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

Good morning, everyone. Welcome to C-RAD Webcast for the Fourth Quarter of 2023 and Full Year Financial Report. My name is Greta Cattani, and I am thrilled 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 and provide insights. Cecilia will kick off the webcast by providing an overview of the financial highlights from Q4 and full year, shedding light on our progress and achievements during this time. Following that, Christoffer will delve into a comprehensive financial review, providing valuable analysis and key figures. He will then endure the microphone back to Cecilia to summarize. Before starting, I'd like to remind you that we will not be taking any questions during the presentation. We encourage you to save your questions for the Q&A session that will follow the presentation. During the Q&A, you will have the opportunity to ask your questions directly to Cecilia and Christoffer. We will not be taking any questions in the chat. [Operator Instructions] A recording of the webcast will be available on the C-RAD website after the presentation. And now without further ado, let's get started. Cecilia, over to you.

Thank you, Greta, and it's great to see so many of you here on our Q4 webcast. And I'd like to start by inviting you to our world. C-RAD is part of the fight against cancer. And cancer is one of the biggest health challenges in the world and unfortunately, growing. Radiation therapy is an important part of this fight. And approximately half of all the cancer patients have radiation therapy as part of their treatment plan. So what does that mean for us? Our technology, SGRT or Surface Guided Radiation Therapy is all about safety for the patient, the precise targeting of the tumor while minimizing radiation exposure to the healthy tissue. And I'm really pleased to see that SGRT is becoming a given in the clinics as part of the treatment work flow. We contribute to both society and patients in several ways. And patient safety and improved quality of life is the foundation for our technology. We are well-established in the market with our market-leading products. And we've talked about that before, but there is a significant unmet demand for SGRT as it's becoming standard of care. We have publications supporting that. We also see that even if it started with breast, it's now spreading to many other types of cancers. And lastly, the investment is minor compared to the full investment of the treatment room, only some 5%. So let me take you to some highlights of the fourth quarter. And I'm really proud to say that we had a strong ending of the year and with high revenue growth and further improving the profitability. And it's been a very active quarter across all markets. Revenue increased to a record high SEK 138 million, an increase of 40%. Order intake for the full year was SEK 525 million, an increase of 8%. However, Q4 was slower with SEK 149 million, mainly due to the seasonality effect of a really strong Q3. Still further, we continue to build our backlog, which now has reached another all-time high of SEK 763 million. Something that I'm particularly pleased with is our progress towards profitable growth. And that is demonstrated by our strongest EBIT effort -- in the quarter, almost SEK 25 million and for the full year, SEK 57.5 million. And for the full year, that's almost doubled compared to 2022. Another focus that we also talked about in the Q3 reporting was the program to improve the cash flow. This is now starting to show results with cash flow from operations of SEK 51 million. We will continue to address cash collection and terms and conditions also going forward. The high interest in SGRT is captured by us while we are managing costs. And now I'd like to double-click on some exciting movement in our collaboration with Accuray. So we had the first launch of the solution together with our industry partner, Accuray for this jointly developed solution. And it's been positively received by the market, and the first installation has now taken place. This innovative solution is designed to treat breast cancer from patient setup to DIBH. And DIBH, for those of you who don't know, it's deep inspiration breath hold. And what about DIBH? Well, it's often used to minimize radiation dose to organs at risk, for example, heart. And another positive benefit is the engagement of the patient who is taken through this treatment only through breathing. And as you can see from the quote there from the -- from Accuray, Suzanne Winter, we share the excitement about the first milestone in this partnership. However, that was not the only highlight for the quarter. We have entered a new market, Croatia, together with our industry partner, Elekta. And this is, in fact, the largest order in Central Eastern Europe to-date, a value of SEK 16 million. Another thing that is exciting is that we are breaking new ground. We've made investments in the UK, which is starting to pay off and with this deal by NHS to a value of SEK 8 million. A way for us to quicker reach patients is to equip existing LINACs with SGRT. And I'm really pleased that we have been selected by a prestigious German clinic to a value of SEK 8 million, sometimes refer to this as retrofits. We've also strengthened our presence in South Korea and South Korea is an interesting market for us. It's large and advanced. It's multiple systems across the territory to value of SEK 10 million. If I then move into the more detailed look into the sales performance, order intake for Q4 decreased 31% to SEK 149 million or 36% in constant currencies. Year-to-date, the growth was SEK 525 million or an 8% growth, and that means 1% in constant currencies. EMEA had an exceptionally strong Q1 and a weaker Q4 of SEK 63 million. For the full year, EMEA ended with a 4% growth to SEK 259 million. APAC continues to be strong with a growth of 49% to SEK 63 million. We have high activity in all APAC markets. In fact, that is resulting in a 42% growth for the full year or SEK 188 million. Americas had a slower Q4, decreasing 35% to SEK 23 million. For the full year, we had a decline of 26%. Still, we continue to build the backlog. And we now have an all-time high order backlog of SEK 763 million. If you compare that to 2022, Q4, that is an increase of 24%, sorry. And just to remind you what is the backlog? Well, the backlog is orders that we have received but not yet delivered nor invoiced. And as you can see here, about half or 56% of the backlog is products and the rest is services. And I am pleased that the backlog actually consists of both large and smaller orders, and it consists of orders from all our regions. For the full year, order intake for services grew 33% to SEK 130 million, which is in line with our strategy to actually -- to actively grow services and increase the attachment rate. Moving then into revenues and -- for the full year, we have revenue growth across all markets. And we had an all-time high, another all-time high of revenues of SEK 138 million in the quarter, a growth of 40% or 31% in constant currency so really pleased about that. Revenues were up 41% for the full year, a 31% increase in constant currencies. In Americas, even if I just mentioned that order intake was slow for the quarter, revenues increased by 46%. Year-to-date was also strong with a growth of 22% for the full year. In EMEA, we see strong execution of the backlog and revenues grew 66% in the quarter and 49% for the full year. Revenues for APAC was slightly down for Q4, however, increasing with an impressive 42% for the full year. And with that, over to you, Christoffer.

Thank you, Cecilia, and good morning, everyone. It's great to be here today to summarize the financial information from our fourth quarter. As you could hear from Cecilia, the revenue of SEK 138 million corresponds to an increase of 40%. With this, we are continuing to show strength in the conversion from order backlog to services also in this quarter. For the full year, we achieved a strong growth of 41%, amounting to a revenue of SEK 425 million. The gross profit remains healthy with 65% in the quarter and also for the full year. Operating expenses have increased in this quarter compared to last year. The major items behind this are FX effects and less capitalized development costs. The EBIT for the quarter of SEK 25 million and the full year figure of almost SEK 58 million shows that we are, during this quarter, also have continued to take substantial steps on our way towards profitable growth. We have had a strong and continuous growth in service revenue over the last years. Back in 2018, the revenue from services was just SEK 8 million. For the full year of 2023, revenue from services amounted to SEK 76 million. Both products and services contribute to our revenue growth in the quarter with 36% and 64%, respectively. For the full year, services share of the total revenue was 18%. At the same time, as we are delivering the strong revenue growth, we are able to keep up our gross margin to 65% in the current quarter and for the full year, as I mentioned. This results in a gross profit of SEK 90 million in the current quarter, an increase with SEK 25 million compared to last year. It is very satisfying to see that we are able to convert this SEK 25 million increase in gross profit to an increase in EBIT of almost SEK 19 million from SEK 6 million to SEK 25 million in the current quarter. We are pleased to see the EBIT improvements throughout this year. We end the year with the highest ever recorded EBIT of SEK 25 million, which corresponds to an EBIT margin of 17.9%. For the full year, we reached almost SEK 58 million, equivalent to 13.5%. The operating expenses of SEK 66 million in the current quarter are higher compared to the previous quarters in 2023. The increase compared to the level from previous quarters are mainly related to one-off items amounting to SEK 10 million. These one-offs consist of the negative FX effect, as mentioned earlier, and increased warranty provision due to more installed systems during warranty period and a provision for social security costs related to previous periods. And in the current quarter, we have also recognized less capitalized development costs. During 2023, we have continued to do investments in our organization, primarily within services and R&D. The number of employees at the end of the year was 87, a 10% increase compared to one year ago. 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 for -- on our path forward towards achieving profitable growth. After the second quarter in 2023, we addressed an increased focus on cash collection. It is both important and satisfying to see that we have been able to do improvements in our cash collection short term. We continue to have strong focus on the cash collection and to work with this on a daily basis. In the current quarter, we managed to reach a positive cash flow of SEK 45 million. The main drivers behind this were the strong EBIT, of course, but also the positive change in working capital of SEK 21.5 million. I would like to remind you of our solid financial position with almost SEK 130 million in cash and an equity-to-asset ratio of 70% at quarter end. This position is enabling us to execute on our strategy and continue the development of the company. And with that, I would like to hand it over to you again, Cecilia.

Thank you, Christoffer. And as a summary, I'd like to take the opportunity to summarize 2023. This is my first year as CEO for C-RAD, very exciting and a year full of activity and interest in our technology from hospitals and clinics. One thing that I'm really pleased with is that our profitable growth focus is really starting to pay off, and it's demonstrated by the all-time high EBIT of almost SEK 58 million. We've also been very active in terms of product and partnership launches. We have a future-proof software and we also have interoperability with our industry partners, Elekta and Varian. And of course, as I mentioned, the jointly developed breast solution VitalHold together with Accuray, which is now gaining traction in the market. There is very high activity to capture this demand of SGRT and we definitely see clear trends of SGRT becoming standard of care, as I mentioned earlier. Our number 1 position in the Proton segment was further emphasized by the large IBA order of SEK 32 million, part of the Spanish Ortega tender that we got in Q3. I'm also really pleased to see that our services focus is now really gaining traction. I mentioned that the order intake increased 33% versus 22%. But it's also so that it's a priority for us. I want to remind you why. It's 2 main reasons. First, we want to make sure that our customers really capture the most out of our technology. And when I say customers, I mean the clinical staff. Secondly, it's about recurring revenue streams. And we have some good examples of breaking new ground. For example, the Missouri [indiscernible] large service contract in the beginning of the year and also last quarter, we had the first service contracts in China. This high activity is, of course, also showing and it's not, of course, but we've had an all-time high of new systems commissioned this year, which is very exciting. And now we have 1,500 systems supplied globally. You've heard from Christoffer just now that we have a solid financial position, which is a great start -- a great position going into 2024. But still, I want to say that this is the result of the hard work from our passionate C-RAD team around the world. In conclusion, I'd like to touch on our priorities going forward. So looking ahead, our continuous focus on investment will be on these 3 things. First, it's about investing in our leading technology. So our technology is all about patient safety and workflow efficiency. Secondly, it's about the untapped demand that we are capturing step-by-step. And this goes for both new and existing LINACs. And even if we see many markets rapidly approaching standard of care, we believe that it's only in the beginning. Services, as I mentioned just earlier, is a strategic asset and a priority for us. But I want to conclude with why do we do this? Well, it's all about serving our customers. It's about ensuring safety and efficiency in advanced radiation oncology. It's about helping to cure more cancer patients and improve their quality of life. And with that, Greta, I think it's time for questions.

Thank you, Cecilia. Let's jump to the Q&A. [Operator Instructions] So I will now allow [indiscernible] to talk question.

[Foreign Language]

So I will repeat your question. So what about the -- yes, you can take it.

Yes, the legal dispute that we are in, that was the question from you, [ Hakan ], and what is the latest status about that. So nothing has actually changed since Q3 reporting. So that was also why we did not include any slide on that in this presentation because there has not happened anything during this quarter. So the status is as before. So -- and that means that the Supreme Court has not -- yes, communicated yet if they would take on the case or not.

[Foreign Language]

So I can repeat the question and you can start to answer to that Cecilia. So [ Hakan's ] second question is about our cash position with SEK 129 million. And for the long-term shareowners, he say is, isn't it about time that C-RAD starts to shareholders.

Yes. So this is, of course, a decision for the Board. And if I put -- we talked about moving into 2024 also. So we have an outlook and a number of priorities. And constantly, we are reviewing our strategy. When it comes to dividends, as I mentioned, that is something that the Board decides.

So we think at this point, the Board thinks that it is better to invest this money in the company and to keep it in the company for now.

[Foreign Language]

No, but very value point. So [ Hakan ] said that valid point, and we will take your comments into considerations for sure.

Let's now move to the next speaker, which is [indiscernible] you are now allowed to talk. You just have to unmute yourself. Probably something happens. So let's move on to the next question. So we have Bastien Jallet.

Yes. This is Bastien Jallet from Eiffel. Can you hear me okay? Okay, perfect. I got 2 questions for both of you. First, talking about M&A, could you maybe elaborate a bit on what could be the perfect target, a great addition to C-RAD? And my second question is regarding the order intake in the U.S. We know that it's quite volatile quarter-over-quarters. But if you have any comment, is it a temporary slowdown or something more structural due to your partnerships not going as well as anticipated or just a regular, let's say, volatility across quarters.

Yes. So thank you, Bastien. So perhaps I'll start with the U.S. question. So -- and I can say that obviously, it's below my expectations for the U.S. However, we come from sort of a more challenging position in the U.S., and it's -- but U.S. is a priority for us going forward. And we don't see anything structural from that perspective. It's hard work, and we do a lot to -- we have, for example, increased our serviceability in the U.S. to be able to even better serve our customers in the U.S. and making sure that they also are happy with our technology. So in summary, no, nothing structural. We continue to see huge interest in our technology and the user friendliness and so on. So we will just continue to work hard. And this -- were you -- okay, would that answer Bastien or should I continue to?

Maybe a follow-up to that. So does it mean that you're okay with the current setup in terms of commercial people over there or would you need additional people on the ground?

So I mean, we do multiple things, and we are -- we have invested in the past also in the U.S. As I mentioned, one of the things that, that we have strengthened is the services team because we felt that, that was a good addition for us to further increase the understanding and the customer satisfaction. But it's also so that we do a lot of work to increase, for example, marketing efforts. And of course, we had some good wins on the U.S. West Coast, for example, in the last quarter. So things are moving in the right direction. If I take the M&A question so we over -- for us being a medtech and technology and R&D heavy company we -- this is part of the normal ways of working to look into our road map, our future and so on. So we continuously assess how we progress going forward. For obvious reasons, I cannot comment on any specific targets and so on. But we -- this is a continuous process for us. Nothing strange.

And before jumping to the next question, I would like to remind the people that have send something in the chart that we are not taking any questions from the chat. [Operator Instructions] So the next people speaking is [indiscernible].

Can you hear me? Great. Okay. Just a couple of questions. First of all, can you just tell us the market share that you've got now in the various region and particularly in the U.S., what do you think your market share is of new installation of systems in the various regions?

Sorry, could you repeat that question?

Yes, I wanted to know what is your market share? What do you think your market share of new system has been over the year in 2023 in the U.S., China, Europe, basically the main region?

So we don't specifically talk about the market shares in the different regions per se. But one thing, if I zoom out a bit, so we -- today, we still -- the majority of our sales comes from selling to new LINACs as part of new installations. However, in some markets, we are more towards actually equipping existing LINACs. And for example, in the U.S. we have more of a tendency towards existing LINACs. And for us, this is really important. So as I mentioned earlier, we see a huge interest in our technology. And the fact that we have LINACs out there that are not yet equipped with SGRT provides an opportunity for us because at the end of the day, we want to make sure that our technology reaches the patients.

But overall, has the market grown -- if you look at your number of systems sold over the year, whether it's for new or retrofit, do you think that your market share has increased or is it stable?

I would like to maybe also put it a little bit. I mean we don't go into such exact details and so on. But I think it would be fair to say that since the revenue for the year has grown 40%, I think that the market is not growing 40%, let's put it that way. So I think that we have been advancing during the year.

Yes. But to go back to the previous question in the U.S. from the question, the U.S. is where your market share was the lowest historically and that's where you [indiscernible] to gain more so that's why I'm trying to understand the momentum. Are you gaining share in the U.S. or you've been growing whatever in line with whatever the market was in the U.S.? Because obviously, you -- globally, you're growing 40%, but as the big part is driven by Asia.

So I mean, as we give -- if I can zoom out a bit, we have -- we are very strong in Asia, as you mentioned, and have huge growth and interest, and there are also -- we are also very strong in EMEA. In the U.S. we see good progress but of course, we want to do more there. But we -- overall, we see a very strong interest in our technology across the markets.

Okay. Just a last question for me is on the margin. So the margin obviously over the years have improved. But you've gone from 0% service to whatever [ 16% ] or a big part of the revenue with much higher margin. So is the increase in margin because I was expecting firstly [Technical Difficulty] more operating leverage in your margin over the last few years. So is it that the margin gains from the service mix, the mix between service and new or is it that also the margin for new system -- just the installation system is also increasing?

I think the -- even though it seems we have had the 65% gross profit margin now for this quarter and for the year-to-date and also for the same quarter last year and so on. But within that, even though it looks very flat, so to speak, on the surface, I think that below the surface, there is also a mix of, okay, what kind of deliveries have we done in which markets and so on. So it is, yes, even though, as I said, it might look like that on the surface. But we are working to -- yes, to challenge, and we think that it is, as we mentioned, a healthy gross profit margin, but we are, of course, actively working with many measures to find more efficiencies also on that KPI.

We still have a couple of questions. So the next speaker is [indiscernible].

Can you hear me? Continuing on the service part, I think sometimes it's hard for me and the market to understand the potential of the service segment. And could you try to explain a little bit if the -- given the current size of the service or the backlog and the current running service contracts and like assuming no churn of service, what approximately level of service revenue per quarter would you expect going forward?

No, no. So I mean we're not giving any financial forecasts forward looking at this stage. But I mean, you see the -- how the order backlog has grown in services and also the revenue growth, as I mentioned, coming from SEK 8 million to SEK 76 million in, so to speak, just 5 years, that is loan growth, I think. So given that information that we already have presented, you need to make your own conclusions, I think, going forward.

But maybe I can add to that [indiscernible] when it to services. And I mentioned that before that it is a priority for us. So if you look globally, we still have systems that don't have service contracts which means that we have an opportunity to increase the attachment rate. And that is a very active work that we have started during the year with even more intensity, so to speak. And as I said, it's really important for us for 2 reasons. It's not only the recurring revenue, but it's also to make sure that we stay close to our customers. We know that they are using the technology to its full potential and that things are going well. In the end of the day, we want to make sure that it reaches the patient, as I said before. So it is -- we have more to do.

Okay. But can you -- I know you cannot give a forecast, but can you explain in more detail how the revenue recognition works for the service segment? Because in the report, you say in the coming 12 months, this amount of revenue -- service revenue is going to be recognized. Is that on top of what you already have excluding churns or can you explain a little bit more? And also, if you could answer the question, is the gross margin in the Service segment higher than the 65% that you currently have in your company?

Yes, sure. So yes, you are right there. What we indicate or right there about the backlog for services, and that is what we know will be converted to revenue during the coming 12 months. As you see and also the comparison figure to last year, it has grown and there is additional revenue coming on top of that. I mean that is planned revenue. Then as Cecilia says, there are systems out there which does not yet have a service contract. And as the warranty period is starting to end, we have a good opportunity to add-on service agreements on those systems, and that will then be converted to revenue also fairly quickly as the warranty period is ending. And then we also have spare parts that we sell to the customers that are not planned, so to speak. So that will also come on top of that.

And is it possible if you could ask for -- I know you won't give an exact figure, but is the service gross margin higher or lower than the 65%?

We would not like to elaborate on that actually. I'm sorry.

One last question for me maybe to Cecilia. The previous CEO or management team increased the number of FTEs during 2022 to be able to meet future demand. Are you satisfied with the current size of the organization you have seen so far? And do you think this size is sufficient to grow, let's say, some years in the future or do you have plans to increase the capacity to be able to deliver more?

So I think -- thank you for the question [indiscernible]. And this has -- as I said before, it's been -- profitable growth has been a true focus from when I joined in the beginning of -- in the end of 2022. And there were a lot of investments in the second half of 2022 that, of course, have also generated quite some traction. For example, the UK order. At the same time, we are in a growth mode, and we have a lot of unmet demand. We are increasing the number of systems commissioned, as I mentioned. So with that, we have to, in a stepwise we grow. So that is -- but again, that is a high priority for me and the management team to do that in the best possible way, if that answers your question.

But I think that you're -- sorry for jumping in, that you were also asking a little bit broader in the organization, the FTEs and that we were also telling that we have added some 10% during also this year. So we -- I mean, resources that we have that are close to the customers as in service, for instance, there when we add on more service contracts, of course, we need to have the manpower to do the service job. So that is pretty yes, obvious from that perspective and also to future-proof our technology and so on, we also need to have that into consideration, of course.

We now have the next speaker, which is [indiscernible].

So my question is regarding the cash position. I'm wondering why the financial income was only SEK 0.1 million in Q4 with an average cash position in Q4 at around SEK 110 million? I mean that should generate at least SEK 1 million in financial income for the quarter given as you can now get up to 4% interest risk-free with full flexibility, for example, [ SB AB ]. That's basically my question.

Yes. Thank you for that one. So we have done some treasury reallocations during the quarter, so that will be visible going forward so we have taken that action.

There should be some improvements then to the financial income going forward. All right. So we should see some improvements when it comes to financial income now, 2024.

As I said, we have done some treasury reallocations during this quarter. So we have noted what you have noted as well.

But no projections, yes, exactly. Any other questions, [ Moss ]?

No, that's it.

[Operator Instructions] I think that we have no additional questions. So the Q&A session is over. A recording of this webcast will be available on our website shortly. And I would like to take this opportunity to thank our CEO, Cecilia de Leeuw; and our CFO, Christoffer Herou, for the insightful presentations and for taking the time to answer to your questions today. I would also like to thank everyone who attended this webcast. We appreciate your commitment to staying informed about C-RAD financial performance and will look forward to making a difference in cancer care together.