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

Good morning, and welcome to C-RAD Webcast for the Second Quarter of 2024 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 interim CFO, Jonas Reinhammar, who will guide us through the financial results and provide insights. Before we start, I'd like to remind you that we will not be taking any questions during the presentation, but we encourage you to save your quick questions for the Q&A session that we follow. A recording of the webcast will be available on the C-RAD website after the presentation. Without further ado, let's get started. Cecilia, over to you.

Thank you, Greta and welcome to our Q2 presentation. And I'm glad that so many of you are here, taking the time to join us in the middle of the Swedish summary. And I'm sure you know that C-RAD is part of the fight against cancer. And today, I will take you through our Q2 performance and our focus going forward. It's been a busy quarter with high activity, and I'm pleased to share that we continue to deliver on profitable growth, increasing the top line while managing cost. And despite some local macroeconomic challenges, we continue to work hard to capture and create opportunities. We have a strength in the global market reach, which compensates for the slowness in some markets for example, some parts of Europe. And we are able to also address multiple opportunities, not only in the linear accelerator space, but also for protons and in the CT room. And we have a strong quarter, a 43% growth in revenue. In fact, this is our second best revenue ever. This is positively impacted by the successful product registration in China earlier this quarter, which resulted in a strong backlog conversion. And our focus on profitable growth continues. And I'm very pleased to see that we have more than doubled the EBIT from SEK 7 million to SEK 18 million. And we have a solid order intake of 8%, also in constant currencies and continue to increase our backlog. We are growing fast. And with an increasing installed base, we need to continue the investments in the offering, reach and the organization. Now a bit more into sales and market performance. And I am very pleased that we have a strong quarter with revenue growth in all markets. Americas continue to be our focus, and I'm glad that we are moving in the right direction from a weak comparison. The enhancements in the services organization are now starting to show results, and we have signed multiple service contracts in the quarter, both new and renewals. The quarter also included some proton orders, which confirms our leading position in this segment. EMEA had strong revenue or solid revenue, but a softer order intake. And there is a lack of larger tenders. And also, we see a slowness in the decision making, in particular for some of the advanced European markets. There are regional highlights, Central Eastern Europe, for example, where the drive to invest in SGRT is high. Kosovo, a completely new market for us is a good example of that. And these emerging markets are inspired by the advanced European markets, and our market-leading positions in many markets is, of course, helpful. In the quarter, we also held a distributor meeting in the Middle East to build competence and also in this potentially growing region. Our important trade show, ASTRO earlier this quarter, this year in Glasgow, it was a great success for us. We had an impressive 4x more visitors than last year with highly initiated discussions both during the meetings and the product demonstrations. And it was yet another impressive quarter for APAC. Revenue was, as I mentioned earlier, boosted by the China deliveries but we also have uptake of vital hold in Japan, the joint product with Accuray as well as a number of deliveries to Australia. Japan is, in fact, an interesting and somewhat different market with smaller centers often connected with universities and a large number of proton centers and our technology is highly appreciated in this market. In Q1, we held a distributor meeting in APAC, and we are actually already seeing results of that in our Southeast Asian markets. Overall, we see a good resilience to our market reach and also our strong portfolio of products and services. We are continuing to build our backlog, both for products and for services. At the same time, as we are having a strong backlog conversion supported by the product registration in China. This conversion also includes proton deliveries for orders taken quite some years back. We have an increase in the number of service contracts and the attachment rate, even with this growing number of systems out there, is on the same level as last year. And we track all the systems in the market if they're on warranty or service contract. And this way, we can proactively approach the customers when the warranty is about to expire. If we then look from a revenue perspective, I am pleased to see that we have growth both in Products and Services revenue. The Services share of total revenue is now 18%. And I would like to draw your attention to the fact that the large number of products sold is very positive for us. It provides us with a base and an opportunity for future service contracts and, of course, then recurring revenue. And with that, over to you, Jonas.

Thank you, Greta. we see an increased gross margin in the second quarter, and Cecilia mentioned the Proton orders earlier and we spent resources in the development of the system, but there is a positive gross margin impact at time of delivery of these systems. So this is improving our gross margin compared to prior quarters. With the gross margin level and the revenue growth, we see a significant improvement in our gross margin contribution year-over-year. And on the right-hand side, you can see that the improvement in gross margin is also visible in our EBIT. And EBIT that supports further investments in our future growth. We continue investing in operations and back office functions, streamlining our processes with more automation and system support, investments that we will benefit from for a long time. We have an increase in consultant cost in our finance organization, and we will work on building the team in the second half of the year. We are a growing business, and a growing organization with global reach with an EBIT of 14%. Cash flow is minus SEK 4.7 million in the second quarter and in Q2, we paid the historical royalty costs of SEK 13.5 million. Normalizing for that onetime payout, we are at the positive cash flow of SEK 8.8 million. A focus area for us going forward is our accounts receivables. Delayed orders in the quarter and the installation times are impacting our working capital. We keep the lower inventory levels in Q2 and with a year-to-date improvement of SEK 7.5 million. To conclude, as you can see on the slide, we have a strong financial position with SEK 142 million of cash and the balance sheet that supports our business. Over to you, Cecilia.

Thank you, Jonas. And I'm pleased that we are moving in the right direction and continue to deliver on profitable growth. So 2024 was a special year for C-RAD. We are celebrating 20 years of innovation. And it started with a number of researchers from Karolinska Institute and the Royal Institute of Technology who had this idea of enhancing the cancer treatment without increased radiation, C-RAD was born. And today, we're a global company with more than 1,800 systems supplied worldwide. And we are present in the whole radiotherapy workflow from CT simulation to treatment and we are integrated with all major LINAC, proton and CT suppliers. We have also agreed to the workflow automation space. One of our first products, the Sentinel, you can see an embryo of that to the left on the picture. It's still around, of course, upgraded. We were first out with DIBH or Deep Inspiration Breath Hold, already a decade ago. This is very suitable for breast cancer and is, in fact, the technique used for vital hold, the solution together with Accuray that is gaining traction in the market. And it was indeed a proud moment, June this year to have a big part of the global C-RAD team visiting the Global Uppsala Headquarter. And I would just like to remind you that C-RAD is continuing to invest in the fight against cancer. In our world-leading products, in our global market reach, we still have more to do. There is an untapped market potential. And as you heard from Jonas, we have financial stability and profitable growth. So let me conclude by extending my appreciation to the global C-RAD team, to our partners and customers for all the hard work this quarter and for your efforts to improve the lives of cancer patients around the world. And with that, it's time for questions. Over to you, Greta.

[Operator Instructions] So the first question is from Mr. Christian Lee.

I have two questions, please. I was wondering if you could comment on the high growth in APAC if you expect it to continue to be sustainable on this level in the coming quarters and if you expect the China to be the main driver? That's the first question.

Well, first of all, and thanks for the question, Christian. It's great to see that APAC is continuing to progress in a great direction. We see that the interest in our technology is very high in APAC, and we are doing a lot of things, as I mentioned, to ensure that our technology is known. We have multiple markets in the APAC region that are very interesting. We have China, we have Australia, we have Japan and also a number of emerging markets, such as Southeast Asia. Of course, we don't comment on the future opportunities. But I can say that we have a good position in the APAC region. And of course, we do what we can to capture that.

Okay. Perfect. And I was also wondering if you could elaborate on the significant gross margin improvement if you could comment on the main contributing factors in the quarter? And do you believe that 68% is a sustainable level going forward?

Yes. And I'll hand over that question to Jonas.

Yes. Thank you, Christian. So for the Proton orders, we do a lot of research and development, and we do that over time. But as the lead time from order to delivery is a lot longer for these systems as the customer, in many cases, actually has to build a bunker or something. Then at the point of sales, we have a higher gross margin. So I would say it's not the new level. This is just that we have a higher share of Proton orders in Q2 than we normally have. So I will see this as a kind of exceptional high level.

Yes. Okay. So how should we look on the coming quarters? Should we expect the gross margin to get back to the previous levels at around 65%?

Yes. I think that's a more reasonable level. If the share of Proton orders decreases, then we will see the gross margin coming down to the more stable level that we've seen before.

And we now have a second question from Michael [indiscernible]

My question here is regarding your communicated investments in the organization. It seems like they have already started. Is that correct?

Yes. So if I can just comment on that. So, what we -- as we are a growing company with more installations and so on, we work with a very sort of step-by-step approach. But we -- for example -- as an example, on the services side, when we increase the number of installations, we come to a point when it's cheaper for us to have our own staff instead of buying from someone else. So it's simply a judgment call on when it's more better for us to have our own people than others. But overall, we have -- we are very cautious with the investments.

So how much of these investments have been done by now? This increase that you have mentioned?

So we are now 94 staff. So we continue -- this is -- we are a growing company. So this is something that we foresee to continue both in the market which, there are markets that are untapped in to make sure that we can capture the service opportunities to strengthen the foundation. We are, for example, making efforts into further increasing the automation, enhancing the back end and so on. So something that we will see effect over time.

But is it more of a continuous increase over several quarters? Or will there more be a bump in the short term? Or how should we see the increase?

If we look at the back office functions and the investments that we do there, I mean, we're in it now, the improvements. And when we go into Q3, we'll also have a new CFO that will start to build the team. So we have a higher share of consultants than we normally had, and I think that's visible in the numbers, but I think this is something that we will work our way out of, once we build the organization. So it's not a permanent level, but we're happy to do investments now so that we can benefit from it later, because we need to get rid of many processors, many work and be ready for the higher -- the larger volumes that we have. I mean, a lot of our processes are based on much lower levels of revenues and transactions. So no, it's not a permanent level, but I would say we're in it. And for finance we have Linda joining in September, and then she will start to build the team and the structure around that.

So there will be kind of a bump in head count increase in the coming quarter or so? Or will there be more of a continuous increase over several quarters?

I would say it's more of a continuous increase. It's not headcount. I mean, we're still a fairly small team, but we have to do investments now and so that we can support -- they have the system to support that small team.

And we have another question from Amir [indiscernible].

So just a bit on the OpEx increase during the quarter, specifically the personnel cost, number of FTEs increased about 10% year-on-year, but personnel around 32%, something like that. What's the discrepancy here?

So the discrepancy, I mean, partly -- I mean, now you look that on quarter-on-quarter here. But I mean, partially in it, it's the royalty payment that we described in the -- in the report, which is SEK 900,000. Then we also have a higher level of shipments and that we increased our bonuses levels a little bit. So I would say it's not -- and then we also have a slightly higher level of activity in the team with -- so there is no -- it's slightly higher, but yes.

I'm just looking at -- so Q2 '23, basically year-on-year, the personnel costs went from SEK 28 million to SEK 37 million. And the royalties, yes, like you said, around SEK 900,000. So that constitutes a smaller part of it. And you mentioned bonuses, right? So I'm just trying to find the 20% difference in increase that is not explained by the increase of FTEs. You mentioned bonus, can you elaborate a bit more on that, please?

On the bonus, it's not compared to Q1, where we already have a high activity. But if you look at year-over-year, we had a very slow quarter, mainly in the Americas where we didn't hit our targets. So I will say it's more of a weak comparison as well.

But a slow quarter in terms of what? I'm just trying to understand the connection of personnel costs, is that related to the sales increase in the same quarter? So basically, when the installation is made, then a bonus is paid out because the last year, Q2 you increased revenues 40% or something like that, if I remember correctly. So it's not -- it wasn't a slow quarter.

But for -- on the -- Americas had a very weak quarter in Q2, last year. So from that perspective, it is a very weak comparison. But maybe over to you again, Jonas.

Yes. As if you look on the past quarters, it's not that big of a difference, but it's a big difference compared to Q2 last year. You're right.

Yes. And why is that?

As you said, there was a lower level of activity in some -- lower level of achievement in some markets. And as Cecilia mentioned, in the Americas, specifically. And you can see that in the comparison numbers now, and we're growing in over 200% from a very low level. So we are high as on the market back in 2023, and we didn't reach the goal.

Okay. So I'm interpreting this basically as increase in sales in the U.S. affects the personnel cost as well due to bonuses. Is that interpretation correct?

If you compare it to last year, that's one [indiscernible]

Yes. Did you have another question, Amir?

Yes, I do. But did you want to elaborate a bit more?

No, no, go ahead. Ask your second question, please.

All right. I think in general, just a comment, I think you might need to be a bit better of explaining the OpEx development in relation to both revenue growth and order intake. I mean, you repeat this like growing organization, I think you better understands that. But I think just a bit more explanation on the dynamics. What affects what service personnel you explained is, as you see that, that's a good part explanation, it makes sense, a bigger, larger installed capacity. But this kind of like explanation with the U.S. growing, and that's why personnel cost is growing more that needs to be explained.

Yes, yes, yes. No, thanks. So just to go back to what we talked about earlier that we are a growing company, and we work very hard to both increase the top line and to manage costs. And we oversee everything. And try to manage the timing also, hence, the example of the services organization. And we do this for multiple things. But overall, we are very cautious. And now, as Jonas mentioned, we have an investment in our processes, the automation that is increasing the OpEx and the cost.

Got it. My second question is, if we zoom out a bit about around product development and innovation for the long term. Your CapEx basically or activity costs has gone down a bit for the last period, I would say. And it's at quite small levels. And your competitor, Vision RT, it's continuously releasing new innovation. I'm just trying to understand. Where are you in the investment cycle of product development? Obviously, I understand it's a continuous work, et cetera. But can we expect some sort of next generation soon? Or how should we view this?

So I'll kick it off. And you're absolutely right in terms of the importance of products and services and innovation. And that is very high on our agenda. This is something that we work with every day. We have a close, not slow. We have a close connection with our -- the clinics and strategic partnerships and where we are also very actively looking into how we can advance our products every single day. So this is part of our normal way and our normal R&D work. And then, there are I don't know if you want to comment on the activation in this quarter, Jonas, but this is the product as such is a top priority for us. And it's more of a timing effect.

Okay. Got it. I guess, my last question here is around a bit of the market. Basically, you have -- you're close to the market, you talk to your customers and your clinics, and the hospitals. Just to put the last 2, 3 years versus last 2 quarters, has anything changed? Or would you say the sentiment is similar today versus a year or 2 years ago?

So I think one big weekly coming back to our ASTRO metric show and the interest in our technology. So I mentioned last year's show, ASTRO, was already done our best ever. Now we had 4x more visitors and it was very impressive to see that the type of discussions that we had. So I think we're moving -- we're talking about standard of care for SGRT. We're moving now to a phase where this is quite well known, and there's lots of interest. I mentioned Central Eastern Europe, for example, even if they are now spending their money to make sure that they have SGRT on their LINACs which is also quite exciting. So I think we have come to like the next level of understanding and how helpful it is for the clinics. It's not -- it also helps with efficiencies and workflow efficiencies and a faster treatment time. And if you look at the clinics around the world, one thing that seems to be similar, whatever clinic I talked to, advance, not advanced, wherever, they all talk about the lack of staff and they want to do the treatments faster. So -- and here, it's not only safety for us, but it also helps with the speed.

We now have another question from Saman [indiscernible]

I just want to continue -- I have three questions. I just want to continue, firstly, on Amir, on the OpEx side. I agree with Amir, as you need to explain a little bit more in detail what's driving OpEx. We know you have to increase the organization and so on. But like, for example, can you say something of the OpEx increase, how much is related to the overhead cost, which is not directly related to the increased sales every year. Like, for example, building the finance function, other overhead functions, how much would that cost? And what have you budgeted for example?

So we don't necessarily go into that level of detail, but I'll ask Jonas to elaborate a little bit more.

So in terms of the OpEx and these investments, I mean, part of the investments, I mean, we're running this company now with two CFOs as you know, and we'll continue for that into Q3, then Linda will join and we'll have a more stable finance organization. So I mean, by building the team, we will kind of step up where we need and also kind of decrease the number of consultants in the finance organization. But looking back kind of -- I mean, another thing we do, and I kind of, look at the quarterly view. I mean, we do had such quite a high volatility on the personnel expenses between the quarters. So we're trying to kind of level that out by being more stringent in how we calculate our staff and how we do the forecast and OpEx planning. So it's part of the things that we are working on to get better control and to have a better level of, I'd say, follow up internally and to kind of work more thoroughly with kind of our management reporting. But I cannot give you any number on kind of how much. But I mean, you can see on the slides, I mean, it's just -- I mean quarter-on-quarter, there are a few millions of movement. And I think that's going to, how you can quantify that.

Okay. Okay. I just want to understand on the proton products, how come they have -- why do they have such a higher gross margin? What's the reason?

We have a high degree of the development costs going in as a project that we will capitalize, and we do that over time. And I mean, if we look at this order that we mentioned that we developed from, one, when we received the order in 2020, we will have other costs, but they're not on the cost of goods. So it's more of a timing in this. And I mean, we can get better to explaining the differences in our reporting, but we've already taken the cost in the development of these projects over the last years. So that's why we have this increase in gross margin.

Okay. Perfect. I just want to understand a little bit more on -- like we all know, you have a very strong market position. Like if you can talk a little bit more about pricing. For example, when did you adjust the prices the last time? And how do you work around pricing? Do you plan to increase prices? Have you already done it and so on?

So this is also a continuous work. And of course, there is often a market price, but we work very actively and to train the sales organization on how to capture the most value out of our equipment. And -- so -- and the price increases, that is also something that that's normal work to make sure that we oversee that over time. So -- but I think overall, it's pleasing to see that there are so many customers around the world that see a lot of value in our equipment. And I think it also has to do with that this investment is limited compared to the whole investment in the treatment room. So therefore, we have a smaller hurdle in terms of investments.

I guess that we have a second question from Christian.

I have a follow-up question regarding the increase in personnel expenses. If I remember it correctly, you have a high number of employees outside of Sweden. And therefore, you are a little bit sensible to currency fluctuations, right? So if you could help me to understand how much of the exchange rates changes that impacted the personnel expenses in the quarter.

Okay. So I mean, year-over-year, we don't have that big fluctuations in the currency. But you're right, we have about half our staff abroad. So it's in the U.S. and then they spread across Europe and China and Australia. So it is kind of a global organization. And we are sensitive to the currency fluctuations but we don't see that we have a big impact in Q2.

We now have a follow-up question by Michael [indiscernible].

I think what we're trying to understand as investors is how scalable this business is, and that's why we, kind of, want to understand the cost, how it will develop over time. You have the personnel cost and part of the personnel cost is bonuses for -- when the salespeople close a sale, it sounds like. Could you say something, maybe give some color about this dynamic? How will the personnel cost increase when revenue increase and order intake increase because normally, in a company, it would scale more. But if you have a lot of bonus that our percentage of the sales, this dynamic would not be the same. So if you could try to give some color on that.

So let me start off by sort of reminding you of the journey that we have done now in the last 6 quarters where we have constantly worked with improving the profitable growth, sort of managing -- increasing the top line and managing costs. So this is a continuous work for us and something that my leadership team is very, very focused on in terms of how we increase the EBIT. That is something that unites all of us. And with that said, we are very conscious when it comes to increasement in personnel. But as Jonas just mentioned earlier, we need to increase the personnel as we are in a growing business. Then there are some other specific effects. And with that, I'll hand over to you, Jonas.

So on the -- you're right on the bonuses, that's how it works, and we're reviewing kind of the setup of those. But now I'd say it's more of a -- the comparison when a quarter -- like Q2 last year where Americas is not performing. And now we are overperforming. So I think that's kind of more in kind of that context that you could see. And we're also working kind of having a better kind of forward-looking view so that we have less of a volatility in the personnel expenses.

Does America have a disproportionate effect because they have higher bonuses than other regions? Or I guess we want to understand more of this dynamic, how much we should expect bonuses to grow as revenue growth compared to other personnel costs?

Right, right. So again, back to sort of more of the helicopter perspective where we are making sure that the top line is going faster than the cost base. And then as there is potentially some volatility as well, but that is where we're driving the company over the quarters.

I am browsing to see if we have any other question from the audience, but I see no raised hands. Let's just wait a few seconds. Q&A session is now over. A recording of this webcast will be available on our website shortly. I would like to take this opportunity to thank our CEO, Cecilia de Leeuw; and our Interim CFO, Jonas Reinhammar, for their presentations and also for taking the time to answer to your questions today. I would also like to thank everyone who has attended this webcast. We look forward to making a difference in cancer care together. Thank you.