Earnings Call: Q3 2020

Oct 22, 2020

Quarterly report

Welcome everyone to today's webcast as part of the presentation of the Q3 report. This webcast is presented to you by Henrik Bergentocht, our CFO and me, Tim Trond, the CEO. In the first part, I will give a short introduction about CRAD, take you through the financial highlights, followed by an analysis of the sales results and finish with commenting on the key events. And we will guide you through the financial review before I will finish the presentation with an update on the market. At the end of the presentation, there will be a Q and A session. This webcast is usually very well attended from existing investors, but also a group of investors that have not followed CRAD for long. Therefore, we will finish the presentation with the market overview and CRAD's position within this market. Like always, you can post your questions through the chat function and we are happy to answer them before we close this webcast. A recording of this webinar will be made available on the website in the Investor section after the live broadcast. Okay, let's get started. C Red is active in the field of cancer treatment. Our customers are hospitals that fight cancer with radiation. In modern high precision radiation therapy, accurate tumor alignment is crucial for a safe and successful treatment. CERAT positioning products are supporting this process and are fully integrated in the clinical workflow. Over the past years, Ciret has been growing significantly in terms of revenue and profit. Last year, revenue exceeded SEK 200,000,000. Our mission summarizes our overall goal. Seeraj's cutting edge solutions ensure exceptional high precision, safety and efficiency in advanced radiation therapy, helping to cure more cancer patients and improve their quality of life. CERant has sold close to 600 systems, whereas the large majority is installed within what we call the advanced markets of radiation therapy. These countries are marked in orange on this map. With offices in Sweden, Germany, France, Belgium, Florida, in the U. S. And in China, we are serving our customers through our sales and service organization. In other markets, CRED is represented by distributors. Especially in China and North America, Cirent is cooperating closely with the Swedish vendor of linear accelerators, Elekta. This cooperation gives us great exposure to the market and is by now yielding results. Looking at the financial highlights from the Q3. The COVID-nineteen pandemic continues to have an impact on the world economy and so on our business, especially in North America and also parts of Europe. Despite implications caused by the pandemic, order intake went up noticeable in the quarter and exceeded SEK 80,000,000. We closed the quarter with a total revenue at about the same level as the same period 2019, still partly impacted negatively by the pandemic since installations and deliveries have been delayed. Operational expenses were measurable lower than last year, generating a record high quarterly profit of SEK5.4 million and a net result of SEK3.8 million. Taking a closer look at our the results from our sales activities. We are closing the Q3 with a total order intake of SEK80.5 million compared to SEK69.7 million in the same period last year, a positive order intake development of 15% year over year. It is encouraging to see that the sales of our positioning products across all regions grew by 18% again. Looking at the full year, we see a very similar picture. Service business was somewhat slow in the beginning of the year, but now it is obvious that customers started again to sign up for service contracts. Order intake in this category grew as impressive 76% in the Q3 and remained about on the same level as previous year for the full 3 quarter period. The focus of our sales efforts is on the positioning product and related service contract. A decline in our laser business of 27% is from a fairly small level during the Q3. As a note, the sales of the distribution products have been stopped in the Q3 2019. So that's the result or the reason why we have no order intake during this year in this category. I think we can be very satisfied with the overall development of the order intake, especially in light of the circumstances that we are exposed to. Asia inclusive of Australia, continues to deliver very good results. Order intake grew with more than 60%, both in the Q3 and in the period from January to September. Whereas this trend includes a few large wins, such as the products in Australia, I will come back to them later in the presentation, it shows the growing adoption of service tracking in these dynamic markets. Order intake in Europe decreased by 12% during the quarter. We saw variations in the purchasing activity between the different countries, largely correlating with the local situation of the pandemic. The South European countries were significantly more affected in Central and Northern Europe. In the Q3, we see that the business activity is resuming in North America and contributing to an order intake in the region that is somewhat exceeding previous year's result. The first half year of twenty twenty was very much hampered by the pandemic, whereas it is very positive to see that customers are reengaging in sales projects. The cooperation with Elekta in North America is contributing to the total and shows results. In the United States, an update to the reimbursement system for healthcare providers has been released during the quarter. Whereas not all the details are entirely set, it is already now obvious that the system, the new system incentivizes cancer centers to adopt high precision treatment techniques. Seabed's view on this development is very positive, both for the patients but also for the future of the company as our products are predominantly used for so called stereotactic treatment where positioning accuracy is crucial for the treatment outcome. The positive development in orders over the past quarters has translated into a strong growth in revenue in APAC, but also in EMEA. The very weak order intake in the beginning of this year impacted revenue for the region Americas. As mentioned earlier, order intake in the 3rd quarter has been picking up and will strengthen our sales and revenue in the region again. Total revenue decreased by 5% for the full period full year period. The again growing order intake, especially in the positioning products, is not yet entirely reflected in revenue growth. But I think it is very encouraging that strong revenue growth in to see the strong revenue growth in the service business with impressive 41%. It is obvious that Zebra has been very much affected by the pandemic, but we also see that the business is recovering. We cannot predict the future development of the pandemic and its implications to our business, but I believe we have adapted very well to the new situation and managed to develop our business despite the circumstances. Let's take a look at the key events during the reporting period. In mid-twenty 19, Cira engaged in a distribution partnership with the Swedish vendor of linear accelerators, Elekta. The distribution agreement enabled Elekta to bundle Seera products in their quotations to the customer. The partnership was launched in America and has now been expanded to China. China is a very important market with a large installed base and very high growth rates in terms of new linac installations. A key win from a strategic perspective is the project in Shanghai at the Shanghai Proton and Heavy Iron Hospital. The project is an important milestone for us to strengthen our position in the fast growing proton and particular therapy market. The state news South Wales went out with a tender for service tracking. Together with our partner, Gammergus, we were successful to convince and to get customers excited about the Seaward solution. Whereas several smaller orders have been booked in the past quarters, Seaward received a large order for 2 sites with a total order value of SEK11 1,000,000 including multiplead positioning systems during the Q3. This is a great success for CERAT and we are excited to be the selected partner for this large scale rollout in the market. Then I would like to comment on the change of leadership in Zebra in North America. Brian Law, who was the former President of CRAD Inc, that's our North American entity, left CRAD in the beginning of the 4th quarter to pursue an opportunity outside the radiation oncology market. The process for new recruitment in U. S. Is ongoing and his duties will be managed by internal resources until the replacement has been established. I want to emphasize for the North American market is unchanged. We will continue to work with the established sales model based on our direct sales force and the Elekta Corporation. And this leads me to hand over to Horker to Henrik. Apologies to Henrik and he will guide you through the financial review. Thank you, Tim. So starting off with a more detailed look at the P and L statement line by line. Total revenue for the quarter amounted to SEK52.6 million, a decrease compared to last year of 5%. In constant currencies, the decrease was 3%. The strong order intake in Asia during the year has led to a significant growth in revenue of 50% during the quarter. In North America, order intake was very low during the first half year as a consequence of the pandemic, resulting in low revenue during the quarter and a decrease of 74% compared to last year. The recovery in order intake in the region will materialize in future revenue, as revenue recognition is dependent on hospitals and cancer centers actually being able to receive and install equipment. Revenue in EIMEA grew with 14% in the quarter, confirming that treatment centers and hospitals, to a greater extent, now are able to install equipment, but still impacted by the pandemic. Revenue for the full period decreased by 5% and amounted to SEK 147,300,000. Gross profit. The gross profit margin was 60% during the Q3 compared to 59% during the same period 2019. Fluctuations in gross margin can be expected in shorter periods as it is dependent on the product mix and sales channels. External expenses. Expenses for the Q3 amounted to SEK 10,500,000 as compared to SEK 13,600,000 last year. The reduced cost is a consequence of active and natural cost reductions during the pandemic. Less spending on marketing and travel are the main drivers behind the cost decrease. The company will continue to carefully monitor its cost depending on how market conditions develops in light of the pandemic. For the full period, operational expenses amounted to SEK 30 200,000 as compared to SEK 38,600,000 last year. Personnel expenses for the Q4 amounted to SEK14.7 million compared to SEK16.6 million last year. Seabed has taken various measures to lower personnel expenses in order to mitigate lower revenue coming from volatile market conditions due to the pandemic. Among other measures, the company has taken benefit from different short time allowance programs available in countries where the company operates. The cost reduction measures implemented, explained by personnel expenses, are in fact lower compared to last year, despite the slightly higher average number of employees. The average number of employees during the Q3 amounted to 58 compared to 57 the corresponding period 2019. At the end of September, the number of employees in the group amounted to 56 as compared to 59 last year. Capitalized development costs amounted to SEK 1,400,000 in the quarter compared to SEK 1 point 5 million last year and are related to continued development of the positioning products. For the full year, SEK 3,800,000 has been capitalized compared to SEK 3,700,000 the corresponding period last year. At the end of September, total capitalized development costs amounts to SEK14.6 million as compared to SEK22.7 million last year. Revenue and cost combined, operating income for the quarter amounted to SEK5.4 million compared to SEK1.7 million last year, corresponding to a margin of 10.3% compared to 3.1% last year. The increased operating income, despite the decrease in revenue, is reiterated by lower operating expenses related to the COVID-nineteen pandemic. As said, the cost decrease is a mixture of active decision and also a natural decrease due to less travel and marketing activities. Net results after tax in the quarter amounted to SEK3.8 million compared to minus SEK1.4 million last year. Tax expenses of SEK1,500,000 refers only to the reversal of deferred tax assets for the Swedish entities and does not affect cash flow. The reversal of the tax asset is due to a positive result in the Swedish entities. Total deferred tax assets amounts to SEK 21,200,000 at the end of the period. Next slide, please, which displays revenue and gross margin over a longer period of time. As said, the gross profit margin was 60% during the Q3 2020 compared to 59% during the same period 2019. We can expect fluctuations in the gross margin in short term period as it is dependent on the product mix and sales channels. But with this, Q3 is on a good solid average. Next slide, please. This slide is putting total operating expenses in relation to revenue for the past 4 years. And the purpose of this slide is to put CRED's growth journey into a context, where investments have been made in the organization to support this growth, hence, generating an increase in total operating expenses. The growth outlines operating expenses and revenue for the last 4 years. And we can see that these investments are, in fact, paying off in the sense that the revenue trend line has a steeper upward leaning curve as compared to operating expenses, equally meaning that the average yearly operating expense in relation to sales is going down. It should, however, be noted that 2020 certainly is impacted by the pandemic, both with regards to lower revenue and also lower operating expenses. Next slide, please. Showing operating profit and revenue over a longer period of time. As seen, the business of Xira is volatile between the quarters and is expected to be so going forward since larger single orders has an effect in the quarter where they are delivered. However, the trend line clearly shows that Zira is on a growth journey. The company also since mid-twenty 18 has reached an important milestone in the sense that the company is delivering profitable revenue growth. Despite the challenges that the pandemic has presented, Zirel has still managed to deliver a positive operating income during 2020 and even a record high operating profit in this Q3. Next slide, please. Displaying cash flow for the Q3 and the 1st 9 months. Total liquid funds at the end of the quarter amounted to SEK94 1,000,000. In addition, the company has an unused credit facility of SEK 20,000,000. Operating cash flow for the quarter contributed with SEK 30,000,000, where changes in working capital contributed positively with SEK 5,400,000. In February, a directed rights issue was undertaken with an issue of SEK 2,500,000 B shares, fueling the company with SEK 102,000,000, net of issue related costs. Following the rights issue, a bank loan of SEK 20,000,000 was fully amortized and the company ceased to use factory. Furthermore, warrants have been converted into shares during the period of SEK2.9 million. In summary, the above has generated a cash flow from financing activities of SEK68,900,000 year to date 2020. Next slide, please. Display our balance sheet at the end of the Q3 with a couple of comments to be made. On the asset side, I want to highlight 2 things. 1 is that inventory is on a relatively high level, which is a deliberate decision that during the pandemic have a buffer to maintain delivery capacity. Secondly, and again, is the cash position of SEK94,000,000, which is at a very solid level from a historical perspective. On the debt and equity side, I want to highlight that solidity is at a historically high level of 75%. And also that the company, after the repayment of the SEK 20,000,000 loan in quarter 1 and the seizing of factory, now is completely debt free. Next slide, please. Displaying our current order backlog and the development of the same over the last few years. And the order backlog represents orders that have been received but not yet delivered and invoiced. The backlog amounts to SEK 305.8 million at the end of the quarter, an increase of 33% compared to the same period last year. From the total order backlog, SEK160.6 million relates to products and SEK 145.2 relates to life cycle business or service contracts. SEK 26,400,000 of the order backlog related to lifecycle business will be recognized as revenue within 12 months, as service contracts are recognized as revenue over the contract period. The service contract can be up to 8 years, while the most common contract period is 5 years. And by that, I hand over to you again, Tim. Thank you. Henrik, thank you very much. So as promised, I would like to give a bit of a market overview and start with this slide highlighting the distribution of the radiation therapy market worldwide. So if we look at the what we call advanced markets comprising North America, East Asia and Western Europe, we see that roughly 9,000 linear accelerators are installed in this region. So CERAT has the firm belief that surface tracking, our positioning products are on its way to become standard of care. With the current market penetration of around 20%, there's still plenty of potential for us to grow in these regions. If we point your attention to the table in the lower right corner, I would like to give a bit of an overview on why we believe that the surface tracking implementation is developing and is on its way to become standard of care. We see here the trend in radiation treatment techniques, whereas the conventional technique is based on this study here from 2016, still the dominant treatment technique is roughly 60%. But it is expected to go down to around 28% until the year 2030. And going to be replaced by high precision treatment techniques such as SIS and SBRT, but also hypofractionated treatments. Here we see a very strong trend to develop this from 21% up to 39% and also for the hypofractionated treatment is a very strong development forecasted here. So these high precision treatment techniques, they require accurate positioning, accurate alignment of the patient and that is exactly what CRAD is providing to the market and that is the underlying reason for the rapid development of our products and the implementation of our products in the market. So looking at the C brand value proposition, essentially, there are 2 aspects to it: treatment efficiency, to improve treatment efficiency and to improve treatment accuracy. If we look to the diagram in the lower right corner here, patient positioning can be done in various ways. And this is always a compromise of time and accuracy. And this compromise does not necessarily need to be a negative compromise in many cases, and that is dependent on the clinical indication, either or method is more favorable. However, I would like to mention that the current standard, which is lasers and on the other end of the scale, we have comb beam CT, which is, on the one hand, very accurate, but at the same time, also very time consuming. Laser positioning is a very fast way, but also has very limited accuracy. So if you look at the Seurat SIGLT solution, that is our positioning product, this is an excellent compromise between high accuracy and a fairly quick setup of the patient. And that is really the motivation for many customers to adopt this technology into their clinical workflow. And we found some studies really providing evidence of the increasing adoption of our technology to the clinical workflow. What we see here on the left side is a chart displaying the distribution of different disease sites treated through radiation therapy across a number of treatment centers. And essentially, what we can conclude is that there are small variations from year to year, but essentially the distribution is unchanged. And our assessment is also that there will not be a significant change in the distribution over the next years. But the interesting piece is looking at the adoption and comparing the year 2015 and today 2020, you see that 5 years ago, the clinical implementation was primarily on breast treatments, which was accounted for roughly 20% -twenty 5 percent of the fractions delivered with radiation therapy. Looking at 2020, however, we see that more than 1 disease site, namely 5 disease sites, are basically treated with the usage of surface tracking. So this is accounting for a bit more than 70% of the fractions delivered in radiation therapy department. So we see a very steep upslope in terms of adapting surface tracking to treat more patients with our technology. And again, this is another driver or showing how the implementation is developing and underlying our assessment that our technology is on its way to become standard of care. So that was what we had prepared for today's webcast. Looking at the financial calendar, we have the publication of the year end report scheduled for January 28, 2021. So like always, there's now the possibility to ask questions. Please use the chat function of the webinar software to address your questions and then we are happy to go through them. So the first question is related to the Proton order in Shenzhen that we published a press release that SeaWorld has signed a letter of intent some time ago. And the question is if the order intake will or if this project will be recognized as order intake during Q4. As said, we have signed a letter of intent. And in order to issue the final purchase order, so called supplier evaluation is taking place. This is an ongoing process. And as soon as this process is finalized, we are expecting to receive the order. Then the next question is, if we can give an estimate in how much of water intake in U. S. And China that will be generated through Elekta agreement going forward. Well, I'm not going to make any forecast here, any predictions. I can say and I said it already, agreements actually in both countries are yielding results. And for us, it is an important partnership. It simply helps to have exposure to the market in these fairly big countries with a lot of customers, with a lot of cancer centers. It helps to get the exposure to these customers. So it is an important component in our strategy moving forward. The next question is regarding the one of the last slides where I probably showed the adoption of surface tracking in radiation therapy. The question is why radiation treatment is not used for prostate cancer. Perhaps I was inaccurate or did not succeed to get the message on spot. I mean, there is radiation therapy, of course, also used for prostate cancer. However, the advantage is that surface tracking gives or provides for an accurate patient setup and monitoring during treatment are more relevant or less relevant for prostate cancer. And the reason for this is that the surface, we are looking at the surface of the patient and the surface is fairly far away and the prostate is moving independent from some motion that we can see and recognize on the surface. So there are many indications, as I said, adoption to around 70% of the clinical indications where customers can benefit from having a surface tracking. But there are also a few indications where the benefits are not that significant. The next question is related to the gross margin. And the question is why do we see a slight decline compared to Q2 2020? I'd refer to Henrik to answer this question. Yes. Thank you. The answer to that question is what we disclosed in the presentation. It depends on the product mix and the sales channel mix. And in this particular case, if we use distributors for certain deliveries, that will have an implication on the gross margin. So by and large, gross margin will fluctuate depending on the product mix and sales channels used. So the next question is related to the math behind the comment that the average delivery time is coming back down to 5 months, it means that what you had in the order book pre-twenty 20 is longer than 1 year? Yes, thank you for that question. And to explain this, this has had a lot to do with the pandemic and the comments that we made about revenue is, to some extent, lower because we are unable to do deliveries and installations. So what it means is that more recent orders, end users have had more visibility in their capability to receive and install equipment, while it is a fairly low conversion rate in the quarter. But as you correctly calculated here, all the orders in the backlog are still sitting there mainly due to pandemic related issues. So the next question is related to the CRAP product we offer to Elekta customers who buy their Harmony accelerator. Yeah, I can say, I mean, our objective is to offer the C Wrap products essentially to all customers and that is also to customers that decide for an Elekta Harmony. So the next question is related to our estimate in terms of growth for the next year. Do you have any goals? I mean, SeaWorld is not disclosing any details or detailed numbers here. However, what we can say, along the lines of what we communicated also in the report, the adoption of surface tracking is rapidly increasing. We had a bit of a hit back during this pandemic time. But overall, we are still absolutely convinced that service tracking is on its way to become standard of care. We have seen that also from a clinic perspective, the adoption not only in terms of the number of centers, but also the clinical cases where surface tracking is a useful tool to improve patient care is increasing. So all these are positive indications for a positive development and for us succeeding in this market. There was another question due to or related to the acquisition between Siemens and Varian. So Varian