Ion Beam Applications SA (IBAB) Earnings Call Transcript & Summary

Gentlemen, welcome to the IBA web conference call. I am pleased to present Mr. Olivier Legrain, CEO; and Madam Soumya Chandramouli, CFO. [Operator Instructions] I would like to turn the call over to Mr. Olivier Legrain. Sir, please go ahead.

Thank you very much and good afternoon. Thank you for joining us on our half year results. I'm Olivier Legrain, CEO of IBA, and with me today is Soumya Chandramouli, Chief Financial Officer. Before we begin, as always, I would like to draw your attention to the company's disclaimer on forward-looking statements. As usual, I will summarize the group's performance for the first half of the year and remind you of our business strategy, Soumya will then take you through the company financials before I close with an update on the proton therapy market, our Other Accelerators business and the Dosimetry business and, of course, our outlook for 2020 financial year. Soumya and I will then be happy to take your questions. A core to the business is our world-leading expertise in particle acceleration, which has enabled the development and sustained growth of 4 robust business lines: proton therapy, RadioPharma and industrial solutions and Dosimetry. Coupled with this expertise is our ability to execute, and to date, we have sold 58 proton therapy solutions, 285 cyclotrons and 250 industrial accelerators to over 10,000 customers worldwide. Moving on, we have progressed in 2020 with a streamline focus based around 3 core drivers: know-how, execution and innovation. Over the last 30 years, IBA has established itself as a pioneer in particle accelerators. We now have over 550 accelerators in operation for the sterilization of medical devices and the production of radiopharmaceuticals and have treated close to 100,000 proton therapy patients across our 37 operating proton therapy sites. In addition, we have further 20 proton therapy projects under development. We pride ourselves on delivering the most efficient service for all of our international customers, which helps drive demand for our technology. To continue to execute and lead the market in which IBA operates, it is crucial that we continue to innovate in the space. IBA currently employs 200 engineers and experts in research and development, working to increase the affordability, proven clinical benefit and ease of use for our customers. IBA can also count on more than 500 patents, half of which are protecting IBA proton therapy technology. This innovation can be seen across all 4 of our business units and include technologies such as Motion Management, ARC therapy and Flash irradiation, information on which was given in our most recent webinar on the evolution of proton therapy. First of all, I'd like to take you through the deal that we have signed and announced today. China today has more than 3 million cancer patients annually, demonstrating the growing need for cutting-edge cancer treatment. Proton therapy in particular has significant potential. And this deal today, alongside the increase in proton therapy licenses from 10 to 16 this year, demonstrate that China is putting its weight behind adoption of proton therapy for precision treatment of cancer. Further, we see this as a strong signal of strengthening global adoption of the modality. The partnership between IBA and CGNNT will bring together the world's leading proton therapy technology provider and strong production capacities in China, further supporting our leading position in this proton therapy market. As you know, we were delighted to announce this morning this strategic licensing deal in China worth a minimum of EUR 100 million with CGN Dasheng. IBA will grant exclusive rights for the use of its ProteusPLUS technology to CGNNT and CGN Dasheng slowly in the Public -- Republic of China. The deal includes a licensing fee, support and training by IBA and the sale of component of ProteusPLUS. In addition, above -- over and above the EUR 100 million, the deal comprises an important stream of royalties based on sales made by CGN Dasheng. In addition, a minimum amount of royalty need to be paid to retain exclusivity on the ProteusPLUS technology. We are due to receive the first payment of EUR 20 million in the coming days, another EUR 50 million within the next 6 months and the last EUR 30 million at the latest within 48 months. The deal brings together the world-leading proton therapy technology of IBA with the strong production and market capabilities of CGN Dasheng. In addition, our pipeline of further new opportunity is robust, and we are in the final stages of negotiating a significant 4-room ProteusPLUS contract in China. Looking now at the overview of the first half of 2020 and the post-period highlights. Highlighting another -- highlighting other products in China, as I just mentioned, we can announce that we have also been selected for a 4-room proton therapy contract in the region. Proton therapy is set to expand significantly in China over the next few years with the Chinese government recently announcing that they are expanding the number of licensing from 10 to 16. We also have a robust pipeline of new opportunities across Asia, the U.S. and Europe. And despite those challenges presented by the COVID-19 crisis that have resulted in some inevitable delays for our 4 business and no new order intake in proton therapy for the first half of the year, we are seeing encouraging signs that the proton therapy market is gaining momentum. In addition, we have seen healthy order intake in our other business with Dosimetry order intake surpassing expectations. As announced yesterday, the Board has been strengthened with the addition of Dr. Richard Hausmann and Ms. Christine Dubus as non-Executive Director, who both bring valuable business and financial expertise to IBA. Looking at H1, our Other Accelerator business has performed well, with a strong order intake of 6 systems, confirming our position as the clear market leader in the space. Our equipment and service backlog remain at all-time high of EUR 1.1 billion, comprising of a solid equipment backlog for proton therapy and Other Accelerators of EUR 362 million at the 30th of June, and proton therapy services backlog of EUR 706 million. However, conversion of the backlog has been heavily impacted by COVID-19 with several project delays, although this has been partially mitigated by tight cost control and flat gross margin. Services continue to grow with a double-digit growth for the third consecutive year and positive impact on recurring revenue as center remained fully operational and 2 new centers starting to generate revenues. In addition, we saw another resilient performance by Dosimetry despite COVID-19, with exceptional order intake up to 17% from last year and sales dropping slightly, but only due to no more RadioMed sales in 2020, following the sale of this activity at the end of 2019. And finally, I'm pleased to say that we have continued to maintain a healthy balance sheet with EUR 95.9 million gross cash and a net cash position of plus EUR 3.8 million. I will now hand you over to Soumya, who will take you through our financials in more detail.

Thank you, Olivier. Right. So let's take a look at some of the headline numbers for the first half. Group revenues were down 14.3% versus last year, the decrease mainly reflecting the weakness in the PT equipment revenue line as a result of several material delays associated with the ongoing pandemic, which of course also resulted in a wider revenue loss of EUR 9.9 million, partially mitigated, though, by tight cost control and flat gross margin. As Olivier already mentioned, the Dosimetry business has been far less affected with really excellent order intake, close to 20% above last year. As a result, total group loss for the first half increased to EUR 12 million. I would like to stress the fact that despite the COVID-19 crisis, our operations have continued smoothly and efficiently. We've maintained a high level of cash and record high-quality backlog. However, our ability to convert ongoing production and backlog into revenues has been hindered by the COVID-19 crisis, thus, leading to a really strong balance sheet but a far weaker P&L. As mentioned, our equipment and service backlog remained extremely high at EUR 1.1 billion. And as you can see, this comprises an equipment backlog for proton therapy and Other Accelerators of EUR 362 million, with our compact single-room PT solution, the ProteusONE, representing around 41% of equipment backlog today, and the ProteusPLUS, around 25%. In addition, our service backlog is also very high, remaining above the EUR 700 million mark, with double digit growth in both PT and Other Accelerators. Now let's take a look at the PT and Other Accelerators business. Total net sales for PT and Other Accelerators were down nearly 17% for the same period last year due to EUR 85.5 million, reflecting delays in PT backlog conversion mostly due to COVID-19 restrictions. This was partly mitigated by Other Accelerators, which continued to maintain revenues in line with 2019. The slower backlog conversion and lack of PT sales also impacted REBIT. However, 5 new sales were recorded in Other Accelerators at the end of the period, and we are positive about our pipeline of proton therapy tenders, particularly in light of today's announcements from China that Olivier spoke about earlier. Now looking more closely at the equipment and service portions. We can see that the strong performance by service helped to mitigate the impacts of COVID-19 on PT equipment revenues that were down quite sharply with no new orders and delayed conversion of backlog. Other Accelerators equipment was up 1.2%, reflecting continued order intake, while services saw double-digit growth for the third consecutive year and positive impact on recurring revenue as centers remained fully operational across the world. Two new centers also started to generate revenues over the period. And in fact, we are quite proud that despite the COVID-19 crisis, we actually managed to complete handover of 1 center in the United States to our customer and started to treat patients right in the middle of the crisis. I'll now hand back to Olivier to take you through the proton therapy market update.

Thank you, Soumya. Despite delays caused by the pandemic, IBA continues to lead the market with regard to number of rooms sold at 41% market share in operation as well as percentage of patients treated by our customers, 56%. Our market-leading position is testament to IBA's unrivaled know-how in particle acceleration coupled with our ability to execute. And this was recognized by UNICANCER in France, who endorsed IBA the #1 vendor ahead of competition for single and multiroom configuration in the recent technical evaluation. We're pleased that over this period, IBA's safety measures have ensured that manufacturing can continue and all suppliers remain open in the geographies in which they operate. On the construction and installation side, at the end of the period, there were 20 proton therapy projects under construction or installation comprising 14 ProteusONE and 6 ProteusPLUS. The COVID-19 impact on the backlog conversion has meant construction and installation projects had been slowed down in varying proportion due to lockdown measures and travel restrictions. In particular, project installation and upgrades were affected in Asia and Latin America. Our services to all PT centers remain operational with 95% of time globally. Moving on to a broader view of IBA's technology expertise. This will be a familiar slide to some of you, demonstrating the important milestone in our pursuit of proton therapy excellence, all of which highlight significant patient benefits, ease of use and patient throughput. IBA continue to work hard to advance proton therapy in close collaboration with our customers and through research and development partnership. This is based upon the technological road map of IBA, which is focused on 3 areas: Motion Management, ARC therapy and Flash irradiation. IBA academic partners, are working for -- of technologies of the future in order to deliver better workflow efficiency, simpler treatment process and superior treatment options. IBA is integrating the most advanced capabilities of partners such as Elekta, Philips and RaySearch, and leveraging the recent development to offer the most sophisticated proton treatment and to assist the group in driving innovation and growth. The latest research has come from our partner, UMCG Proton Therapy Center in Groningen, with data published in the Radiotherapy & Oncology Journal. It found that 1/3 of the head-and-neck patient treated with radiation qualify for proton therapy, and that these patients have the highest probability to benefit from proton therapy in terms of toxicity prevention. Also, we are proud that in 2020, IBA will have reached the milestone of 100,000 patients treated on IBA system. Moving on to Other Accelerators. Encouragingly, momentum in our Other Accelerator division continue in line with the 2019 growth despite COVID with 5 systems sold and 6 accelerators post-period end, confirming IBA's market leadership in this segment. Elsewhere, the success of IBA's RadioPharma offering is underlined by the CycloneKIUBE cyclotron, which offers the highest production capacity, enabling increased diagnostic capabilities. In addition, IBA's Rhodotron continued to be well regarded in the market as a solution that allows customers to sterilize medical device either by E-beam or X-ray and enable the industry to break their dependency on chemical or radioactive-based sterilization process. Now let's move on to the Dosimetry update. We're pleased to report a strong first half of Dosimetry despite the effect of the COVID-19, slightly delaying backlog conversion versus expectations, with order intake up 17% from the previous year, resulting in the net sales of EUR 24.2 million compared to EUR 25.3 million last year. I should clarify that last year numbers include the sales of RadioMed's business, the VISICOIL that was divested at the end of 2019. On a like-for-like basis, excluding VISICOIL numbers in 2019, the Dosimetry business actually show growth of around 3%. REBIT dropped by EUR 1.5 million against the previous year, mostly due to the loss of the VISICOIL business, but partially compensated by strong cost control resulting in a REBIT margin of 5.1% versus 9.3% last year. The Dosimetry division also continued to gain market share in quality assurance and conventional radiation therapy, and confirm its dominant leadership in Dosimetry for proton therapy. If we dive into more detail, we have seen orders for patient dose-monitoring device were particularly strong, with an increased market share in quality assurance for conventional radiation therapy. The strength of this first half underlines IBA's dominance in this area. On the innovation side, one particular highlight is that myQA iON, the unique patient QA software solution for proton therapy is now FDA-approved. I will now hand back to Soumya for the overview of the consolidated financial results.

Thank you, Olivier. So moving to the next slide, let's take a look at the P&L for the group. Group first half revenues were EUR 109.7 million, down 14.3% on the same period last year. As already discussed earlier, this decline was predominantly due to the delays as a result of the pandemic, with no new order intake in PT in the first half. There were also ongoing delays in the installation of projects and upgrades, which strongly impacted the conversion of backlog in the PT equipment revenue line and, to some extent, in the Other Accelerator business. Gross margin was flat year-on-year with a slight improvement in some areas despite the effects of the pandemic due to cost control measures compensating for the effects of COVID. The group has, however, maintained strong cost control measures into H2 2020 to mitigate the loss whilst allowing for strategic investment with OpEx down 2.2% versus last year for the first half in spite of inflation. Now looking at cash flow. Operation -- operating cash flow during H1 2020 increased to EUR 27.3 million. This strong improvement was a result of careful working capital management with close follow-up of receivables, prudent cost control and very controlled spending on production inventory while continuing to ensure timely delivery on all ongoing projects. Cash flow used in investing was negative EUR 1.8 million against an outflow of EUR 8.8 million in the same period last year, which was related to the Hadrontherapy investment. Cash flow generated from financing was EUR 24 million, mostly stemming from the drawdown on the EUR 30 million, 5-year amortizing term loan negotiated at the end of last year. As a reminder, we still have an undrawn revolving credit facility of EUR 37 million available to the company. I now hand over to Olivier to finish the presentation with a brief discussion on outlook.

Thank you, Soumya. It is quite clear that this has been a challenging period for IBA and for proton therapy, but it has also shown the resilience of other parts of the business with Dosimetry service and Other Accelerators all performing well. While IBA expects its usual second half weighting to improve its bottom line performance for the year, as a global business with operation across many regions, the situation remains complex with regard to installation of project, and IBA continues to closely monitor the situation. The significant licensing deal in China and other potential new proton therapy contract in China and the U.S. as well as a healthy order intake in Other Accelerator and Dosimetry highlight IBA's ability to deliver in challenging times through know-how, innovation and execution. The overall pipeline is strong and IBA remains committed to progressing new tenders at an international level. IBA has a strong balance sheet and an excellent cash position. The prudent cost control measures will remain in place for the remainder of the year and beyond as a core part of the strategy. This will be alongside continuing to make strategic research and development investment, which is a core pillar of IBA's plan for longer-term growth. Given the ongoing COVID-19 conditions, IBA remains unable to provide a reliable projected 2020 performance at this time. The group continues to focus on delivering value to its stakeholders and is committed to remain the leader in all of its markets while driving efficiency across the board. Thank you very much for listening. We'll now take your questions.

[Operator Instructions] We have one first question from Mr. Kit Lee from Jefferies.

I have 3, please, related to the Chinese licensing deal. Firstly, just on the milestone payments, what are they linked to? Is the payment linked to any new system sale? Or is it linked to any other factor? And then the second question is on the economics. So if CGNNT sells a system, do you get a certain percentage of the order as revenue? I guess how does that economic work between you and the partners? And my third question is -- so, yes, my third question is just on the 5 contracts which you are allowed to answer, is the -- is CGNNT allowed to participate in those tenders as well?

Right. Thanks, Kit. All right. So in the order in which you asked the question. So first of all, on the payment milestones for the EUR 100 million. As you mentioned, the first EUR 20 million is basically payable upon signature of the contract. So it becomes payable now and will be executed in the next couple of weeks. We then have a first milestone -- well, 2 milestones actually, which are based on IBA delivering certain technology-related information to CGNNT and to CGN Dasheng. And on delivery of that, we will receive an additional EUR 50 million, which potentially will happen by year-end, at the latest by -- a little bit around that date. And then there is a third and a fourth milestone which are related to the first sale of PT in China by CGN Dasheng. And on those 2, there is a milestone which is basically related first to a certain level of training that needs to be delivered to the CGN Dasheng team. And the second one is related to the acceptance of the final room on -- after that sale. However, for those last 2 milestones, there is also a long stop date. So at any rate, it will be the earlier of the 2, either the training, of course, and the acceptance of the last room or the 48-month period that has been mentioned earlier on. On the economics of the royalties, yes, indeed, as you mentioned, the -- basically, there will be a certain percentage of sales that will be paid to IBA on every sale made by CGN Dasheng in China. And there is also a minimum amount of royalties that need to be paid to IBA over a 10-year period in order for CGN Dasheng to retain exclusivity on the ProteusPLUS technology.

It's also important to mention that there's royalties on the equipment sales, but also on the service.

Correct. And then on the last question, the 5 contracts, no. These are contracts which IBA will be able to complete on its own and CGN Dasheng is not expected to tender on those projects.

So there's actually a list of price prospect where basically, it's, let's call it, IBA territory.

Okay. And just on the royalties, can you just give us a feel on the percentage terms? Are we talking about 30% of the order value, 40%? Just a ballpark number, that would be great.

Let's say it's a very substantial amount given the profitability that we expect on these contracts. And basically, it's a remuneration for the fact that we will be giving access to the technology now, but which will continue to allow future sales on the potential that we already mentioned during the presentation in terms of the number of ProteusPLUS systems that could happen in China. So we're not giving an exact number on it, but let's say it's quite a sizable percentage of sales.

Okay. And is that linked to the sales cycle as well? Or do you get a different phasing with that revenue recognition? I guess just historically, yes with...

Yes. It's more or less linked to the same cycle, indeed. So basically, if the contract last for 3 or 4 years, the payments will be made out over that period for every single contract.

And on the installation as well in terms of the statement?

Add-on on the service, add-on on the service. And as I mentioned, there is also an average annual minimum royalty payment to be made to maintain exclusivity whether or not those sales take place.

Next question is from Mr. David Vagman from ING.

Also coming -- I'm sorry, I get you will hear a lot of questions about the CGN deal. On the CGN deal, I would like to also understand, let's say, the -- if you can explain to the extent you can explain it to the point of view of CGN, when we look at the consideration, let's say, the amount that they're able to pay, actually, I was wondering whether they considered directly investing in IBA or even -- let's say, even acquiring a substantial terms of IBA. And related to that, let's say, if you could explain the logic from their point of view, did they consider alternative next to IBA? I don't know, having the partnership with Varian, for instance. That's my first question. And so, yes -- if you want first to answer this question, and then I'll come back to my second.

Yes. Maybe because we can speak for an hour about that, I cannot really comment on the CGN look at alternatives and so on and so forth, probably. But if I step back a bit, and I think we've communicated on that several time in the past, we believe that to unlock the full potential of the Chinese market, the Chinese government will request the -- a Chinese provider to become a reality. It has always been our starting point. And many years ago now, we decided at IBA, say, "Okay, how can we facilitate the emergence of a Chinese provider, making sure that the product will have a lot of IBA content?" That was our starting point of all this. And if I put myself in the shoes of CGN, you mentioned that they could have bought IBA or part of IBA, this was not an option for us. And as you know, it's probably very challenging to do that. So we went directly to the technology licensing route. And that's the vision of CGN as well. Today, we're looking at a sizable market, indeed, from a global standpoint, but still highly regulated and somehow contained by the Chinese government with licenses. We believe the Chinese market has much more potential than whatever licenses will be given. And we have seen in other markets, in other medical device market, the Chinese government going away from giving licenses in order to free the market as soon as a Chinese provider is available. And that's the strategy that both CGN and IBA are pursuing here, is how do we make a Chinese supplier becoming a reality so the market can grow at its full potential. So somehow, you can look at it, EUR 100 million is a lot of money, but it's also time-to-market, the credibility of the partner they have selected and the fact that we believe together that if we join forces, the market in China can be very big. So that's the rational drive of doing it for both for us and for CGN. So we wanted to frame it, and this is why it took so long. I could find many partners out there that would be happy to pay royalty if we are successful in the market. I think CGN was smart enough to say, "Okay. No, we acknowledge there's a huge value in the technology transfers, and we put a fair value to it. And then the upside, we're sharing it together when we're going to be successful in the market."

On the -- of the partnering with CGN, you said you selected them. What can you say about their credibility in executing or manufacturing and installing proton therapy? I don't know of CGN super well, but I see they are active in accelerator or in electron accelerator. Can you tell us a bit more about their technological capabilities?

Yes. I think CGN Dasheng has a successful track record on expanding, in this case, electron beam technology in the Chinese market. So they have, once again, a track record of being able to establish themselves in the field of accelerator, both from a production standpoint but also from a sales standpoint. And they're backed up by a significant group with a significant footprint in China and with, let's say, all the relationships you need to build the credibility in the market. The CGN Group, we speak about 40,000 employees in China. And all this is at the -- is available for Dasheng to actually roll out the proton therapy technology as they did for the electron beam accelerator. They have also this vision, it's a little bit like a repositioning of the group of -- to actually invest more in the accelerator-based application. They did it for the electron beam. They're now doing it for proton therapy. And they have this ambition to actually expand more in the field of ion beam applications, so to speak. So once again, we're evaluating or we have evaluated them based on their -- both their commitment to the market but also the track record in the electron beam space.

And last question from my side at this stage. What is your confidence in the Chinese, let's say, IP legal environment? And of course, wondering about the risk of CGN not respecting its part of the contract.

Well I think there's 2 things. I think first of all, it's a very respectable company. And it took a lot of time. I think I've said it or I will publicly say it now, it's a process that took about 5 years for us. So over the time, we were able to build trust. And also it's a listed company, so it's also a sign of transparency. And somehow, first of all, the agreement is quite front-loaded for us. And on top of that, I think what we want to build is a real partnership where fighting against us will be a bad thing for them as we want to develop this market. It's going to be a volatile market. So I'm not so concerned from China and I'm not at all concerned outside of China because there, we can easily enforce our IP outside of China. So that's -- it's -- you have to put some trust into it. But the fact that they will basically pay us EUR 70 million upfront is also, I think, a good sign that they basically want to leverage and get something back. So I think the fact that they're paying upfront is also a testimonial, I believe, to the fact that they will behave later on. Because in order to recoup and to have a good return on investment, I think we need to build a healthy relationship between the 2 companies.

We have a next question from Mr. Lenny Van Steenhuyse from KBC Securities.

Yes. So with today's deal, we can assume that apart from the 5 ongoing negotiations, further tendering in China will be performed by CGN. I was wondering if you will continue to provide support in this tendering process and how we should feel about CGN's competitiveness as this is, of course, a player with a track record, let's say, in industrial applications for accelerators but not necessarily so in medical equipment. So will you guide them through, let's say, this tendering process as well as they get to grips with the medical equipment sector?

Yes, definitely. I think we don't want to disclose on the royalties, but I think we kind of imply that it's, let's say, it's enough for us to really put support behind CGN because there's a significant upside if they are successful. So we will definitely guide them. The other thing that I want to mention is that, here, we speak about the ProteusPLUS technology. We don't speak about the ProteusONE technology. So IBA will keep, let's say, marketing and sales effort in China. So we will -- it doesn't mean we will completely leave the space, quite the opposite. We will reinforce our market presence that we have today with the support of CGN.

And I noticed that in April of last year, so 2019, CGN already signed an agreement to build a PT center. Is this center also already incorporated in the collaboration? Will this also be a center based on IBA technology? Or is this also separate from what was disclosed today?

Yes. It's -- there's a lot of announcement in the Chinese market. I think that this one in particular was probably a positioning, so there is no current CGN installation going on.

Okay, okay. Perhaps a last question from my end. This is more relating to the acquisition of Varian by Siemens, which was, of course, huge news in the sector. I was wondering if you have a feeling on competitive pressure changing after this event, whether you feel it will increase or decrease as Siemens perhaps has different priorities compared to Varian at that point.

Yes. Well, first of all, I'm not involved with Siemens strategy, even though I'm sure I can give them a few ideas. Having said that, I think we've been very consistent on how we looked at the strategic positioning of Varian in the field of proton therapy. And if you look at their P&L, for the segment, you see that they've been able to take market share not because they had a genuine competitive advantage, but because of the pricing strategy. So one way for me to look at it is also, well basically, Siemens will continue to play the same kind of policy in the strategic -- in proton therapy or they will have a different look at it. So I tend to summarize my intuition, let's say, to -- for us, it's a neutral to a good news, that's how I look at it. Or they continue and it's business as usual or they have, once again, a different look at it, maybe play it a bit differently with more based on value-added they bring with the portfolio, and we might see a little bit less of a price pressure in the market. So -- but once again, I cannot decide for Siemens. And the other thing is that they've paid a significant price, and they have announced they are searching for EUR 300 million synergy. So that's also something that we keep an eye on and it has to come from somewhere. So we can hope that it will partially come from proton therapy.

Okay. And then perhaps a very last question, if I may. I was wondering of course, due to COVID, we see some delays in ongoing projects, but of course, a large CapEx for hospital systems is likely to go down as well in the future. I was wondering if you had any idea or what kind of actions would need to be taken in the case that the proton therapy market in general for new tendering remains very quiet as we have seen in the first half of this year.

I think for the next 18 months, we have to have a prudent view on this. Having said that, we don't really have indication that what we've seen in the first half is the new normal, even in the midst of a COVID crisis. So I believe we'll see deals in 2020. You have seen that we have announced we've been selected in China for a significant deal, 4-room system. Do I expect the proton therapy market to surge during the second half and in 2021? No. Do I expect to see it at the level that we have seen in the past? Yes. Is it going to come back after 2022? Of course, I don't have a crystal ball, but that's what we believe. We believe proton therapy has still a lot to bring to cancer care. And yes, COVID will put some pressure on hospitals, but it will not be forever. So we tend to look at prudently at the next 18 months. We have the backlog. We will close deals within the next 18 months. We have a very strong balance sheet. So let's take the right decision, so we can be ready with an even more competitive portfolio when the market will come back, let's say, as of 2022. So to summarize, I think, not to expect a huge number of orders in the next 18 months, but still enough order for us to continue to operate at the level we operate today and be ready for the period after where I believe proton therapy market will come back.

Next question is from Mr. Matthias Maenhaut from Kepler Cheuvreux.

A couple of questions also from my end, first, on the Chinese licensing contract with CGN. As you already gave the indication yourself, the contract is only done for ProteusPLUS and not for ProteusONE. Could you maybe give a little bit more color on the rationale behind that? And also, how do you judge -- or maybe the contract prevents this, but how big do you judge this? Is the risk that they use your P PLUS technology to develop something more compact and take on competition with that? And that would be my first question. Then secondly, maybe I missed the beginning of this call, maybe this has already been answered, but I was just wondering, you opted for a licensing deal and not for a joint venture. We have seen other companies more opting for joint venture. I think it would also give you, I think, more control or mitigate maybe more the technology risk. So I was wondering, why did you opt for this licensing structure, not for the joint venture? And then thirdly was actually on a prudent view you have on the order intake. If I read the press release, I would kind of -- was left with the impression that you were remarkably more optimistic on order intake, so I was thinking that we are going to see maybe 10 rooms being announced over the next 6 to 12 months. So could you maybe give us a little bit of more indication of which tenders are -- or how many tenders are ongoing presently? And also on how fresh those contacts have been because I was a bit surprised to see such a comment in the press release while, on the other hand, I would think that financing at this point in time would -- for such contracts, would be more restricted. So if you could give us a little bit more feeling on that as well.

Okay. So don't hesitate to jump in if I forgot part of your first questions. But first of all, P ONE, why P ONE and -- why P PLUS and not P ONE? Because, basically, we didn't want to talk about P ONE. I think the P ONE platform, we see it as a significantly more advanced. And basically for us, it was not a question we wanted to discuss. So are we afraid of seeing CGN developing more of a compact system? Today, the agreement is on proton therapy. So whatever they do is covered by our agreement. So namely, the agreement provides -- they can develop a ProteusONE-like technology, but it will be covered by our agreement. So they will have to basically fulfill and pay royalties on it as well. And on top of that, because of the licensing situation in China, the Chinese market today is really Proteus -- or let's say, multiroom only. So we're pretty well covered from a contractual standpoint when it comes to our IP in China, as I tried to explain. Having said that, it takes a lot of years to develop a proton therapy center system. We used to say 7 years. They will be and we will be busy with them to operationalize the multiroom aspect of it. And I think, yes, they'll be busy enough. So even if we could think of a potential danger in the long run, it's very well covered by contractual commitment. It will take a lot of time, and they'll be very, very busy with that. Having said that, once again, it's a starting point, and we'll have to make the relationship leap and make sure it's a win-win, and we are successful together. So there is no reason why we should go away with competing to each other. On the JV versus in-licensing, it's a charge we made. Indeed, we could have gone -- we're not very concerned about controlling the IP. I think -- and also, as I mentioned earlier in the call, we wanted to really have a 2-step approach. One is to put the right value to the technology transfer and then to build common business so we can benefit from the growth. And we felt the in-licensing was an elegant way and a very straightforward way to put the right value on the ProteusPLUS technology while preserving the upside. Once again, we're not very concerned by controlling our partner. It's a listed company. It's a very reputable company in China with very high visibility. And therefore, we're quite confident about how they will behave in the future. And when it comes to order intake, you said, "I would expect to see 10 rooms after reading your press release." I don't want you to take that as a guidance. I didn't say something else. If we announced a 4-room deal in China in the next few weeks or months, we still have another 12 months to announce another 6 rooms, which seems to be very reasonable if I look at the pipeline and the -- you were asking about the freshness of the contact, we entertain a multiple of the number of room you mentioned. So it's not that we're desperate to sell the next 4 rooms. We really entertain, let's say, once again, a multiple of 10s room in the market today. And you're right, financing is not as easy as it used to be, but we see a very active Chinese market that could significantly bring some business to us in the near future. And remember, we have carved out 5 deals out of this in-licensing agreement. And we see a lot of activities going on in the U.S., where we still need to understand when COVID will be under control in the U.S., but when -- as soon as this will happen, I'm confident we will see some market coming back in the U.S. as well. So if you understood, I said that I don't see 10 rooms in the next 18 months in the proton field, this is not what I meant.

[Operator Instructions] We have the next question from Mr. Thomas Guillot from Degroof Petercam.

Just one regarding the gross margin. So regarding the services, it tends to be quite good actually for the first semester. Regarding equipment due to decrease, obviously, because of the lack of backlog conversion, just wondering why the gross margin did not increase. You repeated, you said in the past that the services would have expanded -- will expand the gross margin. Just would like to ask how should we look at the ongoing gross margin and if services will expand the gross margin in the midterm.

Okay. Maybe I can start just one -- maybe one more technical portion of things. So indeed, normally, gross margin should indeed be increasing, but as you -- as we mentioned during the presentation and in the press release, we have had to absorb the effects of COVID. And one of the effects has been that while we have staff and we have mobilized resources in order to be able to build up project plans on time, several of those projects have been delayed. And we, therefore, have a certain level of inefficiency in production. Well, again, significantly, it means that basically we produce a little bit ahead and so we had to mobilize more resources than required at this point in time. And also, we have people who are hired and ready to go, but who are not able to travel on site. So we have had to absorb some additional costs, and that is what has basically compensated for a certain level of gross margin improvements on projects. If you look at an individual equipment basis and service basis, every single contract actually has excellent margins, and we continue to work, as we mentioned, in our R&D plan to continue to reduce the cost of both our equipment and in particular of our service because as you can see, that's the biggest chunk of our growing revenues today and that's where we see the biggest potential to be able to continue to reduce margin -- reduce costs and increase margins. Maybe you wanted to add something, Olivier?

No. I think -- indeed, I think what we see, which is a bit frustrating for us, is a lot of gross margin is stuck in the backlog. And this gross margin should move to the P&L. We'll have a much better coverage of our cost. So that's a little bit the effect we have seen in H1. And we were able to compensate part of it. We called upon economic unemployment. But of course, we were not able to fully compensate for that. So you rightfully say so that should we have a better backlog conversion on the equipment side, we would have seen a better gross margin.

Okay. And another question I had in mind is regarding your Chinese contract. How should we see the cash conversion actually from your milestones? Meaning what will be the cost of goods you will need to share with -- I mean the OpEx you will need to share with your Chinese partner? Should we see the EUR 100 million as a full cash conversion, let's say, payment? Or should we see some expenses on that amount?

Yes. So the EUR 100 million has several components. So a big chunk of it is indeed the licensing fee, which basically remunerates our R&D developments that we've done for the ProteusPLUS equipment in the past, and we will continue to do to a certain extent. And then there's a portion which is relating to equipment that we will sell to CGN Dasheng and CGNNT in order to be able to kick-start their manufacturing and production processes around ProteusPLUS. So there will be some expense. But indeed, as I said, the expense will be more on the production and equipment side than on the licensing side. Of course, we can be -- as part of the deal, we're also going to be giving licensing support. So we will train their staff and we will give them support on implementing the know-how that we will transfer to them. But again, the cost will mostly be on the equipment side of things than on the licensing side because that is basically R&D that we will be sharing with CGN going forward.

Next question comes from Kit Lee from Jefferies.

Just have a follow-up to the Chinese licensing deal. Once the manufacturing is set up, is the deal then accretive to your EBIT margin compared to you going direct in China? And I have another follow-up just on your order backlog. Do you see some risk of some of the orders aging out, maybe some customers are now either postponing the installation or thinking about or revising some of the time lines? So do you see the risk of aging-out in the backlog, please?

So on the first one, well, is it accretive? Yes, because basically how we see things is that as and when a new contract is signed, there will be a royalty, which is a percentage of sales. And so basically, we -- CGN will be doing the effective operational sale of the system, and we will be receiving a top-to-bottom revenue on -- more or less top-to-bottom revenue on every deal that we sign. So the answer to that one is simply, yes. The second one, I'm not sure I understood the question, Kit. Are you asking about the aging of our backlog and whether some of it will kind of drop out because of 2 extended delays? Is that the question?

Yes, yes. I guess what's your -- I guess what's the maximum number of years you will allow in the backlog and whether there's any risk of some of the orders dropping out of that acceptable range?

So my first comment on that is, as you know, we always have a cash-positive deal in most of our contracts, which means that our customer usually pays us upfront in order to be able to start the equipment production and, of course, the installation. Which means that, basically, by the time we have even produced maybe 1/4 of the equipment, we have received more cash than that. And practically, in many cases, up to 30% to 50% of the cash has been received. So in that case, we don't really see a customer suddenly backing out of the deal because backing out would mean that they would lose the cash that they have invested in such a big contract. So for us, it's really a very comfortable situation, and we don't see any of these deals dropping off the backlog today. As a reminder, we only add a contract to our backlog when we have received a substantial down payment and a signed contract. So that is a guarantee against having to adjust our backlog against fluctuations. Now I'm not saying that it's never happened. But when it has happened, we've actually kept the cash, and therefore, made a nice top-to-bottom profit. And it's happened probably I think only once in the past and many, many years ago. So I really don't feel uncomfortable with the quality of the backlog. And yes, indeed, there might be a delay in the conversion, but it will happen at some point in time.

At this stage, we see a quite limited impact. Of course, some cities are still in lockdown and things like that, so depending on when we can resume or when the customer can resume construction. But we don't see years of delays, of course.

No.

We see a few months here and there. And to my knowledge, we have resumed almost all our installation. And that's why we're quite confident that we -- the second half will be much better in terms of backlog conversion. We have shipped the machine already, and it's supposed to be put in place in the building of the customer in September. And we're probably going to ship another one. So we see, like we did last year, an acceleration of the backlog conversion. So I think -- but of course, depending on how the pandemic will evolve, we've probably seen the worst of the wave at this stage. And we will see a better backlog conversion in the second half and probably first half of next year.

And maybe one other point on that is also that in all of our contracts today, we don't have any issues with IBA, for example, being directly responsible for any of these delays. It's again either down to the pandemic, which restricts travel or even actually the construction site not being able to complete on time because of access issues for the staff working on the construction. So again, we don't expect something like penalties and stuff like that to hit our P&L. It's actually the other way around. We're actually now in discussions with each and every customer who's delayed to see how we can mitigate the impact of any additional costs on IBA rather than actually suffering from any penalties that the customer might want to impose on us. So all in all, a very comfortable position.

We have one last question from Mr. Matthias Maenhaut from Kepler Cheuvreux.

Two follow-ups from my end. Just on the gross profit margin, actually. I kind of appreciate that if PT equipment sales go back up that absolute gross profit would rise, but I was kind of thinking that there is a risk that gross margins would be down given the fact that some of the contracts, if I recall correctly, are signed at increased competitive intensity. And I thought last year, we saw a quite negative effect of contracts coming into the sales with lower margins. So I just want to appreciate that I did understand that correctly, that you also think that gross margin will go up and not only absolute gross profit. And then maybe on OpEx. I was just wondering. The level we have seen in H1, will this be approximately the level that will be also relevant for H2? And has there been any impact from any government measures of temporary unemployment that are actually quite material and that will reverse or not?

Okay. So on gross margin, so first of all, yes, indeed, we have had to suffer some competition squeeze in the past couple of years and that has had an impact on some deals. But at the same time, we have been able to sell several other deals at excellent margins also. So basically, if you look at the overall mix of contracts, yes, I would say that we have been affected for the equipment portion of our business, but it's not that drastic. I mean it hasn't gone down to crazy levels. Now the percentage of gross margin in a particular year also depends on the mix of which products -- which projects progress faster than others. So if we have certain projects, which have high margins which progressed more than other lower-margin projects, then that can have an impact positively. And in other years, if there are lower-margin projects that progressed more than higher margin, then that impacts negatively. So it's really down to mix. But I would say, on average, we are pretty flat versus last year on equipment. Now what we have had this year is that while we've been flat on equipment and slightly growing on service, we've actually had to absorb the effect of COVID and the fact that the amount of gross margin in absolute value, as Olivier mentioned, is much lower than last year. We're 70% down from last year in equipment, means that we have a lower capacity to absorb our overhead costs, which are not variable. So that is what has affected the gross margin percentage. So I would say that would at least remain flat or improve in the coming months. The second thing on OpEx, your question was H1 versus H2. Well, we'll try to do better. But let's say that we expect to remain more or less in line with what we've spent in H1 and H2 and so we continue all the measures. We have benefited a little bit from economical employment, especially in Belgium and in Germany, but nothing major. So we don't expect that it's going to be kind of a big impact in H1 and then nothing in H2, and therefore, seeing a big increase in costs over H2. Also because, as we mentioned during the presentation, manufacturing has actually continued at reasonably normal levels. And I had mentioned earlier some level of efficiency but which is minor and which has been absorbed, to a certain extent, by the economic unemployment.

I see that selling and marketing expenses are actually quite down, that's mainly travel? Or are there any other reasons? Because it kind of...

Travel, all these conferences, trade shows, was canceled. So hopefully, we can resume some of it, but I'm not very optimistic that we will resume it in the second half of the year. So indeed, I can see the same kind of OpEx spending, maybe a bit more depending on how the end of the year will unfold. We're in hiring freeze, of course. So here as well, until we have a better view and we see an acceleration of our backlog conversion and some potential more deal coming in, we will remain in hiring freeze.

We have one last question from Mr. David Vagman from ING.

Could you highlight us -- give us an update on the outlook for political risk in the coming months or the coming years? And I have especially with the U.S. in mind, and I understand it's complicated to do. And also an update on the reimbursement policies of insurance companies, again, in particular, in the U.S.

David, I'm not going there. I think it's -- who am I to comment it? What can I say? The world is more complex every day. Now we have -- somehow we're used to deal with this complexity. I think maybe one thing I can say regarding that is the decentralized operation by nature of IBA makes us a bit less dependent on all this. So I mean, to make a long story short, I think in the U.S., for many of our stakeholders with a U.S. company in China now is going to be more of a Chinese company and in Europe. So if there's one thing I'm very proud of is that, actually, despite the fact that we've been banned from traveling, which is -- was unconceivable for us pre-COVID, we were able to operate quite normally because, actually, yes, indeed, we have competence across. Now I don't know how U.S. will continue to look at China and vice versa. And yes, it's a big uncertainty. It's very difficult for me to comment. We are apolitical and a global company, so we try to be a well-behaving company wherever we operate, respecting the stakeholders wherever we operate. When it comes to reimbursement, I think many of the decisions that was supposed to be taken in the U.S. are postponed. The U.S., what they call it U.S. APM has been postponed. I think we've exchanged on that in the past. We don't really think it's a bad thing for proton therapy to a certain extent where we believe you should look at the benefit or the total cost of treatment, including the cost of toxicity. But for the time being, at least in the U.S., we're in business-as-usual. And we see more of a solidarity trend where all this is put on hold for the moment, waiting to go out of the crisis to potentially resume them. So I'm not aware of anything getting worse or better for that matter in any jurisdiction we operate in. For the moment, it is a standstill. And once again, if we go back to -- I believe that the proton therapy case, especially with the escalation of the dose to the extreme of Flash therapy, of course, which is the Holy Grail we are pursuing, but it's not for tomorrow, is the way to go because it will indeed so much change the logic and has the potential to decrease the total cost of treatment that I believe we have a strategic, somehow, advantage here. But we're not fully ready to play, but we're going there. So pressure on reimbursement, it could be a way for us to answer it, thanks to new modalities such as Flash, where indeed, you'll be able to treat in one fraction. And once again, I don't take it as it will be available next month or it will take some time. But we're going there and proton therapy is very well positioned to deliver on that promise. So in the midterm/long term, I believe this could play in our favor. Okay. Thank you very much. Thank you. I think we're probably at the end of the call. I'd like to quickly give you a snapshot on the next and upcoming events. Of course, due to COVID, there is no ASTRO whatsoever, but we'll be able to give you an update for our third quarter on November 19, and full year result 2020 on the 25th of March 2021. Having said that, I'd like to thank you very much for your time today, and we'll keep you updated on our progress. And if you have any questions, please do not hesitate to contact us directly. Thank you very much, and have a great afternoon.

Thank you. Bye.

Ladies and gentlemen, this concludes the conference call. Thank you all for your participation. You may now disconnect.