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

Welcome, everyone, to the IBA Full Year 2022 Results Conference Call. [Operator Instructions] I would now like to turn the conference over to Olivier Legrain, CEO of IBA.

Good afternoon, everybody. Thank you for joining us on our full year result call. I'm Olivier, and with me today is our CFO, Soumya. Before we start, I'd like to draw your attention to the company disclaimers on forward-looking statements. I'd -- first of all, I'd like to start today by thanking the entire IBA team for their continued hard work over the course of this year. I am pleased to see that all that hard work is paying off, with a very strong year, with growth across our business unit and record order intake and backlog. As always, I will give an overview of our business and our progress over the course of 2022. Soumya will summarize our financial statements, and then after I discuss the outlook, we will be very happy to take any questions. Now let's take a look at some of our key highlights for 2022. Here is a snapshot of the key 2022 financial highlights. As announced this morning, a few point to pick out here, group revenue of EUR 361.3 million, up 15% on 2021. The group REBIT of EUR 11.1 million, and a net profit of EUR 6.1 million. All-time record annual equipment order intake of EUR 456 million, and Dosimetry order intake of EUR 67 million. All-time record overall equipment and service backlog of EUR 1.4 billion, including equipment backlog of EUR 713 million and service backlog of EUR 669 million. Finally, our balance sheet continues to be extremely strong with EUR 158 million gross and EUR 117 million net cash at the end of the year, providing us with significant stability and flexibility for the future period. This slide will be familiar and cover the key objectives per business unit, which includes growing market share, developing technologies for the future and delivering our backlog. Over the year, we have continued to deliver against these objectives. For Dosimetry, order intake is up to a record EUR 67 million and has been boosted by the acquisition of ScandiDos and Modus. Within Proton Therapy, we have seen 17 new Proton Therapy rooms sold in 2022. Yes, ladies and gentlemen, 17 compared to 9 last year. Every -- elsewhere, good progress has been made in terms of research collaborations, which we'll explore more later. Other Accelerators sold 36 new systems compared to 31 in 2021. It, as well, once again, a record order intake. On the RadioPharma side, the official launch of Pantera brings us a step closer to providing access to actinium-225 to patients. And finally, within Industrial, changing market dynamics in sterilization has brought increased demand, which, it as well, we'll discuss later. IBA remains committed to improving and investing in sustainability. This investment was across 4 streams in 2022: assessing the carbon footprint and life cycle of our products, making changes across the entire organization to reduce carbon emission and waste, working with the organization to ensure IBA is an equitable and inclusive workplace and finally, we have improved our BCorp score and for the first time linked 1/3 of our management performance payment with sustainability report. I will now pass to Soumya to talk us through the summary of the financials. Soumya?

Thank you, Olivier. On Slide 10 here, you'll see a summary of the key figures for 2022. As Olivier mentioned, it's been a particularly strong year in terms of order intake and backlog across all of our businesses. We therefore achieved a REBIT margin of 3.1% in 2022, which represents top line growth but has been impacted by increasing OpEx and overhead investments for future growth and of course, inflation during the year. Net result was EUR 6.1 million. As a result of the strong performance, a dividend of EUR 0.21 per share has been proposed, and that's an increase of around 10%. And I am pleased to report that we continue to have a solid net cash position of EUR 117 million. I'll now hand you back to Olivier to take you through our business update.

Thank you, Soumya. Let's have a look at Proton Therapy first. IBA maintained a market-leading position in 2022. We have sold 15 new systems across Europe, the U.S. and China. And in China, thanks to our partner, CGNNT. There are currently 32 projects under production or installation, which does represent 7 ProteusPLUS and 25 ProteusONE. A significant milestone for Proton Therapy was the 10-system agreement made with the Spanish Ministry of Health in December, which is our largest order ever made for -- from a single customer. Collaborations continue to be an important part of our strategy, with partnership signed with UMCG in Groningen in April to investigate FLASH irradiation techniques in early-stage breast cancer. Comparable FLASH Alliance was launched in June to accelerate the delivery of this novel technology with partners, including University of Pennsylvania, UMC Groningen and many others. And the first patients were enrolled in the European PROTECT-trial. Looking more broadly at the PT market. Momentum has continued throughout 2022, and IBA has maintained its market-leading position with a 71% market share. IBA has also maintained its leading position of 43% of the total proton rooms in operation, and 42% for the total market share in proton rooms. In terms of performance, we have a total proton therapy order intake of EUR 281 million, which continued momentum in all global territories, most notably in China, Singapore, the U.S., Taiwan, Italy and Georgia. Our proton therapy equipment revenue grew 48% to EUR 110 million. Service increased 13.5%, with backlog of EUR 669 million. Overall, revenues grew nearly 29%, and this is due to a variety of factors, higher production levels, stronger backlog conversion, growing service revenues as well as the recognition of indemnities following the Rutherford bankruptcy. REBIT for Proton Therapy was EUR 4.4 million, an improvement on 2021 despite overall cost increase. Let's have a look at Other Accelerators business units. RadioPharma Solution to start with looking more closely. We are seeing an increase of the market demand. We signed an agreement in China for a Cyclone IKON for the production of novel isotopes for the use in theranostic and targeted oncology therapies. Elsewhere, IBA is seeing growth in the African market with an IntegraLab PLUS solution agreed for a center in Ghana. 2022, saw the official launch of Pantera, a joint venture with SCK CEN in Mol to produce actinium-225, one of the most promising alpha-emitting radio isotope to fight cancer. Pantera is currently in the process of building relationship with pharmaceutical companies to develop collaboration and ensure patient access. The building of the production facility is expected to start in 2024. Moving to Industrial Solutions now we have seen a significant growth during 2022, with order intake nearly doubling from the previous year. The primary driver has been the strong increase in demand for X-ray and electron beam sterilization as they both become growing contenders to ethylene oxide and gamma irradiation, the current standard. IBA Industrial also signed a contract to install the first fully integrated X-ray irradiation solution at a customer's new service center site in France. In addition, NorthStar and IBA announced an agreement for 2 additional Rhodotron TT300 High Energy electron beam accelerators, building on 3 previous sales in 2019 and 2021. So looking at the Other Accelerators business unit, we see an overall record order intake of EUR 175 million. Equipment revenues decreased to EUR 62.6 million due to slower backlog conversion related to the global supply chain and other macroeconomic conditions. Service performed well with an overall revenue growth of 9.8%. Overall, REBIT was lower than last year, affected by inflationary pressure on cost and lower equipment backlog conversion despite the strong catch-up in H2. Finally, let's take a closer look at those Dosimetry performance over the year. Our Dosimetry business has been busy over the course of 2022. Business has been increasing footprint with strategic acquisitions and alliances. We acquired Modus QA, a specialist provider of phantoms for quality assurance for radiation therapy, strengthening Dosimetry's operation in North America. In addition, 2022 saw the signing of a strategic alliance with ScandiDos, a Swedish company, and active in the radiation therapy for patient QA. The team has been also expanding the range of indications for IBA Dosimetry technology, announcing myQA iON compatibility with LINAC-based radiation therapy. A collaboration was agreed with Elekta for the optimization of QA, in which IBA is providing QA solution that integrates with Elekta's offering. And the Dosimetry business also achieved approval from Varian for the compatibility of IBA's product with their radiotherapy and adaptive therapy solution, Halcyon and Ethos. Looking to the top line financials. 2022 Dosimetry order intake was up 22% to EUR 67 million, significantly above the performance of the wider market. Backlog increased 200% to EUR 32 million from EUR 16.3 million in 2021. In part, thanks to the Dosimetry equipment order alongside 10 Proton Therapy system in the Spanish contract. And sales increased 3.1% from 2021, boosted by the modest acquisition. However, the division continued to be impacted by the slow recovery in China and by sanctions on Russia. REBIT was strongly impacted by investment in research and development for the future of IBA and cost increase due to the supply chain issues and therefore, decreased to EUR 0.7 million compared to EUR 4.9 million in 2021. Now over to Soumya to talk about numbers in more detail.

Thank you, Olivier. So group sales increased 15%, largely attributable to Proton Therapy backlog conversion, sales in Dosimetry, overall services revenue as well as Rutherford indemnities that have been explained earlier. Gross margin for the year was 35.1%, slightly increasing from last year, thanks to product mix and the impact of those Rutherford indemnities. Now as mentioned, you'll notice the uptick in SG&A and R&D spending linked as in most places to increased travel and marketing expenditure as regions open up again against -- after COVID, high inflation and investments in future growth, as already explained. Other operating expenses were impacted by stock option costs, costs related to a change in pension plan terms as well as write-offs on receivables, including Rutherford. Financial expenses were significantly affected by USD and Chinese yuan evolution over the year. Current taxes of EUR 4.8 million were compensated by recognition of deferred tax assets of EUR 11.2 million in Belgium related to improvement of future profitability for the company. And finally, net profit of EUR 6.1 million compared to a net profit of EUR 3.9 million in 2021, following the effects explained above. Turning on to the cash flow statement. Operating cash flow decreased to EUR 21.7 million, mostly as inventory and down payments to suppliers increased and also several large invoices that were issued to customers but paid only in early January. Cash flow used in investing activities increased as CapEx increased, and this was particularly linked to IT and software investments and the Dosimetry acquisitions of ScandiDos and Modus. Finally, from a financing standpoint, IBA made an early reimbursement of its syndicated term loan given its strong cash position. I won't go into the details of the balance sheet, but it is worth highlighting once again the gross and net cash positions. Also, as IBA ramps up production to its record backlog and being mindful of supply chain challenges, inventory is set to grow over the coming years with some effects on overall working capital. I'll now hand over to Olivier to discuss the outlook.

Thank you, Soumya. Looking to the year ahead, we see stronger order intake across all business units continuing in 2023. Growing services continue to provide stable recurring revenues, and backlog has reached another all-time high. Our secure balance sheet and excellent cash position provide us with opportunity for both organic and inorganic growth. Despite the current geopolitical situation and economic uncertainty, IBA has clear visibility on its midterm performance and is confident in its capacity to develop in the coming years and deliver value to all of its stakeholders. Therefore, subject to stabilization of supply chain and inflation over the coming years as well as a solid order intake, we are pleased to provide midterm guidance as follows: A target of 15% CAGR 2022-2026. On revenues, aiming to deliver 10% of REBIT on sales by 2026 weighted to after 2024. The CapEx will grow to around EUR 10 million to EUR 12 million per year until 2026 to support increased investment for the future. And finally, a gross dividend of EUR 0.21 per share has been proposed, which is an increase of 10% compared to last year. Finally, I would just like to flag some key dates for the year ahead. As usual, we will be publishing quarter 1 2023 update on May 18, and will be on the ground at ESTRO, ASTRO and EANM. Soumya and I are now pleased to take any of your questions.

Okay. I see that David has a first question.

First question on the 2026 target, let's say, or guidance. How do you see the revenue mix in 2026? So differentiating, of course, between Proton Therapy, Equipment, Services and Other Accelerators, I know this would impact the margins. And in particular, maybe just aside, any impact from theranostics on REBIT margin accounting-wise? So that's my first question. Second one on PT profitability, maybe more of a short-term question, I would say. So PT was loss-making in 2021 at the REBIT level, slightly loss-making. If we exclude Rutherford, it was as well in 2022. So how should we see the profitability of Proton Therapy evolving in 2023, 2024? And then okay, so a bit like the curve or the trajectory, sorry, that we should expect? And then third and last question for now. You're discussing for 2022 but also for 2023 about the impact of inflation on margin in 2023 and maybe also 2024, by the way. So my question is the following on this topic. So we saw wide fluctuation of the margin for Other Accelerators or actually decline -- accelerator REBIT margin declined from 14% to 7% and then Dosimetry from 9% to 1%. Should we see these as a floor? So how should we think about the future impact of inflation for home material, SG&A and so forth in 2023, 2024?

Okay, let's take them one after the other. In the -- your first question was about the mix by 2026, I believe, between the different businesses. I don't know Soumya, if you want to take that one?

Yes, sure. So first of all, I think your angle was also profitability and how you see profitability evolving across those business lines. So first of all, of course, the proportion of service revenues overall will probably remain stable as a proportion of total sales, which means that in absolute value, it will continue to increase annually. But as a percentage of overall sales, we should probably remain in the region where we are today, which is between 40% and 45% of sales. On the other hand, the industrial business is set to grow. Because as you've seen, the order intake in 2022 was really huge. If you look at overall Other Accelerators order intake, it's EUR 175 million, which is actually close to what we do in some years in Proton Therapy. So there, you will see that converting into sales much more. And since the conversion cycles for Other Accelerators is much shorter than for Proton, you should probably see this really translating into P&L over the next, let's say, 2 years to 2.5 years, more than the average 4 years that we see for PT. So the proportion of Other Accelerators revenue should increase overall versus Proton. But at the same time, you've seen that there's been the 10 content contract -- 10 system contract in Spain, and that's going to contribute quite a lot to revenues from 2024 to 2026 more or less. So I would say that we have an overall big increase in the top line, which will practically double by 2026. The proportion of industrial and RadioPharma sales will increase in that total. And so you should probably see profitability improving slightly also on the back of that as you will have the proportion of service and Other Accelerators revenues increasing. PT profitability, what's the trajectory going forward? Olivier, do you want to take that?

Well, I think PT profitability is including -- included in our guidance. So the way we look at it is actually a contribution of all the business unit to the improvement of profitability, including Proton Therapy. And the main drive behind it is the so-called operational leverage as we see a significant volume increase in the future years. We believe we've reached a level where we're able to cover our fixed cost and to generate profit in Proton Therapy as well. We can see and we have started to see an improvement of our competitive position in the market, which will allow us to have -- we have always had quite a healthy margin mix in our backlog, but we believe, and we have started to see, let's say, a healthier gross margin mix in the backlog, which will help us to continue to improve on our profitability journey. So a mix of operational leverage, a bit better competitive environment with a healthier gross margin potential in the market, which will allow us to cover the inflation plus whatever investment we need to make. As we are on a journey to double the size of the business basically, more or less with 15% figure, so we're off to significant growth, which will both deliver an operational leverage but also require some investment to be able to cope with the growth. If we move to the future impact on inflation, I mean, this year is probably, hopefully, let's say, the top inflation year. We're facing an index here in Belgium of 11% and some significant inflation in the rest of the world as well, in most of the world as well. And once again here, we believe we're able to swallow it, thanks to the operational leverage, plus being able to push part of it to our customers. Going forward, and that's part of our guidance as well, we expect, even though we don't have a crystal ball, a bit not coming back to where we were before the crisis, but let's say, more, yes, lower inflation, that's how we've built our model, knowing that should the inflation be higher, then we will have no choice than to push it to our customers. So that's how we've built our model. We see a bit of an inflation. I don't know if you want to give our assumption.

Yes. I think what we've seen is that at least for 2021, '22, we've seen on average between 7% and maybe 10% of increase on materials between -- depending on the type of materials so that would probably be across the board, maybe 5% increase of cost. And then on salaries and labor, as Olivier said, indeed, the inflation has been between 5% last year and now closer to 9% to 11% and maybe even more in some countries. So going forward, we think that if we come back to slightly more reasonable levels and taper down towards 3% to 4% by 2026, then that allows us to be able to deliver the guidance to the people.

A very quick follow-up on your fixed cost. So more SG&A and R&D. You said you have to invest, and there is the impact of inflation, of course. How much do you expect in 2023 next to inflation, let's say, additional investment? Do you expect more also in the years to come to -- I think you have a bit of a soft target to spend 10% of your sales on R&D?

Yes, that's correct. I think the main thing we speak about when we speak about investment is what we call the backbone. We'll have to invest into basically ERP and software to be able to have a stable backbone and an efficient one. And the other thing is hiring. And as you know, when we hire, we need to train people and they start by being overhead before they become productive, which we have started to see in 2022, by the way. We'll see -- we'll continue to see that in 2023. And that's why we don't give a specific guidance on 2023, but we -- on our journey to 10% REBIT, but we'll see, let's say, an acceleration of the improved profitability more towards 2024 as we have to go through this step up, let's say, in terms of organization to be able to cope with the doubling of our turnover.

We have Laura, who has a question.

First of all, could you elaborate a bit on what will drive improvement in REBIT in Dosimetry and Other Accelerators and how you look at it for 2023? And then a second question, a bit related to that, could you provide a bit more information on the backlog conversion issues in Other Accelerators and how the situation looks like now and what to expect for 2023 as well?

I think both for Dosimetry and Other Accelerators a big impact will be an acceleration of the backlog conversion. I think we opened the year with -- Dosimetry is amazing, so we have a huge backlog that we believe will start to convert or accelerate the conversion in 2023 with an impact on profitability. We expect to see Dosimetry back to where they were, let's say, before 2022, thanks to an acceleration of the backlog conversion that we have booked. In Other Accelerators as well, we have a big wave of -- there is an amazing number. There's many amazing numbers in the numbers we have published today. There is -- one is the order intake for Other Accelerators, and it's coming mainly from industrial, where we have a big wave coming at us on E-beam x-ray. And we will start to see quite a significant acceleration of this in 2023, which will help us to improve profitability as well as finance the investment we need to prepare for the growth of 2024 and on. And I would say the -- as I said, the competitive advantage -- yes, the competitive positioning of our product line is very -- is much stronger than what it used to be in every division, but in particular, in industrial. In industrial when it comes to high-power accelerator, the value proposal is extremely strong for our customers. And therefore, we're able to claim our fair share of the value we create together with them, and we have quite a healthy business in industrial, which will also help us to improve the profitability of the group. And yes, I think that's it. I hope I answered the question.

Yes. Just could you provide a bit more information on how does the situation look like currently in Other Accelerators, and what we could expect for...

Yes. I think the -- once again, the Other Accelerators backlog conversion in 2022 was somehow hampered by the geopolitical situation in namely Russia, where we were supposed to start installation that we did not start for obvious reason. And this will be somehow diluted to the different geographies of the backlog in 2023. And this is true for Other Accelerators. This is also very true for Dosimetry, which has been significantly impacted in 2022 by Russia -- by the situation in Russia and somehow a slow start in China. I mean we tend to forget that China did not reopen post-COVID before earlier this year. So -- and Dosimetry -- I mean, the biggest market for Dosimetry today is China. And this was quite significantly impacted in 2022 in terms of backlog conversion, and we start to see a normalization of the situation there. So it will also help us to accelerate backlog conversion in Dosimetry. Simon has a question.

On your guidance of 10% by 2026, I was just wondering how you are treating your venture with CGNNT in that number, is that including or excluding? And then secondly, how do you see this evolving because we still have not seen too much contracts coming from their side, actually. Well, we have the feeling that it is moving, but just a little bit more color on that would be helpful.

Okay. So the joint venture with CGN nowadays, the revenue impact will be royalties that we will get on -- I mean it's going to be twofold. First of all, they will buy equipment from us that we will recognize, and then we'll have royalties on their sales, and that's indeed part of our guidance. Other than that, I think most of the preliminary license agreement has been recognized. I think we still have a little bit of a tail to recognize with the shipment of with the shipment of the first unit that will be done in 2023. I think from a performance standpoint, they have been able to sell one system. I think they're pretty close to potentially close other deal in China. But once again, here, China has been quite badly impacted by COVID. And so they have been slowed down a bit from a market standpoint in China due to COVID but I expect to see them resuming sales in 2023, knowing that the competitive positioning for them has improved as well as they are facing less competition from one of the suppliers, let's say, in China, and therefore, I expect them to be successful and claim their fair share of market share.

And just on the royalty that you are receiving, if they sign a contract for a multiroom, let's say, EUR 60 million, do you get upfront -- do you get immediately your royalty? Or is it staggered?

It's based on down payment. Is it based on nonpayment?

No, no, the -- well, it's 2, it's both. So a portion is on down payments. But otherwise, if there is no down payment, then it's anyway spread over 5 years.

Okay. Very good. And you don't get the royalty on the service revenues. Do you? No?

Yes, we also have royalty on the service revenue. So that's the beauty of the whole contract, which is that the royalties allow us to basically make up not just on the equipment side, but also on the service and for as long as the service contract continues.

Very good. And then on the high energy Other Accelerators, is anything changing on the competitive side? Do you see some action there? Because like you say, you have an incredible position there. But do you see the lower end of the market trying to break in, in the high-end segment, too? Or are they -- are you way ahead of competition there?

Do you speak about electron beam?

Yes.

Yes, electron beam, we're way ahead of competition.

So we don't have to fear that, that...

I mean naturally, they will come, but I think we're years ahead. And we're not sitting idle either. So I think we have -- I mean, this Rhodotron machine is a beauty. And indeed, we have a very big competitive advantage.

The backlog shows that it's a beauty. And then last question from my side on Actinium. If we follow a little bit what's happening on LinkedIn, I have the feeling that it's a done deal, that it's proven that they can make it. But that seems to be a wrong assumption from my side. I was thinking that we would get a press release on the breakthrough that is happening. And then we could start to make our calculations for 2026 and onwards, but I clearly see it wrong. How should we look at it?

I mean, Pantera will become an actinium machine, but no, they're a marketing machine. We don't really give guidance on this. I think it will take some time. First of all, if you want a good indication, look at the drug development, look at the pipeline of drug development that will use actinium-225, and you will see that with more late 2020s than early 2020s for a major drug to hit the market. So does it mean we're not going to generate revenue before that? No, because there's a big market for early supply, preclinical doses, where we intend to play a role, but that's it for the moment.

But the point is you can make it and you are now trying to get contracts from the pharma to get the long-term agreements to supply. Is that how we have to see it?

Yes.

Okay. So it works.

Plus, we're working on early supply development. So we could be on the market earlier than...

What's required for commercial supply.

What's required for commercial supply. But we're working on both fronts. So one is to set up a facility so we can provide early supply as well as work with big pharma on how they could secure access to clinical supply when they will hit the market with their drugs.

And just because, Laura, you asked the same question also, more sort of. None of these numbers are included in the 2026 guidance that we gave. It means that anything that happens in Pantera will be an upside at some point, whatever point that comes. So if it's early supply and we are able to start to produce and deliver doses of actinium earlier than when we reach commercial supply, which will be in a few years' time, then that will hit the P&L positively in addition to what is already in the guidance. David?

Yes, it was actually a question related to the same topic. So indeed, what is part of your guidance, in particular maybe on the CapEx. So you're doubling the CapEx. So at the same time, okay, the sales are also doubling. But the -- on theranostics, so you're saying there is -- I think there is a plant you said, which is supposed to -- you're supposed to start the construction in 2024 of the plant for -- the Pantera plant. So this does not impact your -- let's say, the EUR 12 million CapEx guidance?

Essentially, it will. We explored different ways to finance this. We have many, many non-dilutive or dilutive or if we -- when we will start the business, maybe some leverage. There's many, many different ways to finance this. I think it's fair to say that today, in our CapEx guidance, we did not include Pantera. So it will come on top of it whenever we will accelerate there. But once again, it's a partnership. There's many ways we can finance it. I know maybe some of you have understood that we are going to finance everything. It's -- first of all, it's a 50-50 partnership with SCK-CEN. So should we finance everything, it will only be the financing of 50% of it. And then there's many, many other alternatives. I believe with what we have achieved already together with SCK-CEN, we have already created a significant step-up of the valuation of Pantera because we have unique technologies being the Rhodotron or radium or targetry around the concept. So I'm not very concerned about a big impact of the financing on Pantera and IBA numbers, let's say. Let's put it that way.

Okay. You mean on every, like, P&L or balance sheet or cash flow statement, you don't expect the...

Well, in terms of financing, I mean?

Financing. Financing. Okay. All clear.

We're not saying that we're going to see EUR 150 million CapEx lined for Pantera. If we see some CapEx, which, by the way, will be investment in a company, I believe it's something -- I would not say not significant, but not dramatic for us. It will not put IBA in a negative net cash position again, let's say.

I don't know if there are any more questions, but if there are any, please, feel free to unmute and ask. Laura?

Yes. Just a follow-up again on actinium, but just to make sure that I understood it well, it means that the technical feasibility studies have been concluded and positive.

Correct. So we have reached the threshold. We call it the threshold, and we move to the next phase. Any more questions? Okay. Well then I would like to thank you again for joining us on this call. And we look forward to the next call and updating you soon on our progress. Have a nice afternoon. Bye-bye.

Bye, everyone.

Thank you.