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

Good morning, everyone. We are glad to welcome you at the webcast of C-Rad's financial report for the third quarter of 2023. My name is Greta Cattani, Global Marketing Director, and I am free to be your moderator for today's session. We have an exciting agenda filled with valuable insights and updates. I'm delighted to introduce our CEO, Cecilia De Leeuw; and our CFO, Christoffer Herou, who will guide us through the financial results. Cecilia will kick off today's webcast by providing an overview of the financial highlights from Q3, shedding light on our progresses and achievements. Following that, Christoffer will delve into comprehensive financial review, providing valuable insights and key figures. He will then hand over the microphone back to Cecilia to summarize. [Operator Instructions] I would like to let you know that this session is being recorded, and a recording of the webcast will be available after the presentation. Without further ado, let's get started. Cecilia, over to you.

Thank you, Greta, and it's great to be here today to present our third quarter. And before I go into the Q3 highlights, I'd like to remind you of the world that we act in. Cancer is unfortunately one of the world's biggest health challenges and unfortunately growing. There are 3 main ways to treat cancer and approximately half of all patients are treated using radiation therapy, either as the main treatment or as a combination with the surgery and chemotherapy. This is our space with our surface-guided radiation therapy or SGRT technology. And what keeps us on our toes is to treat more patients safely. C-Rad contributes to both society and patients in several ways. Patient safety is the foundation for our technology and the radiation dose needs to be delivered to the tumor with high precision, not to damage healthy tissue. We continuously monitor the position of the body before and during each treatment, and that can be up to 30 sessions per patient without the need for tattoos or markers. Our customers are mainly hospitals and clinics. We are well established in the market and have global presence with our market-leading products. With a seamless integration to our industrial partners, our products speed up the workflow during the setup and treatment of the patients, and that increases efficiency and hence, more patients can be treated. SGRT is becoming standard of care, and I'd like to highlight a few things. Last year, independent guidelines recognize the clinical benefits of our technology. And secondly, while initially focusing on breast cancer, we see more and more clinics now also using SGRT for other cancer types, for example, brain, lung, head and neck. And lastly, the investment is minor relative to the value of the patient safety and treatment efficiency, roughly some 5% of the total investment to equip the treatment room. Let's move into the results and a few highlights from our third quarter. I am pleased to share that we have a quarter of both growth and stable profitability. And the quarter has been active across all markets. And right after the end of the quarter, the most important industry trade show for the Americas as well as globally, ASTRO took place. The number of visitors are back from pre-COVID levels and our demo was in constant demand. Order intake more than doubled to SEK 169 million, and this is very strong even compared to the soft quarter in Q3 last year. We are going into Q4 with a backlog of SEK 751 million, another all-time high. The top line was strong with revenues up 33% in comparable quarters to an all-time high of SEK 111 million. With our focus on profitable growth, we're capturing the market demand with a close eye on the cost. And I'm pleased that we continue to deliver on our path towards profitable growth. The EBIT of SEK 19 million corresponds to an EBIT margin of 17% in the quarter. And looking at the first 9 months, it corresponds to an EBIT improvement from SEK 16 million to SEK 33 million. With increasing cash flow from operations to SEK 17 million from a negative SEK 11 million last year, we are not where we want to be. The improvement program involves short-term cash collection as well as addressing our terms and conditions going forward. And The Breast Solution VitalHold, developed in collaboration with Accuray on the Radixact system is now available in the U.S., E.U. as well as other markets. And finally, we reached another milestone for the quarter, launching our latest software release and further enhancing our interoperability and seamless integration with our industrial partners. The release comes with improved usability, accuracy and introduction of new innovative features. We ended the quarter on a high note. So let's take a look at some key deals in the quarter. We reached a significant milestone in the field of highly advanced cancer treatment, receiving the large order from proton supplier IBA for multiple SGRT proton systems. The order is part of the Spanish Ortega public tender and the value is SEK 32 million. We've got 2 important orders from Germany, and I am pleased to see the significant trust in C-Rad's technology, and this is yet another proof of SGRT becoming standard of care in advanced cancer treatments. So the SEK 16 million order from a German clinic in North Rhine-Westphalia fallen for both multiple systems and a service agreement. And earlier in the third quarter, we got a SEK 10 million order from Katholisches Klinikum Bochum for multiple systems and a service agreement. And after the end of the quarter, actually yesterday, we received an SEK 8 million order from a new customer, a prestigious German clinic in North Rhine-Westphalia that has chosen C-Rad as their partner for SGRT. It's multiple systems and service agreement to an order value of SEK 8 million. So let's take a closer look at our markets and the sales performance. And I am pleased to announce that we have growth in all markets in the quarter. An order intake increased at 108% to SEK 169 million, an increase of 87% in constant currencies. Looking at the year-to-date, order intake grew 40% to SEK 376 million, an increase of 30% in constant currencies. It's good to see that America is starting to recover from the weak second quarter, increasing to SEK 26 million. And year-to-date, there is a decline with 21%. EMEA had an exceptionally strong quarter overall, including the large Spanish protein order and the 2 German orders. Year-to-date, EMEA is up 81%. Activity levels in APAC continues to be high, and we're gaining traction across multiple regions across India, and we have continued recovery in China. Year-to-date, APAC is up 39%, including the large Australian order from last quarter, SEK 23 million. It is worth noting that in addition to the order is just presented, we have growth in all regions, but also in both products and services. Products, which is the lion's share of our business, grew 79%. Services more than tripled with an impressive 244%. This is in line with our strategy to grow services and part of our active work to increase the service contract attachment rate. For example, we have taken the first service contracts in China. Let's take a look at the impact, the order intake had on our backlog. And the order backlog represents orders that have been received but not yet delivered nor invoiced. Order backlog increased 52% to SEK 751 million. And out of the order backlog, more than half is for 57% related to products and 43% to services. And we have a good spread across all markets and all sizes contracts. And with that, let's move into revenue per market. We have an all-time high of SEK 100 million or 33% growth. This is 16% in constant currencies. And year-to-date revenue is up 41% and 28% in constant currencies. In America, revenues increased 22%, and I'm pleased that we are gaining some traction on the important U.S. West Coast. For the first 9 months, we had a 12% growth. EMEA is executing on the strong order backlog with revenues growing 35%. And year-to-date, the growth is 41%. Revenues in APAC grew 40% in the quarter and 69% for the first 9 months. And the deliveries are spread across the full APAC region. And with that, over to you, Christoffer for a closer look at the financials.

Thank you, Cecilia, and good morning, everyone. It's great to be here today to share the financial information from our third quarter. In this quarter, we are proud to have reached another all-time high in order backlog, all-time high revenue for a single quarter, highest EBIT for a single quarter with '19. At the same time, we have also have items and processes to improve, and I look forward to further contribute to that. As Cecilia mentioned, the revenue of SEK 111 million corresponds to an increase of 33%. With this, we are continuing to show strength in the conversion from order backlog to revenues also in this quarter. Year-to-date, we see a strong growth of 41%, amounting to a revenue of SEK 286 million. After 3 quarters, we have almost reached the full revenues from 2022. The gross profit margin remains healthy with 65% in the quarter and 64% year-to-date. As you can see, the operating expenses have increased compared to last year, but they are at the same level in Q3 as in previous quarters during 2023. And I will touch more on that later on. The EBIT for the quarter of SEK 19 million and the year-to-date figure of SEK 33 million shows that we also, during this quarter, have taken substantial steps on our way towards profitable growth. Both products and services contribute to our revenue growth in the quarter with 31% and 44%, respectively. Growing services is an important part of our strategy and service as part of the total revenues has grown significantly over the last years. Year-to-date, services share of the total revenue is 19%. At the same time, as we are delivering the strong revenue growth, we are able to keep up our healthy gross margin, as I mentioned, to 65% in the quarter and 64% year-to-date. This results in a gross profit of SEK 72 million in the current quarter and the gross profit development year-to-date with an increase of 40%, which corresponds well to the year-to-date revenue increase of 41%. For the third consecutive quarter, we are pleased to see an improvement in EBIT to almost SEK 19 million, which corresponds to an EBIT margin of 17%. This is to be compared to the EBIT level of SEK 14.6 million from last year. Year-to-date, we see a steady EBIT improvement of almost SEK 17 million. The operating expenses of SEK 53 million in the current quarter are more or less flat compared to the previous quarters in 2023. The increase compared to the level from last year is mainly explained by the investments in our organization within sales, services and R&D, which were carried out at the end of 2022. The growth in order intake and revenues show that these investments have paid off. With this organization, we are looking forward to drive the business, continue the conversion of our all-time high order backlog into revenues, gross profit and EBIT. In the graph to the right, you can follow the dotted lines to see that the revenues are continuing to increase at a higher rate than the operating expenses. And this is important also on our path forward achieving profitable growth. The cash flow in our company fluctuates between the quarters. We managed to turn the negative cash flow from previous quarters in 2023 to a positive cash flow of SEK 8 million in the quarter. The working capital was still slightly negative as the accounts receivables continued to increase in nominal figures. As mentioned during this presentation, we are in a steady growth phase with increased revenues. So from that perspective, an increase in accounts receivables is to be expected. But as I said and also in the presentation from the previous quarter, we are actively working to speed up the cash collection, which includes many different measures. Some of the measures will have positive effects short term, while other actions are expected to show improvements medium or long term. I would like to remind you of our solid financial position with almost SEK 90 million in cash and an equity-to-asset ratio of 69% at quarter end. As you are aware of, C-Rad is in a legal dispute with a former employee regarding the patents. The patent is a minor part in one of our main products. As we informed in the Q2 reporting, the patent and market appeal court in the end of June, ruled to partly award the counterpart compensation. As it stands now, C-Rad should compensate the counterpart SEK 4.4 million for first time and 1% royalty from 2020 up to latest 2029 on the net sales using the patent. The counterpart is to partly compensate C-Rad as well. Normally, the patent and market appeal court is the last instance. But in this case, in the verdict, the patent and market appeal court granted permission to appeal the decision to the Supreme Court. During this quarter, both C-Rad and the counterparts have appealed to the Supreme Court. And with that, I would like to hand it over to you again, Cecilia.

Thank you Christoffer. SGRT is rapidly becoming a given in the clinics and part of the treatment workflow. Ultimately, it's about safety for the patient and the precise targeting of the tumor while minimizing radiation exposure to healthy tissues. And I'm excited to see how the increased demand for our technology is translated into our numbers. We have the best ever, SEK 111 million revenue and an order intake of SEK 169 million. We are going into Q4 with an all-time high order backlog, both for products and services. It includes the large Spanish protein order, but is well spread across the regions and sizes. The cash flow has improved, but there is more to do. We had a solid third quarter, and I'm pleased with our strong revenue and order intake growth in all markets. Our focus on profitable growth is starting to show in our numbers. In the first 9 months, we improved EBIT from SEK 16 million to SEK 33 million, which is our best so far. In conclusion, I'd like to touch on our focus going forward. We continue to invest in our leading technology. Our innovation is centered around patient safety and workflow efficiency. The untapped demand is captured step by step and even if we see many markets rapidly approaching standard of care, we are only in the beginning. And lastly, services is a strategic asset, and it's a priority for us, and it's a priority for us to grow services. And it's important for 2 main reasons: Looking sure that the customers get the best out of our technology and also for recurring revenue. To execute on what I just mentioned, we are strengthening the team within marketing and sales. Marketing Director, Greta Cattani and VP sales, EMEA, Vincent for EMEA, Vince and Telia both come with strong industry background. And together, we are building an empowered and even stronger organization. And with that, it's time for questions, and over to you, Greta.

Thank you Cecilia. As you mentioned, it's time for questions. [Operator Instructions] We already have a couple of questions. So I will now start with Christian Lee, so you have to unmute yourself, and then you can speak.

Yes, good morning. I hope you can hear me.

Very well.

Okay. Great. I have a couple of ones. The order intake for services increased by 244%. Were there any specific reasons for this strong growth? And it would be helpful to know how much China contributed to the order intake.

Yes, so first of all, thanks, Christian, for noting the growth in services tripled that is great. And the reason for that is a really forward leading and active approach to increase the attachment rate. And more and more, we see customers taking on service contracts, but we have also, in addition to that, actually looked at the contracts that we have and working to sign contracts. And in China, as mentioned, it's the first, it's starting on small levels, but really important for us going forward.

Then to fill in Cecilia also, it is not that, it is 1 or 2 major orders that is doing this amount in the order intake for services this quarter, but it is many different medium-sized towards you call it, orders so that we find that very solid as well. The large order from Spain did not include any services, right?

No. Correct. We have an opportunity there going forward for sure when we start the deliveries.

Okay, thank you. Could you please talk a little bit about the potential you see for the service business in China. Have you seen changes to the sentiment of adding services to the products or have there been one-offs in the third quarter?

No, again, as I mentioned, we're starting from small numbers. But as part of our strategy, it is important for us to have service contracts. It keeps us closer to the customers. We are able to ensure that they are happy with our product. So we will continuously work with our customers to make sure that they sign service contracts.

Okay. Perfect. And my last question. Could you please give some color on the Chinese market where you have seen slowdowns in purchasing patterns? I believe this is related to the anticorruption campaign or are there any other factors?

So I think in general, as I mentioned in the presentation, we see China getting back towards pre-COVID levels. And it's a very important market for us as a whole. We are market leaders. And however, it does fluctuate. And of course, yes, somewhat of a slowdown with the anticorruption for sure. But we have a healthy pipeline, we have lots of interest from the customers, but we do see that things are fluctuating.

Now a second question by Mr. Bostrom.

Yes, can you hear me?

Very well.

Yes. Okay. You had some large orders lately from Germany. Can you elaborate on what drives the demand of these orders in Germany?

So first of all, EMEA is a very important region for us. We are very strong. We are very strong in Germany. And I think in general, the uptake for SGRT is increasing. More and more clinics see that this is an important part of their workflow in their treatment. And I think as in some other markets, when you see a clinic that is bringing in SGRT, that creates some ripple effect. And we are actively working with the clinics and the last one that we actually released yesterday is a retrofit. So that is an installation on an existing clinic, which is also a very sort of low threshold investment in patient care.

Okay. In Europe, APAC, Americas reflectively, do you believe you're taking market share? Or is the growth mostly coming from general market expansion?

As I mentioned, the interest in SGRT is increasing. So the uptake across the world is actually increasing. However, we have a very strong position, both in EMEA and in APAC and Australia, for example, market leaders. We are market leaders in China, as I mentioned. We're very, very strong in Germany and also the Central Eastern market. Central Eastern European markets are growing as well. So yes, we have a strong position in those markets.

So probably growing more than the market in general at the moment.