RaySearch Laboratories AB (publ) (RAYB) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the telephone conference in conjunction with RaySearch's Year-End Report 2019. [Operator Instructions] I must advise you that your conference is being recorded today on Friday, the 14th of February 2020. I would now like to hand the conference over to your speaker today, Johan Löf. Please go ahead, sir.

Thank you. Good afternoon, and welcome to the RaySearch Q4 2019 Earnings Conference Call. My name is Johan Löf, and I'm the CEO and Founder of RaySearch. I have here with me, our CFO, Peter Thysell. And together, we'll try to answer any questions that you may have after my presentation. I will start by giving an overview of our fourth quarter and the full year results. After this, you are more than welcome to ask questions. So after a record first half of the year, license sales were weaker in the second half of the year. In the fourth quarter, our total order intake declined by 6% to SEK 277 million. Nonetheless, net sales increased by 7% to SEK 234 million, while operating profit decreased to SEK 22 million compared to SEK 42 million the previous year. The operating profit was impacted by negative currency translation effects. And adjusted for this, operating profit would have been SEK 37 million compared to SEK 38 million. However, RaySearch operate in the market with uneven order flows where large individual orders can have substantial impact on revenues between quarters. Therefore, we believe our operations and financials should be seen in a longer perspective. For example, for the full year 2019, order intake increased 30% to SEK 1,046 million, and net sales rose by 18% to SEK 742 million. And if we go 2 years back, our order intake has increased by 60%. Our operating profit for the full year decreased to SEK 68 million compared to SEK 94 million, and this corresponds to an operating margin of 9% compared to 15%. The lower margin is partly due to our large investments in development and marketing organizations, and this needs to squeeze profit margins in the short term, but it's a conscious investment that is expected to deliver better growth and profitability in the future. Cash flow, adjusted for amortization of bank loans, increased to SEK 72 million compared to minus SEK 48 million for the full year, an improvement of SEK 120 million since last year. All in all, the longer perspective shows that our expansion strategy is working and our RaySearch software solutions for improved cancer treatments are continuously gaining new ground. In 2019, RaySearch has continued to be successful with several of the world's leading cancer clinics, several of our largest customers, including Princess Margaret Cancer Center, MD Anderson Multi-cancer Center, University of Washington Medical Center and Massachusetts General Hospital have decided to gradually replace all existing treatment planning systems and use RayStation alone. During the fourth quarter, we received a large order for RayStation and RayCare from a carbon ion clinic under construction at the Yonsei Cancer Center in South Korea. We also received a large order for RayStation from the Shanghai Proton and Heavy Ion Center in Shanghai, China. And in February 2020, MD Anderson Cancer Center in Houston in United States placed a SEK 40 million order for additional RayStation licenses in order to replace all its existing treatment planning systems. These orders clearly show that RayStation is the technologically most advanced and most effective treatment planning system in the global marketplace, and orders confirm our market-leading position among the largest and most prominent clinics. Our market-leading position for RayStation also creates an opportunity for RaySearch to sell its other products to existing and new customers. However, RaySearch market share among smaller clinics is still relatively small, particularly in the U.S. Small clinics, according to our definition, have only 1 or 2 treatment delivery machines. These clinics usually have both treatment delivery devices, software systems from a single supplier, and they make up about 80% of the total number of clinics in the United States. Small clinics have different conditions and needs compared to the larger clinics, therefore, we have developed a special strategy that makes it easier for small clinics to move to RayStation. We also see it as a particularly important task for us to intensify the work of reaching out to the small clinics during this year. And we will demonstrate in concrete terms what benefits RayStation can offer to also these clinics, regardless of size. Our development work also continues at full strength. RayStation and RayCare are already the leading systems on the market for simplifying and streamlining the highly complex workflows of cancer care. And we are determined to advance our leading position in 2020. More and more clinics are currently implementing RayCare for clinical use. On February 6, we also achieved an important milestone for our strategic collaboration with IBA when we completed all validation tests for RayCare and the connection to IBA's proton delivery system. The tests were performed at the UZ Leuven Hospital in Belgium, and they are a crucial step for this hospital to start treating patients with proton therapy. The development work for our treatment control system, which is new product, RayCommand, and our new machine learning system, RayIntelligence, is proceeding according to plan and we will launch both products in December this year. So all in all, we have both challenges and opportunities, and I look forward to an intense and exciting year 2020. This concludes my presentation. Peter and I are now ready to answer any questions. Thank you.

[Operator Instructions] And your first question comes Kristofer Liljeberg from RaySearch (sic) [ Carnegie Investment Bank AB ].

I have 3 questions. First on the RayStation, license sales, which has obviously slowed quite considerably in recent years. What do you think needs to happen for growth to pick up again? And what do you think is a reasonable longer term, medium-term growth for that part of the business? Then on RayCare, you mentioned that you are taking some orders, but when do you expect the more full commercial launch where you could probably also price it higher without discounts, et cetera, including the data from the Varian and Elekta machines, is that still expected to happen in this year? And my third and final question related to operating cost. How do you think about that now when growth maybe is a little bit slower than what we have seen historically?

Okay. I'll start to answer -- try to answer a couple of your questions, and then Peter can fill in. So as I've said regarding the RayStation growth, we need to break into these smaller clinics. I mean, obviously, we have -- out of our 600-and-some clinics already, there are smaller clinics as well, of course, goes beyond 60 huge centers out there only. And so we have a spectrum of medium-sized and smaller-sized clinics already as customers. But we need to be more successful in this area to have the -- have growth. The Chinese market has been close for us for a number of years due to changes in the regulatory situation. Now we have achieved clearance there. So we -- so the Chinese market will come back. We have -- for the customers there already, we will have them, during this period of getting regulatory approval for RayStation for the Chinese market, we haven't been to sell there. So there has been a loss as well. So this coming in us being more successful in achieving uptake from the smaller clinics with 1 or 2 linacs are the main drivers for accelerated growth. The -- I think you also asked about the growth rate, and that's the sort of forecast that we don't give, exactly what to expect in terms of growth rate. The second question, I think, related to the -- when there's a full commercial, well, launches there, but RayCare has been commercially launched, obviously. The sales to -- I think that the question was really about when the sales really pickup there.

Yes, what I mean is, I guess, for Elekta and Varian, you need agreements with Elekta and Varian. I don't know if you agree on that but.

Yes. Not necessarily, but that will help of course. There are other ways to sell new systems. But this is progressing, and we cannot give detailed information about that, and we haven't stated when it will happen because we're not allowed to say exactly when it will happen. But eventually, it's going to happen, for sure. And that will have a positive impact of course on RayCare. But in general, RayCare is maturing at a very high pace. And the more customers that bring it into clinical use, the better the e-sale will be to sell the system. But it was a similar situation with RayStation in the first few years. We -- there were a few -- actually a few years where we sold only a couple or a handful of systems, and it picked up over a number of years, and then it ramped up quickly. So there are 2 differences compared to that situation back in 2009, then we had no customers at all in the direct clinics that customers are looking for RaySearch. So that's different now since we have over 600 direct customers. So that's a better situation from that perspective. The same that weighs in the other direction is that RayCare is a more complex system to install and to convert from and all the way as to RayCare is more, well, elaborate process, so that will slowly ramp-up down. But overall, the reception of RayCare and the excitement about RayCare is very palpable and clear. And we have no fear that this will not ramp up. I will not give exact time frame when this will happen, but it will, for sure, happen. There is no other way.