly after this webcast. Without further ado, let's get started. Cecilia, the floor is yours.

Thank you, Basak. It's great to be here today and this time with our new CFO, Christoffer Herou. And before I go into the Q1 numbers, I'd like to remind you of the world that we act in. C-RAD is in the field of radiation therapy, which is one of 3 ways to treat cancer. In fact, approximately 50% of cancer patients are treated with radiation therapy as many patients get a combination. For example, surgery and radiation therapy. Our customers are mainly hospitals and clinics, and we are active in the field of Surface Guided Radiation Therapy, or SGRT, and are well established on the market. Our job is to treat more patients safely. The radiation dose needs to be delivered to the tumor with high precision in order not to damage healthy tissue. This is where our groundbreaking technology comes in. Safety and the quality of life of the patient is key. In addition, our products speed up the workflow during the setup and treatment of the patient, which increases efficiency and, hence, more patients can be treated. One would think that it's a given to use SGRT in radiation therapy. The additional investment is only some 5% of the total investment to equip the cancer treatment room. We have mainly 3 ways to go to market: direct, with our industrial partners, such as Elekta, Accuray, Varian; proton suppliers, such as IBA, Mevion, Hitachi; and our global network of distributors. Often, it's a combination of these. Let's move into the results and some highlights of the first quarter. So this is my first quarter as CEO of C-RAD, and I am pleased to say that we had a solid start of the year. I have spent a lot of time traveling to meet and work with my team, our partners and also gotten the opportunity to receive feedback directly from customers at the hospitals and clinics. The order intake was stable with a growth of 12%, and we continue with that to build up our backlog, which is now an impressive SEK 649 million. We continue to see strong interest from our customers, and there is an underlying unmet demand, both in advanced markets, for example, Germany, as well as developing markets who are in the early phase of building up their radiotherapy capabilities. India, with an increasing GDP and a growing demand for health care, is a good example of that. Our revenues grew 50% to SEK 84 million compared to the same period last year, which is indeed a good start of 2023. I'm pleased to see that all regions are showing strong growth and that China is continuing its journey back towards pre-COVID levels. Our focus during the first quarter has been on growing the top line, but at the same time managing cost. And I am pleased to -- pleased that we can display that in an EBIT of SEK 6.4 million for the quarter, corresponding to an EBIT margin of 7.5%. And again, I'm excited to be here today with Christoffer, who took office actually the Tuesday of this week. Let's look into a few highlights that are displaying the high interest of our technology. So the year started off strong with a prestigious win in Germany with a leading radiotherapy practice, Nordstrahl. It includes both Catalyst+HD and Sentinel systems as well as a multiyear service agreement worth a bit more than SEK 8 million. We have an ambition to increase services as well as growing our business in the U.S., and our multiyear extension with a radiation oncology network in Missouri, U.S. is a proof of the trust in us. The order -- the value of this order is almost SEK 9 million. And at the end of the quarter, or after the end of the quarter, we got yet another confirmation that Surface Guided Radiation Therapy is becoming a standard part of the treatment. Australian Cancer Care Associates selected us for all their clinics across Australia, an order worth SEK 23 million. Let's take a closer look into our markets and the sales performance. Order intake for the first quarter amounted to SEK 91 million, a growth of 12%, as I mentioned just earlier. And in constant currencies, order intake increased 5% compared with the same quarter last year. EMEA grew by 18% to almost SEK 44 million, and we continue to see a growing interest cross-country, both for new systems and retrofit to existing accelerators. In APAC, order intake increased by 12% to SEK 27 million. And here, we are positively impacted by China opening up. And let me double-click on China. We are market leaders there and are expanding -- executing on our strategy of more direct sales, so in combination with our network of distributors. And this improves our reach and also our profitability. Order intake in Americas was at the same level as last year. And what we hear from our customers also is that cost increases in the U.S. is leading to a slower uptake of investments. Let's take a quick look at the distribution of orders by product category. We had a growth both in products and for services. And the order intake for products amounted to roughly SEK 60 million in the quarter, which is an increase of SEK 8 million -- of 8% compared to the same period last year. The order intake for service agreement was even stronger and grew 21% to SEK 38 million. And as a reminder, our business is subject to a very distinct seasonality pattern. And as you can see in this graph, the second half of the year is typically stronger than the first half. And the main reason is that our customers typically have an annual budget which is aligned with the calendar year. The fourth quarter is normally the strongest. However, last year was unusually strong due to the Italy order of SEK 46 million. So let's take a look on the impact that the order intake had on our backlog. So order intake represents orders that have been received but not yet delivered or invoiced. And the backlog, as mentioned earlier, amounts to SEK 649 million at the end of the quarter, and this is an increase of 44% compared to last year. And a bit more than half, or SEK 364 million, relates to products, and SEK 285 million relates to service contracts. The conversion rate, which is the time from receiving an order until delivery is made, is 6 months for products for this quarter. And this depends on -- I mean, this depends on several factors and varies between periods. For example, is the clinic ready to receive our system? Service contracts can be up to 8 years, but most commonly it is 3 to 5 years for us. Let me then move into revenue per market. I am pleased to see that we have revenue growth in all markets. Revenue in EMEA increased by 48% to SEK 44 million. APAC increased 64% to SEK 22 million. And one large factor for the impressive growth in APAC is, again, that China is getting back towards pre-COVID situation. The Americas increased 39% to almost SEK 18 million. Finally, let's take a closer look at our products and services business. Growing services is an important part of our strategy. And it's not only for recurring revenue, which is also very good, but it's also due to the improved customer experience and a way for us to get closer to our customers. We are monitoring the contribution of service revenue as a function of the total revenue. This is a trend that we foresee continuing to increase over time as both installed base and the attachment rate for service contracts continues to develop favorably. Product, which is the lion's share of our total revenue, had a growth of 51% compared to the same time last year. And with that, over to you, Christoffer, for a closer look at the financials.

Thank you, Cecilia, and hello, everyone. My name is Christoffer Herou, and I just started as CFO here at C-RAD. I've got a very good impression so far of the company, the colleagues and the culture. I will now give you some more details about the income statement as well as the cash flow and our financial position in general. The revenue increase of 50%, which Cecilia mentioned, corresponds to that we, in the current quarter, had a revenue of SEK 84 million. At the same time, we were able to keep the gross margin at 65%. As you can see, the operating expenses have increased compared to last year. However, if we compare to Q4 in 2022, the cost level in the current quarter is significantly lower. More information about the operating expenses will follow later on in the presentation. Despite the increase in operating expenses, we reached an EBIT of SEK 6.4 million compared with a level of SEK 0.2 million from last year. The revenues in the current quarter ended up, as mentioned, at SEK 84 million. The geographic split between our market is fairly stable compared to the distribution of fiscal year 2022. We are pleased to see that service's share of the revenue is increasing and amounts to 18% in the current quarter. This illustrates the improved profitability in the current quarter compared to last year. The gross profit increased from SEK 36 million to SEK 55 million, which corresponds to an increase of 53%. And we are pleased to see an improvement in EBIT in the current quarter to SEK 6.4 million, which corresponds to an EBIT margin of 7.5%. The historic development of revenues and gross margin for the last 5 years is shown here. The overall trend is that the revenues are increasing, but we also have been able to increase the gross margins at the same time. This is mainly due to a larger portion of service business in our revenues. The operating expenses have increased to SEK 49 million in the current quarter compared to SEK 36 million last year. The investment in our organization is continuing in a sensible way. Since Q1 2022, we have added resources within sales, services and R&D. In addition to this, the travel costs have increased due to the higher activity level in the company. Inflation has impacted external costs negatively. And as we have a significant part of our personnel expenses in foreign currencies, the weakening of the SEK also had a negative impact on our costs in the current quarter compared to last year. However, if you look to the right, you can see that the revenues are increasing at a higher rate than the operating expenses. And this is important on our path toward reaching profitable growth. The cash flow in our company fluctuates between the quarters. In the current quarter, the cash flow was negative with SEK 16.9 million. The major reason for this is that there were many customer orders which were delivered towards the end of the quarter and, therefore, the cash in will be recognized after the quarter end. We also had an increase in the inventories to secure future delivery capacity. On the overall level, we have a stable cash position with SEK 105 million in cash balance and an equity-to-asset ratio of 73% at the quarter end. And with that, I would like to hand over to you again, Cecilia.

Thank you, Christoffer. We have had a solid first quarter, and I am pleased with our revenue growth and the improved profitability. With SGRT, we are able to treat more patients safely. This quarter, we have put a lot of focus on growing the top line and at the same time managing our spend. Our first quarter started off well with a revenue growth of 50% and a number of important wins. We have improved our profitability to an EBIT of SEK 6.4 million. All this despite a challenging macroeconomic environment. The cash flow was impacted by the fact that we had deliveries in the very end of the quarter. Still, our financial position is very strong. In conclusion, we will continue to deliver on our strategy for profitable growth. We, at C-RAD, have an important role to play in making SGRT becoming standard of care, and I look forward to our continued strive to bring SGRT to more patients around the world. And with that, it is time for questions. Over to you, Basak.

Thank you, Cecilia. Yes, it's time for questions. [Operator Instructions] Okay. I see some of you have already raised your hand. So let's get started. Christian Lee, yes, please go ahead and ask your question.

I hope you can hear me?

Yes, we can.

Okay. Excellent. I was wondering if you could give some color on the overall SGRT market given that you grew organically by 36% in Q1. Would it be fair to assume that you are growing faster than the SGRT market and gaining market shares? What do you estimate your current market share of SGRT?

So yes, we definitely see a growth in the market as more and more accelerators are equipped with SGRT. And this, of course, is different in different markets. In some markets, we are definitely the market leader, China, for example. So I think, overall, we have somewhere of a 30% market share. But of course, that depends region per region. And I think that is one of the reason why we also want to be a bit stronger in the U.S.

Okay. You had good order intake in EMEA and APAC, but it was a bit slow in Americas. Could you please elaborate on what you're seeing in this region except for adverse impact from cost increases from -- for the customers? Do you expect it to improve in near term? And are you seeing a tougher competition from Varian in this region?

So all in all, Americas or the U.S. is a very big and important market. It's the biggest radiotherapy market in the world. What we hear from our customers in hospitals and clinics is that they are -- they can feel the increases that they have in costs due to inflation and other cost increases. So we don't really see a slowdown, we just see a hesitation when it comes to making the decision. So we -- right now, we are not necessarily impacted, but it is something that we see when we talk to our clients or to our customers.

Okay. My final question before I jump into the queue again. OpEx increased by 44% year-over-year as part of your strategy of growing the commercial team. And how should we think about OpEx going forward? Do you plan to continue increasing the commercial team from current levels? Or have you reached the level you want to be at?

So we -- as I said earlier, we are on a growth journey. So there is a huge unmet demand in the market, and it's important for us to make sure that we do the land grab in the markets that are a priority for us. So continuously, we -- I think also, going back to the investments that we did last year, we are now seeing some things -- good things coming out of that investment. And continuously, we look to where we need to -- if we need to strengthen. But I just want to emphasize that we are doing that. It has to be balanced between top line and costs. So that is a key for us going forward.

Thank you, Christian. Okay. Our next question is coming from Erik Cassel. Erik, you can now go ahead and ask your question.

Perfect. I hope you hear me all right.

Yes, we can.

Absolutely.

Perfect. Well, Cecilia and Christoffer, I guess congratulations are also in place. So I have a couple of questions. I'll just jump right in with the first one. So the reopening of China was obviously supportive for you this quarter. But could you just talk about the monthly cadence during Q1? I mean did you see a notable pickup of installations late in the quarter? Or was it pretty stable throughout Q1?

So as I also talked about earlier in terms of the cash flow, we have a tendency to have more installations by the end of the quarter. And there was nothing unusual about this quarter. And this quarter, we had quite a high level of installations. So it's more towards the end.

Okay. Do you think that pace could continue into Q2? Or has the catch-up effects may have been in Q1?

In China, you mean?

Yes, exactly.