Elekta AB (publ) (EKTAB) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to Elekta's Q1 for the fiscal year of '26-'27. With me here in the studio in Stockholm, I have our CEO, Jakob Just-Bomholt; and our CFO, Klara Eiritz. And as usual, we will start off with Jakob bringing in the highlights from the quarter and some strategic updates, then Klara will bring you more details around the financials. And after the presentation, we will, as usual, have time for Q&A. But before we start, I want to remind you that some of the information discussed in this call contains forward-looking statements. This can include projections regarding revenue, operating results, cash flow as well as products and product developments. These statements involve risks and uncertainties that may cause actual results to differ materially from those set up in these statements. With that said, I would like to hand over to you, Jakob. So please, Jakob.

Yes. Thank you very much, Peter, and welcome to all of you. Let me start by giving and sharing some key reflections on Q1. We have been very clear, I believe, Elekta is not trading at full potential. We want to action that. And to that end, we have established a 3-phase turnaround plan. And this year is really about improving the underlying profitability of the company. Q1 is a step in the right direction, and we expect to see continued progress and execution. Let me just share with you a few highlights. We have now completed the change in operating model. The savings we indicated a few quarters ago has materialized above expectation, more than SEK 500 million. But most importantly, we did it to really enable faster execution. And Klara, you will unfold our now 5 regional P&Ls, part of that pushing P&L responsibility further down in the organization. We see significantly improved EBIT margin. Yes, part of that uplift related to tariffs. But keep in mind, we also reported we have a headwind of 109 basis points linked to a more prudent way of accounting for R&D expenses. So the underlying improvement is significant, and that translate into to cash flow that improves year-on-year despite the inventory buildup that we're also going to address. If we turn to sales, yes, sales decline of 2% is below our guidance for the year. We reiterate that guidance. That also implies that we expect positive sales growth in Q2, and I'm sure we'll come back to that in the Q&A. Just to flag here initially, China did start out weak in the quarter. I have to say, pretty much in line with our own internal forecast, and it really relates to poor order intake a year ago linked to poor market circumstances. Our market share give and take is unchanged. That also means that we will guide for solid growth in Q2 as we are now having an order backlog that supports revenue growth going forward, but I'm sure we'll also come back to that. So we are on plan. Focus is on improving profitability. But of course, we also have focus on delivering on the top line guide at fixed currency of 2% to 4%. So let me share some financial results, and then you'll give more color, Klara, on it. Book-to-bill of 1.11, order growth of 3%. We did see Elekta Evo, particularly in the U.S., developed as we planned and hope for. I just gave color on the negative net sales growth. Keep in mind, Q1 is, by far, the smallest quarter of the year. And as I said, we expect positive growth in Q2. We see Americas and Europe growing, APJ, China, TIMEA declining. I'll come back to that. Then gross margin, significantly up, and it's been some time ago since we had above 40% in Q1 at 42.6%, but obviously, 150 basis points one-off related to tariff refund, and we'll get a bit more what we expect in Q2, but underlying improvement. That translates into an EBIT margin of 11.2%. EBIT cash margin is actually 11.4%, and an even bigger improvement year-on-year when you look at the tailwind we had from a more aggressive accounting practice a year ago. So I think we are quite pleased with that EBIT margin improvement and then the fact that it translates into cash flow. So the trend we are on in reducing our net debt continues, and we expect that also in the period ahead. So that's on the financial outlook. If I then just give you a commercial flavor Overall, radiotherapy market, when we look at it at a global level, it continues to grow, roughly 6%. That also implies back to our revenue guide of 2% to 4%. We are still not growing with the market. That's highly unsatisfactory. We are going to do something about it. But as I said, at this stage, focuses on improving profitability. On order intake, a little bit lower than 6%, but still healthy. So we start to see a slight impact on some NPIs in the market and also various impact on orders around the world. But underlying market growth of 6%, which I consider very healthy. If we look at Americas, very importantly, we are getting back to growth, and we expect that to continue for a period to come. We did get Elekta Evo approved, as you all know, in January, and that starts to translate into orders. So I'm not going to share specific order numbers for the U.S., but it's good. I mean we are happy with progress so far, and we have our online adaptive for pelvis pending FDA, that will be further tailwind for the U.S. organization. Many more things to be achieved, but the momentum is what we hope for. On U.S. reimbursement, still early days, but it actually looks favorable, both for freestanding and hospital systems with 3% to 5% reimbursement uplift. So let's see where that lands, but so far so good. If we move on APJ, that was -- we actually expect it to come in stronger. The fundamentals of that region is strong. It's an underserved market. It's very varied from Australia to Vietnam, to Indonesia, to Japan. But we have just seen specific macro and impacting health care spend. So the market is down quite a bit. We don't expect that to be sustainable, and we are holding on to share, but we have now seen that for a period of time. If we then focus on China. I was there last week reviewing commercial, reviewing outlook, obviously also centralized procurement. And as I said, we have seen a weak order intake a year to 2 years ago. That has obviously depleted the order backlog and that impacted Q1 is particular with the low number of installations. We have guided that we have now had 3 consecutive orders or quarters of good order intake, and that also is the reason why we say that we expect solid revenue growth coming into Q2. A few words on centralized procurement. I think it's important for you to understand. Clearly, it's a change. It will lead to more price transparency in the market, but we have had centralized procurement in the past. Last year, our fiscal year, roughly 25% of the market was through centralized bidding, and Elekta had a win rate of more than 50%. So we are used to it. And I would say we are also ready for it. Obviously, it is a bit of choppy waters. Is that going to delay certain order intake our second half of the year? Maybe, but not necessarily. On the other hand, we see a push from Chinese government to advance CapEx to stimulate the economy and serve the health care system. So there are pros and cons. And all in all, when we look at our market share, we are in the mid-30s. So slightly down from last year, but we maintain our competitiveness. On Europe, increasing revenue by 5% growth in most countries. So that's good. We are piloting some very important NPI, integrated console, really a new workflow on our Harmony platform and it goes well. Just keep in mind, when we come to second quarter, last year was a high growth quarter, so the comp is tough. And then on TIMEA, we saw a decrease of 4%. We expected growth here, I have to say. And it's delays. It's not cancellations, very important. We expect quite a good growth for TIMEA for the full year. That will start also come Q2 is our expectation, but we had some specific installations in neighboring countries of Iran that actually not due to Elekta but other suppliers, they stalled the final installation and hence, we couldn't recognize the revenue. But the outlook actually looks surprisingly solid for TIMEA, both in terms of orders and revenue. So that's overall on the commercial side. And if we then go to where we are in our turnaround. The way we think about it is that we have now concluded Phase 1. We really had to change a lot of things at Elekta. So we said it's a reset. But then once you reset, you also need to stabilize. And we are happy with where we are. Here 1st of August, we appointed a new COO of the company, Rodolfo Velasco, to really drive operational excellence within the company. And we can see that there's quite a lot of potential ahead of us. So I'm very happy to see we have a complete executive committee to drive the performance. And then this year, we -- this quarter, we provide additional transparency. It's also how we want to operate the company. So we align internal with external. And then the improved quality of earnings with the more prudent accounting. So I'm happy about that. The focus is really on improving profitability this year. We have been optimizing our portfolio. We are more focused in how we invest. We still invest more than 10% or roughly 10% of revenue in R&D, have a laser focus on releasing new products to the market, strengthening commercial execution also through delegating responsibility and accountability to regions. We have good pricing guidelines now in place that will support us in the period ahead. And then we are laser focused on COGS reduction program, and you also see some of it translating into improved gross margin. So first, it's about expanding margins. It's about productivity initiatives. And then importantly, at this phase is making the required steps towards us translating innovation in market share gains going forward. So we can soon get into Phase 3, and that is growing at above the market because that is the future of Elekta bringing innovation to the market. So that's a high-level perspective of where we are. We feel good about it, but we know we have a lot of work ahead of us. And with that, I leave the word to you.

Thank you, Jakob. All right. So let's look into the numbers for Q1 in a bit more detail. Net sales decreased by 2% in constant exchange rates. Solutions sales decreased by 9%, and we saw growth in both Europe and Americas, however, offset by lower sales in APJ, China and TIMEA. Service sales grew by 5%, with growth in all regions. The adjusted gross margin amounted to 42.6%, a considerable improvement from last year's 37%. The improvement is related to growth in software and service, price increases, but also lower cost levels, largely related to the change of operating model implemented over the last 2 quarters. We had refunds of U.S. tariffs imposed under the U.S. International Emergency Economic Powers Act, which had a positive impact of SEK 53 million in the quarter, corresponding to about 150 basis points. As we anticipated when reporting our Q4 numbers, we had a negative FX impact impacting the gross margin negatively by 20 basis points. The adjusted EBIT margin amounted to 11.2%, and the year-on-year improvement was primarily driven by earlier mentioned improvements in gross margin, of course, but also lower selling and administration costs driven by the change in operating model. Year-over-year, we had a negative impact of about 190 basis points from lower capitalization and of R&D and increased amortization of R&D. And that's why we see a larger improvement in EBITC than we see in EBIT. I should also mention that we have no items affecting comparability in the quarter, but we did have SEK [ 16 ] million in Q1, as I see in Q1 last year. So we have an adjusted EBIT for Q1 last year but not for this year. Net income amounted to SEK 106 million and adjusted earnings per share amounted to SEK 0.31. And if we move to the next slide here. As of now, our external reporting structure is aligned with how we manage and organize our business internally. Internally, we are organizing 5 separate regions with full P&L responsibility. We have Americas; China; Europe; TIMEA, consisting of Turkey, India, Middle East and Africa; and APJ, Asia Pacific and Japan. And starting now in Q1 '26-'27, this is also the structure that we will present externally. And you all were introduced to this new structure also at the Capital Markets Day. The regions have a P&L with fully loaded costs. So when you add the region's EBIT and group common costs together, you get Elekta's P&L and Elekta's EBIT. Group common costs consists of central costs associated with our central staff functions, and these costs will not be loaded into our regional P&Ls, but instead kept centrally. Previously, in the old external report structure, we only showed 3 regions with net sales and contribution margin. Now we will report on net sales, gross income and EBIT for each of the 5 regions. So let's look at the performance of our 5 regions. To start with, the gross margin has improved in all 5 regions, except -- and all regions except TIMEA are now above 40%. If we then take the regions one by one, we can see the following. We start with Americas. The EBIT margin for Americas improved year-over-year, driven by, of course, the launch of Elekta Evo and related price increases. In addition, as I mentioned, the refund of U.S. tariffs imposed under the U.S. International Emergency Economic Powers Act had a positive impact of 53% -- or sorry, SEK 53 million, corresponding to 490 basis points for the Americas region. For the next quarter, we expect around USD 3 million in a second and final tariff refund. Also remember that we continue to pay tariffs in the U.S. So that continues. But the refund is for Q1 and Q2. APJ. So despite lower sales, driven by constraints in health care budgets and capital investments that Jakob also mentioned, the EBIT margin was almost in line with last year due to cost initiatives in both gross margin and OpEx, but we also see positive movements in terms of price and mix service sales, to be precise in APJ. Region China's EBIT margin declined as a consequence of the lower volumes, but even their gross margin improved due to lower gross margin expenses, but we can see that we don't have full coverage of the OpEx in the Chinese region here. So we see a drop in the EBIT. So we need slightly higher volumes in China for EBIT to come up. And then TIMEA -- or sorry, Europe. The EBIT margin in Europe improved compared to last year, supported by a favorable development for Neuro and Brachy solutions. And finally, the EBIT margin in TIMEA was negative in the first quarter. However, it was an improvement compared to last year. And normally, we see a seasonal pattern of gradual improvements towards the end of the year for TIMEA, and they have a better starting point this year than last year. So we expect that to improve over the course of the year. All right. So let's talk about currency impact. We see a negative currency impact on net sales, mainly due to the strengthening of the Swedish krona against the main revenue currencies, the U.S. dollar and the [ euro ]. This impact is partly offset by the group's significant cost base in U.S. dollars, British pound and Europe, limiting the effect on bottom line profitability. Changes in FX had a negative impact on both gross margin and EBIT margin by 20 and 30 basis points, respectively. And then a few words on cash flow. Free cash flow before dividends and M&A improved by SEK 154 million, reaching a negative SEK 266 million in the first quarter. The year-on-year improvement was primarily driven by an improved EBIT of SEK 176 million, reflecting an underlying improvement in the business. We had a negative impact from more unfavorable changes in working capital of SEK 318 million, driven by a seasonal buildup of inventory. We, of course, had that last year also, but it was higher this year. And also as planned, we had lower R&D related investments in the second quarter compared to last year and lower costs for interest and tax compared to last year, driven by a tax refund paid in Q1 this year and positive FX impacts. Okay. Let's look at the historic development on a rolling 12-month basis, starting off in Q1 last year. If we start with the graph on the left-hand side, we can see that the EBITC margin is up considerably compared to the same period last year, from 9.1% to 12.6%. We can also see a gradual improvement in gross margin with a 12-month rolling gross margin very close to 40%. Finally, on the right-hand side, we see solid development in free cash flow before dividend and M&A. I also want to mention that Elekta, on August 24, signed a EUR 100 million credit facility with the European Investment Bank, and this facility is dedicated for R&D project funding and has a 6-year maturity. All right. So before I hand back to Jakob, I want to conclude by reconfirming our previously communicated outlook for the fiscal year of '26-'27. This slide is the exact same one that we presented on our Capital Markets Day on June 17. And for '26-'27, we continue to expect net sales growth of 2% to 4% in constant currency and an adjusted EBIT margin of 12.5% to 13.5%. And by that, I hand back to you, Jakob.

Thank you very much. Yes. So let me conclude this call, look forward to Q&A. We see Q1 with continued progress in strengthening our financial performance, big improvement in terms of gross margin, EBITC margin and then stronger cash generation. On the top line, yes, sales decline in China as a result of weak markets in recent years, but important for you to take away that based on the order intake we have seen in recent quarters, we expect future growth and certainly in Q2. U.S. sales growth happening, order intake as expected and how far with the Elekta Evo, of course, as the main contributor. And that also means based on those events, our sales guide of 2% to 4% stand. And then focus is within Elekta to continue to improve the profitability. We are still below where we should be. And at the same time, we continue to invest in levers to accelerate our midterm innovation-driven revenue growth. So with that, Peter, thanks. Back to you.

Thanks, Jakob, and thanks, Klara. So before handing over to Q&A, just a short glimpse on the financial calendar. We will have our next report, Q2, in November 25. But before that, actually, we have our AGM coming up next week, Thursday. But operator, so we are now ready for the Q&A, so you can open this session, please.

[Operator Instructions] The first question is from Ludwig Germunder, Handelsbanken.

I have 2, please. And firstly, on orders in the U.S., you were talking a little bit about it, but I just wanted to follow up from the CMD in June, you told us that you buy -- that time has taken double-digit Evo orders in the U.S., I believe, of which 25% were slips from competitors. Would you be willing to give some more color on how U.S. orders are progressing? And perhaps if you could update us on the things you told us at the CMD? And my second question would be on top line growth. You leave the outlook unchanged, and we understand that Q1 is a small quarter. You told us that Q2, you expect to be back on positive growth territory. But would you be willing to give some more color on how do you expect the trajectory of the organic growth to be throughout the year, please?

Yes, yes. Jakob?

Yes. Yes. Thanks, Ludwig. Nothing changed from CMD on U.S. We did see double-digit growth, very solid double-digit growth in the U.S. I don't want to give the specific numbers here. So we are following the plan, and that also is the reason why we say that it will start to turn into revenue. So the growth -- revenue growth outlook in U.S. for this year is solid, right? And all in all, we are progressing as we hoped for. So on top line growth, we stand by the guidance. And what we can say at this stage is we expect positive growth in Q2 also to an extent that we, as it looks now, will be positive for first half of the year. That's as far as we will go at this stage. But of course, we wouldn't say it if we didn't have funnel on orders to support us being within the guide of 2% to 4%.

We will move to the next question, [ Philip Ekengren ] from Nordea.

So first -- and I'll do them one by one. I also have 2. Could you elaborate a bit on what you're seeing on the Chinese market? So what's driving the order growth? And what visibility do you have for order interest for the coming quarters and also perhaps order conversion?

Yes. So Chinese market, we guided a year ago, we would see a recovery in the market, and that has happened actually. So there was, as you may recall, an anticorruption campaign a couple of years ago that subdued market demand. Everyone was nervous at going in and entering bidding situation. Situation is now normalizing, which means that the market is coming back to more or less its long-term equilibrium. And there's still a very significant market potential because there are roughly 3,000 linacs installed. There should be at least 5,000. So the fundamental of the market growth is happening. Then we have seen that market recovery translating into orders secured [ for later ], and we have seen order intake growth the last 3 quarters. And they are now turning into installations. And once they turn into installation, we'll recognize MS revenue. And that's why we say we have expectation of solid revenue growth in Q2. And we still think -- yes, the outlook actually looks okay for us in China, I have to say. And then in terms of market share, we estimate that it was actually the Chinese Medical Device Association who put us at 35%. And I think that's give and take, right? So we are able to defend our market share to a large extent, at least.

You had a second question, Philip, is that right?

Yes. So trying to understand how sustainable the gross margin improvement is? Could you rank the importance of pricing, software service mix and also the structural cost savings?

Klara?

Yes. So I mean the service solution mix is considerably favorable this quarter, but the pricing aspect is also an important lever both for services and solutions. But the mix is definitely very positive this quarter. And then we have -- I mean, related to the new operating model we have, we are operating at a lower cost level than we have in the past. So it is a mix of those 3 things.

Okay.

And if I may, just a follow-up. How sustainable is that going forward?

Well, as you know, the mix goes up and down, right? That will be different from quarter-to-quarter. The price increases are -- we view as sustainable, of course, but that also depends on the mix a little bit. And then we have an underlying lower cost level that we see, yes, that we expect to maintain.

We'll move to Sten Gustafsson at ABG.

Coming back to China. I was wondering if you could comment on what you think will happen to pricing. And what you saw last year on -- I think you mentioned, and thanks for that color, 25% of the business you did in China last year was through centralized procurement. And did that have any impact on price? And with this new increased level of centralized procurements out in the regions or provinces in China, do you think prices will come down significantly? Or what's your take on that?

Yes. Thanks for a great question. The truth is we don't know for sure. Well, what we know is that there will be increased price transparency. I think that works both ways. So essentially, price we give in one province will be available to all 32. Price transparency will also discipline the market access because once you give a price here, it commits you elsewhere. So that's a positive, going to say, price transparency also means you can't get away with very high prices in one province and not in the other. But if we judge by history, then we actually don't have evidence to say that centralized bidding resulted in lower pricing than you can say, the more curated negotiated deals.

Okay. I guess we'll just have to wait and see what happens there. And then a question on your orders in -- if I remember correctly, in Q4, there were 2 specific orders that didn't qualify to be booked, given your new stricter order acceptance criteria. Were there any orders in Q1 that you didn't book given your new methodology?

Yes. But it's almost a topic that we have stopped debating within Elekta because we just say follow the guidelines. And whatever escalations came out, we declined because for us, it's extremely important not just to deliver good order numbers in a given quarter, but to, over time, build a order backlog that is of sound quality. So absolutely, there were deals here and there and there where there will be a degree of uncertainty and then we err on the side of being prudent.

We'll move to Veronika Dubajova at Citi.

I hope you can hear me okay. I kind of want to delve a little bit more into the order and revenue growth dynamic, if that's okay. Obviously, you guys are maintaining the guide. But if I look at the 12-month rolling order growth, it is still at minus 3%. Can you maybe help us understand how you can go from that minus 3% order growth to that 2% to 4% revenue? And I guess, what are the regions that are most important as we think about that growth acceleration through the remainder of the year? And maybe if you can kind of quantify some of your expectations around that, that would be super helpful. And then apologies, I'm going to go back to the gross margin. Again, just trying to piece -- separate out the pieces. And I guess you did have a pretty significant inventory buildup, which obviously should have been a tailwind to the gross margin as well. So trying to understand whether that was a contributor. And I guess if you guys can give us any guidance for the gross margin for the year or at least help us kind of anchor it relative to last year, whether you would expect that gross margin in aggregate to be flat, up or down, that might be a good starting point as we think about modeling out the remainder of the year. And then the final, third one -- I'm sorry, I know I said 2, but I'm going to squeeze in a third one. Why no change to the margin guidance if we are anticipating more tariffs refunds?

All right. I'll take the first and then you take the last 2. And of course, Veronika, when it's you, 3 questions is absolutely okay. Keep in mind, we have a book-to-bill of 1.05. That's really how I think you should reflect on when you look at future revenue because when you look at the comparison on order intake, rolling 12 months versus the previous and we are applying stricter criteria, invariably, there's going to be a consequence of that change. So the revenue guide stance, if I would just give you a little bit of color of how we think and the visibility we have at the moment is likely TIMEA is going to be the fastest-growing region. I would also expect region Americas would potentially come in second. And then we -- as it looks right now, have a good chance to see all regions growing. And then on gross margin and...

Yes. I think something to remember about the gross margin also is that we have a very positive geographic mix this quarter, right, with a lot of revenue in Americas and Europe. So that's something to consider. The inventory piece is not a huge part of what we see on the gross margin. But at the same time, I mean, we have -- we have -- sorry, yes, your question about tariffs was more for the guidance, right? And there...

Yes. But if you -- separately on the gross margin, yes. So the inventory build out was not a big contributor to the gross margin this quarter.

No.

No.

And then maybe I can build on Klara, on top of -- so we are actually starting to see a nice inflow that's more on current orders on price uptick. So I think it's good. I think I shared with you, we have implemented new pricing frameworks, and we are starting to see that gradually flow into the gross margin. And then on our operating model, we have been quite positively surprised about our service and order fulfillment costs coming down. And it really links to now regions taking full ownership of their P&L, and that's very supportive.

Yes.

And then on the full year -- yes, on the full year guidance?

Yes. I mean, we stick to the guidance that we have. I mean, when we did the guidance, the tariff refund situation was quite uncertain. But we stick to our guidance. I mean, we have things that go in the opposite direction also. I mean we have the tungsten prices. We have FX, of course. So we -- so we stick to this guidance, and it is a range. So we expect to be within that range.

We'll move to Mattias Vadsten at SEB.

Can you hear me?

Yes. Perfect.

Perfect. First one, you said in the presentation that U.S., you're quite clear, it's performing in line with expectations. I'm just trying to understand, so Americas, plus 2% here. Of course, only one quarter, but plus 1% in Q4, last 2 quarters. So is it then either that orders to sales in the U.S. take more time than you thought? Or are there other markets outside of U.S. performing below expectations because I presume this is not the growth rate that you're aiming for in Americas.

Yes, it's linked to 2 things, Mattias, one is order intake that is developing as we hope for, and then our revenue outlook because we are starting to see that orders that came from the FDA approval in January will start materializing into revenue from next quarter onwards.

Okay. And so the markets outside of the U.S. and Americas are nothing to dwell on?

No, that's exactly right. I mean the way I would suggest you think about it is that there is a timing issue. Of course, every installation is different, but we really expect revenue growth to increase in Q2 versus Q1.

Okay. Then you made some helpful comments on reimbursement in regards to the U.S. So maybe could you comment if, let's say, in the last 12 months period, if the reimbursement situation has been a headwind. I mean, we've seen some headlines regarding reimbursement to [indiscernible] clinics lately. And then if you would want to elaborate on the increase that you talked about going forward.

Yes. It's still very early days, so it's not final codes, but the first proposal indicates a little bit more for freestanding up to 5% reimbursement increase and for hospital systems to the tune of 2.5%, 3%. But keep in mind, it's early, and we'll know more over the next 1 to 2 months. Last year, it was obviously a headwind. I think we also flagged that in the call that there are challenges on the reimbursement environment. If that is now partially reversed, of course, it's going to be a tailwind in the market. But let's see how it plays out. And then very importantly, it continues to support adaptive treatment. So more -- there is an incentive to drive more complex treatments, and that's good for Elekta.

We move to Kavya Deshpande at UBS.

My first one was on the revenue decline in China. If I understood correctly, I think you said this was a reflection of a weaker order backdrop in past. I was wondering if you could give us more color on what the order to installation period in China is today? Because last year, I think you called out a China book-to-bill ratio of around 1.3x in both Q1 and Q2, and we know orders grew in H2. So should we be looking at this revenue decline as a reflection of even older order weakness before that? Or were there any installation delays impacting as well? And then my second question was on COGS inflation and just what you're seeing around tungsten and memory chip pricing and what kind of headwinds you've got baked into your guidance for that for those elements this year.