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

Hello, and welcome to IBA's Half Year 2023 Results Conference Call. [Operator Instructions] I will now hand over to Olivier Legrain, Chief Executive Officer of IBA.

Thank you, Olivier, and good afternoon, and thank you for joining us today on this results call. I'm joined today by Soumya Chandramouli, our CFO. And before we start, I would like to draw your attention to the company's disclaimer on forward-looking statements. Here is an overview of today's call. I will start with IBA performance and progress of the first half with a detailed look at the different business units. Soumya will then provide commentary on the financials before I talk through the outlook and then open the line for questions. I'll kick off with an overview of the first half performance. There is a snapshot of the key financials. There's been a modest uptick in revenues in the period related to solid Other Accelerators backlog conversion, strong Dosimetry sales and service revenue growth. However, there is a significant phasing of our Proton Therapy revenue recognition to the second half of 2023. Alongside investment made at the group level to future-proof the business as well as prepare for the acceleration in the second half. Proton Therapy revenue recognition has impacted our REBIT. The rate of growth has been relatively slower during this first-half period. However, we are expecting a significant ramp-up in the second half. REBIT was impacted by 3 factors: reinvesting for growth for the expected increase in the activity in the second half, timing of several projects that are planned to start in H2 and some unrelated customer-specific installation delays. You'll recognize this slide from our full year results. We remain committed to the key objectives laid out for each business unit. This is underpinned by a group-wide focus on digital developments as well as sustainability initiatives. Moving on to strategic progress on this objective across the business units during the period. Dosimetry has had an excellent first half with excellent growth in order intake alongside product launches and upgrades. We will discuss the impact of Modus and ScandiDos in more details later. Within Proton Therapy, we have seen an encouraging increase in service revenues. Our commitment to Proton Therapy innovation continues, and we were pleased to start a new research partnership with PARTICLE earlier in the year. Moving to RadioPharma. We are pleased to have launched AKURACY, a cardiac imaging solution and reached another milestone with our joint venture, Pantera. Industrial has seen very strong revenue growth elsewhere, it has been pleasing to see the potential for our technology in a growing range of applications, including food irradiation, more than 100 participants are expected to join our Food Irradiation Symposium in September. Finally, at the group level, IBA has been investing into digitalization, which includes, among others, the development of a business-wide predictive maintenance platform and the launch of a customer dedicated web portal for industrial business. During the period, we continue to make good progress on our 4 sustainability related streams. And I'd like to highlight the B-Corp recertification now in progress with target for 2024. Risk mapping exercise started with Ecovadis on our supply chain and the various ESG initiatives being taken at employee level. Let's take a look at the key figures for the first half. As noted, first half performance was strongly impacted by a number of Proton Therapy factors, including timing of backlog conversion and investment in the business that I will comment more in details in the later. Elsewhere, Other Accelerators and Dosimetry performed very well with sales growth of 30% and 23%, respectively, and a strong profitability. REBIT margin was affected by the combination of the low Proton Therapy backlog conversion already outlined alongside higher investment in sales and marketing and R&D in anticipation of ramp-up in the second half of the year and beyond. Net cash sits at a healthy EUR 61.7 million as part of a scheduled renegotiation and unused EUR 37 million indicated credit facility was refinanced in August, increasing to EUR 40 million. Total unused credit line now stand at EUR 44 million. Let's move on now to a deeper dive on the Proton Therapy business unit. Taking a look at the Proton Therapy market more broadly. So far this year, IBA remains a clear market leader with 60% market share in the Proton Therapy rooms sold. IBA has also maintained its leading position in a number of rooms in operating and total market share. Proton Therapy order intake for the first half was EUR 59 million with 3 homes sold globally. Revenue decreased by 6% in the period, while we expect the second half 2022 has already been the case in the past few years, this effect was even more marked in 2023 due to 3 main factors: an anticipated second half phasing of 5 major projects with no major start shipment or completion of projects in H1, an unexpected shift of 3 projects from H1 into H2 for unrelated reasons; and order intake, which came late at the end of the first half. In addition, there were inflation related costs that were adjusted on project cost to completion. With a record backlog of more than EUR 700 million, comprising 35 ongoing projects, there is continuing focus to accelerate conversion to revenue in H2 and beyond. As we have seen across the group, service on the other hand, continue to grow in Proton Therapy at 10%, a backlog of EUR 670 million remains. Now moving to Other Accelerators performance. Interest in IBA Rhodotron machine remains high, particularly in sterilization settings, where it is meeting a significant gap in the market. Despite a slower intake -- order intake impacted by macroeconomic factors, revenue climbed over 72%. This was thanks to high order intake during 2022 and the no increased footprint, meaning that service revenue is increasing. Demand for IBA's RadioPharma solutions remains strong, and the business remains a market leader for accelerator of [indiscernible] auto-production. AKURACY, an integrated solution for cardiac PET imaging was launched back in May. Elsewhere, we were pleased to successfully install a Cyclone 30XP in Jülich, Germany for the production of the Radioisotope astatine-211. We have continued to make progress with our joint venture, Pantera, focused on increasing the global supply of actinium-225. In the near term, this is enabling production for use in ongoing clinical trials. Longer term, it is hoped that the partnership with a large scale -- sorry, I skipped a line. I forgot to speak about the signed agreement with Terrapower, which will in near-term enable us to produce doses for ongoing clinical trials. But longer term, this partnership, it is hoped, it will allow large-scale supply of the isotope. Post period, we made a EUR 20.4 million contribution to the capital of Pantera, mostly in kind with another EUR 20.4 million equity was also brought in by our partner in the joint venture, the SCK CEN. Post period, we were also pleased to sell 3 further machines, including CycloneKIUBE, Cyclone IKON in China. Alongside the Cyclone IKON, a strategic collaboration has been signed with the buyer for the production of radioisotope for cancer diagnosis. Taking a closer look at the financials, I'm pleased to report a solid order intake of EUR 29 million across 8 systems, while this was weaker than last year for the same period, we've already started to catch up. As mentioned earlier, with 3 additional machines sold post period. Equipment revenues increased by more than 20% to EUR 4.3 million due to good backlog conversion. Then installation started in the first half with 21 installation expected to initiate by the full year. The service part of the business performed extremely well, growing by almost 50% due to an increased installed base, several upgrades to existing machine and a strong replacement part business. On the Other Accelerators slide, REBIT loss of EUR 0.5 million includes impact from inflation, particularly in Belgium. Let's move on to the Dosimetry. It's been a strong first half of Dosimetry with order intake reaching another record of EUR 37 million. The 20% uptick is linked to demand for conventional radiation therapy and Proton Therapy quality assurance solutions as well as 2022 Modus acquisition. Sales are up 23% to EUR 33 million with around EUR 1.5 million attributable to Modus. Backlog also increased to a record high of EUR 35.6 million, growing 47% from the end of 2022. This excellent level of sales contributed to Dosimetry REBIT increasing more than 200% to EUR 3.2 million. On the product side, DOSE-X, a next-generation electrometer was launched in April at [indiscernible], we were pleased to demonstrate upgrade Patient QA software, myQA iON 2.0 as well as launching a radiation oncology risk management software called myQA PROactive. During the period, we were pleased to build on the strategic alliance first agreed with ScandiDos in -- last year in August 2022, signing a distribution agreement enabling users to buy the combined myQA iON and Delta4 phantom+ directly from IBA. I now will hand over to Soumya to take you through the financial statements.

Thank you, Olivier. Good afternoon all. First, looking at the P&L, you will note that group sales grew by 6%. This is largely attributable to Other Accelerators backlog conversion, excellent Dosimetry sales and services growth, but was impacted by PT backlog conversion and the comparator with 2022, which included certain Rutherford related indemnities. While G&A expenses were strongly controlled and even beat inflation, rising by just around 1%, there was an increase in sales and marketing and R&D expenses with inflation, higher level of travel and marketing expenditure as we prepare for future growth and product development. I'd also like to highlight the impact of currency fluctuations in the period, which had an impact on our financial results as well as the tax line that increased as we expand into new geographies, especially in Asia. The above impacts contributed to a net loss of EUR 27 million for the period. Now moving on to cash flow. Operating cash flow of minus EUR 43.7 million was impacted by a large inventory increase and an uptick in down payments to suppliers. As the company geared up to deliver projects in H2 and beyond, in particular, in the Proton Therapy and industrial businesses. As outlined previously, H1 has seen significant in levels of investment across the business including in digital costs. Cash flow here was also impacted by medical device regulation costs and by a minor acquisition in the Radiopharmaceutical business. Finally, on the balance sheet, I won't go into much detail, but I would like to highlight the solid balance sheet with a high level of inventory in preparation of backlog conversion and a net cash position of EUR 61.7 million. I now hand back to Olivier to take us through the outlook.

Thank you, Soumya. And looking ahead, we are confident that the second half will see strong performance, not just in Proton Therapy, but also in all our other businesses. underpinned by the quality of our backlog and the ongoing preparation by the full organization at IBA to convert into revenues. We are reiterating our midterm guidance today as laid out at the full year, aiming to deliver 10% REBIT on sales heavily weighted to after 2024. I would now like to open the floor for questions.

Laura Roba from Degroof has a question.

Can you quantify the impact of the postponement of the 3 PT system that we're supposed to be installed in H1 on REBIT?

Well, we don't give specific numbers, but we can certainly several million euros. It's calculatable in millions. Well, what I can say is that basically every project, if you look at 1 ProteusONE project, which is in the region of revenues of around EUR 20 million or so and delivers over around 3 years. Well, there's a big bump usually where around 30% of course, are recognized at shipment and at least to revenue-related revenue recognized also at the point of shipment. And since those have shifted to H2, you can basically more or less calculate what the impact of the shift of 3 projects into H2 would be.

Okay. And 1 more question on H2. How confident are you that these 8 systems will be installed?

Pretty confident, otherwise we wouldn't have mentioned it in the results call. I don't know if you have any...

I think what we can say is that 6 out of 8 is fully under our control, because we speak about what we call the outbounding phase. Outbonding phase means we are putting all the equipment into the boxes to be shipped and this is fully under our control. For 2 others, it depends on readiness of the buildings of the customer. So this one, let's say, a bit more less particularly some -- less under our control. Otherwise, we're pretty confident that it will happen.

We have a question from David Vagman online. David?

Maybe first to come back on 2023. Could you give us a rough idea of where, let's say -- very rough idea, let's say where the 2023 REBIT could land, maybe give us a range. Should we expect the REBIT to turn positive for H2, so basically? And then the full year REBIT to maybe to turn positive? That's my first question. And second question, given that all the PT projects landing in H2, what level of PT equipment sales growth rebound should we expect, again a range could maybe helpful. The last question on the Other Accelerators. You had a very good -- very high level of growth -- this growth H1. Could you explain us why we didn't see more operating leverage, so in terms of profitability? And how should we think about the profitability or the Other Accelerators so for the full year -- at the full year level, the margin side.

Maybe I'll start by the last question, and I cannot be specific, because we don't give short-term guidance. But what you will see in Other Accelerators is a bit similar to what we see in Proton Therapy. So yes, we have seen growth in the first half, but we expect even more growth in the second half. And you have a bit of the same effect. Yes, we have inflation, but we have also prepared for that growth. And therefore, we have invested into these 2 businesses as well, same kind of narrative then on Proton Therapy. So we have an increase of sales and marketing expenses and research and development, which basically has compensated for the operational leverage. But once again, we're doing it because we expect an acceleration of the growth in Other Accelerators as well. For the rest, I think it's going to be a short answer, because we don't want to give specific guidance -- on short-term specific guidance. So it's difficult to answer your question, even with a range. Once again, and I think we have already alluded to that, we can expect a second half very different than the first one.

And maybe a very quick follow-up, more on the general climate. Though we saw even if the book-to-bill remains above 1 for Other Accelerators, we saw quite a drop year-on-year, I would say. What can you tell us about the -- in general, on the client side, let's say, their willingness to invest? And so we see some hospitals clients struggling for other type of suppliers. Also on the clinics, maybe the industrial clients, do you see them postponing projects, canceling projects due to inflation, due to higher financing costs or macro uncertainties?

I mean in RadioPharma solution, we don't see that. We have the same momentum around the world. We're pretty spread around the world as well. So we're not very market-dependent. On industrial, we witnessed a bit of a pause in terms of order intake, even though we are confident it will resume, there's a bit of a bullwhip effect on the medical device over the consumable or the -- how do we call the small medical device -- disposable medical device due to post-COVID bullwhip effect. So they have built up significant inventory. So they are a bit less in a hurry to build up sterilization capacity, and indeed. So I think from what we see in the market, we expect it to resume in the second half. But definitely, we've been impacted in the first half by a bit of a pause on the sterilization market when it comes to order intake.

Maybe just to add on that. If you remember, the growth in the industrial business was coming from several angles. It was coming, of course, from a growth overall of the overall sterilization volumes, but also from a conversion of existing technology to [indiscernible]. So I think, indeed, as Olivier said that on the volume side, it's probably getting -- it got slightly slower because of the effects you just explained. On the conversion side, we expect that, that conversion will continue as an industry trend. And as mentioned earlier on, for example, we are also seeing encouraging discussions on food irradiation. So we're also seeing that potentially there will be other avenues of increased volume than the medical one itself.

And having said that, there is no change whatsoever in the plan to convert a big part of their capacity to [indiscernible], so it's more of a pause than questioning the idea of doing it -- the commitment remains extremely strong with the big yes.

[indiscernible].

My first question would be on the Other Accelerators. I recall that in the past, you gave like a complete breakdown of the backlog also in terms of Other Accelerators. And I think at the year-end '22 that was still high, the equipment -- how I assumed it would be EUR 150 million to EUR 200 million, maybe. So I'm a bit surprised because you mentioned, okay, we have a good increase for the Other Accelerators, yet it looks like, given the usual time frame, it's a bit below the normal budget. Is there -- address some delays on that front?

No, no. I think we talked a buildup of inventory to be able to deliver. You are really -- you are right. So we see a much stronger H2 in Other Accelerators as well. So we've seen increase in H1, but we'll see a stronger increase in H2.

If your point was -- is the backlog not converting fast though, is there some problem there? Not really. Because if you look at 2022, a lot of the backlog that we had at year-end came in the last months of 2022. And so there's a 12- to 18-month gap between the time when we get it into order intake and it really delivers. And so there it's just normal, we'll see that converting into revenue faster in each and beyond. So we should see a much bigger increase in revenues there also indeed. Because indeed, you mentioned that at some point that industrial has increased by 72%, well, I think it will be stronger in H2.

Can you -- because I think the operational cost, it was well flagged already last year that you were going to invest. How should we look and maybe first on operational costs going into the second half. Will that come down a bit, whether remains stable, whether you go up on an absolute basis? And then secondly, maybe a follow-up in terms of the gross margin mix, which was quite low. Can you give a bit dynamics of order rationale is, because you have the highest gross margin with the shipments -- or, if you can give some color on that.

First of all, on the OpEx, you can expect a stabilization a bit. So no decrease, no increase. But we have reached a bit the attitude -- paying attitude, let's say. So we'll see what inflation will give us for next year. We're pretty confident there as well. I think the first number we gave a bit back to normal, more like inflation plus but no major increase. When it comes to the mix, you're right, I think we -- with a low level in Proton Therapy, we have to a lesser extent, let's say, absorption of our overhead costs. So with the acceleration of the backlog conversion, we will see an improvement of the gross margin, not only due to the mix, but due to the acceleration after conversion.

Was there -- for the Other Accelerators, was there also gross margin contraction there, because like David mentioned, I mean, you grew more than 30% and its -- the profit margins remained stable in absolute base. Is it also because you have some gross margin contraction on that?

No, but there's investment going on also over there. I mean we have heard during the call that you mentioned that we're investing quite heavily in digitalization of that business also. So that has an impact. And of course, we're also ramping up in Industrial also because to meet the order intake that has come in over the last 18 months, we also had to ramp up on procurement on that side. So that's also had an impact. But again, as we expect that the revenues will increase over H2 and also -- yes, to some extent, the margin percentages will increase because many of the contracts that we sold later on, later in 2022, had better margins than the previous sold ones. I think we'll also see an improve over there. Go ahead, Laura.

And just have 1 question from my side. So you mentioned an uptick -- an anticipated uptick in order intake in PT. Could you provide a bit more color on that? How does the pipeline incline like?

I think there's quite a good momentum in the U.S. And in China, I believe -- so yes, U.S. and China.

And some other parts of Asia also.

Yes. Let's say, U.S. and Asia. Yes, we are in good momentum.

David has a question online. Go ahead, David.

Yes. One more question on the gross margin and inflation. Can you break down, let's say, on the drop of the gross margin in H1 versus last year. So we had, of course, the -- I think, the EUR 7 million related to PPI and then you're not playing, let's say, so to speak, the inflation of [indiscernible] and I don't know, maybe staff as well the technical staff and you rather referring to the let's say, the scale impact of having less revenues than anticipated. So can you, let's say, break down a bit between, let's say, 1/3 of the drop in margin is inflation, 2/3 is just scale volume. Can you -- should we think about it this way?

Well, I think a major portion, more than 50% is really down to a non-absorption of overheads. And because if you read through the press release, you may have seen the actual cost of our projects have really not increased a lot on the overall cost basis, which is basically hundreds of millions of euros, because EUR 700 million revenue backlog, you can make a rough estimate of what that means in terms of costs. We've only seen around 1.2% cost increase. So that's not a lot. But what you do have is that when you have a cost increase that hits your P&L directly, because you also have to readjust your past margin to the new margin if -- I'm sorry, that's bit technical, but basically, it hits directly in the period, even though over the duration of the project, it's a small cost decrease. As well as that has a double effect on the margin for the period. Now if I look at the overall gross margin, I think more than 50% is indeed related to non-absorption of overheads. There is some level of product mix. We do have some projects, which have been sold at lower margins, and we had some level of delivery of production, I would say, to those projects rather than to the ones that are higher margins that are coming in the future. So I think what we expect is that, indeed, while it won't -- there won't be a crazy improvement on the gross margin, I think there will be some level of improvement in gross margin indeed as we start to absorb more.

Okay. Not crazy, you mean improvement in H2. That's what you mean?

Yes.

Okay. And maybe to finish on inflation and gross margin. When should we see really like an improvement or, let's say, you not being impacted any more by inflation at the gross margin level, i.e., what I mean is when in your orders, you would have, let's say, correctly priced the raw material inflation and I don't know, technician inflation, et cetera, or protect it yourself maybe also contractually. Is that more something for 2024 or 2025, when you would have processed, let's say, enough of your historic backlog.

I think to some extent, we've already mentioned it that after -- and during the COVID crisis, we started to adapt our contracts to make sure that we are able to pass on a portion of the cost increases to our customers, and that certainly happened in all the contracts that have been signed then. We continue to have some contracts that were signed before that period and indeed in some of those, it's more of a negotiation with our customers. We've been able to transfer cost to them in many cases, in some cases, not. But indeed, I do expect that, that will -- that effect will be smoothed out over the coming months as we have more and more of the projects where we do not have those costs -- those extra costs attributable to IBA.

Okay. So let's say that the historic covering is more something to be solved in the next months rather than, let's say, in the next 18 months?

Yes. Well, I mean, our backlog, as you know, for most projects convert over 3 to 4 years, some projects, it can be longer, because you have some projects which get stuck out there, on which it takes much longer to convert. But any day, it's probably something which is a question of -- I don't know, the next couple of semesters, I would say.

I have a small question on the number of Proton Therapy systems, which are generating the services, there was a bit of a drop in there from 41 to 37, if I'm not mistaken. Just trying to understand why nevertheless, your services revenues are up.

That's related to Rutherford. So we have removed the other Rutherford contracts from our services because those stopped. But then we've been renegotiating new contracts in the meantime. And of course, we had new contracts that came into service also during the period. And so one compensates the other basically.

Okay. Then on the cash flow going forward. You have, of course, the working -- the investments in the inventory to ramp things up. I think -- is that for everything in the second half or also a part related to everything that needs to come with the -- yes, with the project in Spain, how should we see if it's for the Spain project. I don't expect it to see it normalize like in the second half. So how should I look at it for the second half? And when should we see like a full normalization?

So indeed, the inventory buildup that we are having here right now is not only for Proton, by the way, it's also for the industrial and even for the RadioPharma business because last year, that RadioPharma business also had a very high level of order intake. Of course, the rotation cycles for RadioPharma and industrial are smaller. So for RadioPharma, it's really short, it's in between -- I would say, on average 6 months or so; for Industrial, it's still between 12 and 18 months, but still much shorter. So we are already procuring also for beyond 2023 H2. I would say that we will probably see some level of drop of the inventory over H2 but it will come back to what it was end of 2022 because we continue to procure for 2023. And just as you said, indeed, the 10 deals in Spain are also going to deliver some level of revenue in H2. Of course, they will not be shipped, but there will be some level of recognition as we have a buildup of users.

So can you explain it, if I understand this correctly for the Proton Therapy delays. So what you mentioned in the press release was that there were 5 systems planned for the second half. These remain -- and originally, there were 3 plants for the first half, and these 3 got postponed. That's correct, right?

Yes.

And in terms of capacity, there [Technical Difficulty] that should not be?

No, because we have dedicated teams who make sure that the inventory shipped out and of course, the installation is dedicated. We have a question from Simon. Go ahead, Simon. I think, you are still on mute.

Yes, I was. Sorry about that. A very quick one still on Proton Therapy. So the first half, there was not a single installation payment coming in. Second half, let's assume that we'll have 8. Every installation shipment or whatever brings about EUR 3 million on average or even more as a revenue for you. So is it fair to say 8 x 3, that's going to be the difference, first is the first half contribution for Proton Therapy?

That's an assumption.

I mean it's just based on everything that you're saying. So that basically means that your results should be EUR 24 million in the second half for PT indeed?

Are you speaking on revenue, Simon?

No. Just the delta, because you get the money in, which is different from what happened in the first half.

No, it's not related to cash. As you remember, our cash is completely dissociated from our revenue recognition, because cash is based on milestones and revenue recognition is based on cost recognition. But if you look at it from another angle, basically, indeed, I think you will -- we will see a very big ramp-up in revenue in H2, because every shipment, as I mentioned, has indeed a big chunk of revenue associated with it, which has not got any relationship with the cash, at least not direct. But indeed, it does lead to a big level of revenue recognition as that cost is registered on that project. On the number itself, I'm not going to say anything, but the 8 projects are a mix of ProteusPLUS and ProteusONE and you need to remember that the ProteusPLUS contract, of course, is worth much more than a ProteusONE and so there could be a much bigger level of revenue recognition on those ProteusPLUS contracts.

Okay. And then on the Other Accelerators, can you give a bit of an example on investment to future proof, because there's been already a segment that's been doing very well for the last 2 years, I would say. And can you quantify how much that investment was, because we have -- I think we run a little bit with the understanding that the margins in the Other Accelerators are significantly higher than in Proton Therapy.

It's a fair assumption. I can give you the example, like we are currently installing a number of machines in the U.S. for Industrial -- and historically, in the U.S., we have no field service engineers to maintain the machine in the U.S., and we're building a team to actually be in a position to maintain the machine as soon as they will be operational. And this has impacted our profitability in the first half, because when we hire someone, we have what we call an applied time, which is the billable, let's say, number of hours of a person, which is very low in the beginning and is increasing as they are trained and fully operational. And we speak a certain number of people that we have onboarded, not only in the U.S., in Asia as well. And train, and that will continue to be trained in 2023 to be in a position to maintain the machine when they will be up and running. So that's an example of investments we've made to build up the capacity. And -- if and when we sell more machines in the U.S., then we can count on them. So there as well, there's a potential operational leverage on something that has been an investment -- a pure investment in the first half.

Okay. But -- and you cannot -- but you cannot quantify that?

No. I can, but I will not. But once again, I think we had a question earlier on why don't we see the operational leverage on Other Accelerators. Well, this is a big part of the answer on why we don't see an operational leverage on the Other Accelerators. So you can actually do the calculation. Do we have more questions online?

No, not for now.

Okay. In this case, I will now close the call, and thank you all for joining. And I think we look forward as you look forward, to updating you on our future -- progress in the future. Thank you very much for joining, and speak to you soon. Thank you.

Bye, everyone.