Hi, and good morning, everyone, and welcome to this second quarter investor analyst call. My name is Peter Nyquist. I'm Head of Investor Relations at Elekta. With me here, I have, for the first time, our new President and CEO, Jakob Just- Bomholt. Welcome, Jakob, for the first call, and hopefully many to follow. Together with Jakob, we have our CFO, Tobias Hägglöv. Jakob and Tobias will present the result for the second quarter and in the fiscal year of 2025/2026. We will start off with Jakob giving some initial reflections on his first quarter as CEO, followed by a summary of the Q2 financials, including the order review announced today. Tobias will go into more details around the financials and Elekta's outlook. Jakob will then present the change in operating model and organizational structure leading to the cost reductions that we announced today as well.
After the presentation, we will, as usual, be available for a Q&A session. Before I start, I want to remind you that some of the information discussed in this call contains forward-looking statements. These can include projections regarding revenues, operating result, cash flow, as well as products and product development. These statements involve risks and uncertainties that may cause actual results to differ materially from those set forth in the statements. With that said, I will hand over the word to you, Jakob.
Yeah, thank you very much. Let me start by talking a bit about some of the initial reflections and then give a highlight on Q2. Tobias, you will go into Q2 financials in greater detail. Importantly, we will get back to Elekta Reset, if you will, our new operating model. On initial reflections, before I go into the details on that slide, I would just say fundamentally, I like what I see. I'm now four months into the position. Obviously, perspectives will modify somewhat, but I do think directionally what we will outline here in terms of strength and challenges and opportunities will set the direction for the company ahead of us. We have been very open. Elekta is not performing at full potential. As incoming CEO, I think that's great. It gives us a lot to do.
It also gives us an opportunity to do better. When we look at the company, we do not feel, and I do not feel, that there are structural headwinds. Of course, we have competition like for any company. The challenges are really within our control to face. That is what we are about to do. Today, we disclose our must-win-battle one . We call it Simplify, Empower, Speed, but I will get back to it. Let me go a little bit in details with some of the reflections. If I start on the positive side, it is not positive. Cancer burden is increasing. You all know that. Cancer incidence is on the rise. Fortunately, due to aging population and growing population, we see more and more that cancer is a chronic disease. You get treated, you are cured, you come back, and then you are using Elekta equipment again.
The second major trend is that there is a shortage of professionals. I've heard numbers up to a shortage of 80 million. That really speaks for us as a vendor into the industry to innovate, to support the professionals with speed and better treatment and more precision. At Elekta, if I turn to the right, we are well positioned. We are number two. We are not number one. That's in many ways an attractive position to be in, but we are clearly number two. Radiation therapy is an attractive and growing medtech segment. We look at the segment likely to grow faster than the average medtech segment. We have many strongholds built up over many years in key markets outside the U.S., strong in Europe, strong in many Middle East, Africa markets, very strong in China, strong in a number of Asia-Pacific regions.
Clearly, what we also imply here is that we are not strong enough in the U.S. I'll get back to that on some of the challenges and opportunities. We are the only dedicated, 100% dedicated company focused on radiotherapy. I think it's such a strength because when you're dedicated, you have to have product passion. You have to focus on your customers. You have to execute fast. We have a well-recognized brand. What I truly cherish coming from a company with more indirect sales force, we have a direct sales force. We are really in control of our commercial execution. When we look at R&D spend, we have been willing to spend on innovation. I think that's right because when you look at the graph again to the left, there is a need for us to innovate. We need more precision. We need more speed.
We are not mature or end of the road in terms of innovation. When you look at gross spend, we spend roughly 12%. It is very high for a medtech company. It is certainly sufficient to realize what I would call future best-in-class solutions because that is the future of Elekta, that we have best-in-class products, highly innovative, and the current spending run rate supports that. We have, if you will, a razorblade model. We sell our solutions, but then we supplement that revenue generation by more predictable, profitable software upgrades, but also service markets. As you see, our service business continues to grow. There are a lot of strengths. We are fairly asset-light. We have, as you will outline, Tobias, good networking capital. Our physical CapEx requirements are relatively low. There are many things to like about Elekta.
If we go on the next page, importantly also, we have a strong portfolio logic. If I just speak a little bit to it, perhaps many of you know, but the products are complementary, both from a brand commercial, but also workflow perspective. If I start from the right, we are building software that really connects the different modalities because that's a customer need. Often when we tender, it's not only a Linac, it's bundled with other products as well. Our Gamma Knife, what started Elekta, that is the gold standard for stereotactic radiosurgery of the brain. We are uniquely positioned with a clear market leader. Same for brachytherapy, actually. It's highly targeted, internally delivered dose for specific cancers. It's not for all. It's cost-effective. It's also attractive for emerging markets. Very often it complements a Linac treatment.
You can get a boost and then you get your Linac treatments or the other way around. We have our Linacs, and we are the only one with both MR-guided and CT-guided Linacs. The CT-guided Linac is really the workhorse for high-volume broad cancer treatment. MR-guided is top of the line with ultimate precision. I want to take away, my takeaway is, and hopefully yours as well, the portfolio logic is good. That is not where we have a challenge. We do not need to slice off or do big portfolio changes. It really makes sense. Of course, if we get into improvement areas and we also believe in the statement that we are not at full potential and the industry is attractive, then what do we need to look at? If we look at gross margin, it is too low.
We used to be in the 40%, a bit up actually in the 40%. We did see a dip post-pandemic or during the pandemic, and we never really recovered. If we look at it now, we have too much single source, too much supplier dependency. Some of them take advantage, and we will double down on continuous engineering to make sure that we have a relentless cost reduction focus in the years ahead. There is not a quick fix, but it is going to happen, and it is certainly viable. When we look at our 12% gross spend on innovation, I do think we need to become more focused, more commercially driven. Elekta comes with very strong scientific roots, strong within academia. I would certainly push us to be a little bit more commercially focused when we take innovation bets in the future.
Of course, over time, we need to grow, add up of the market. When we look at our growth rate, we have to accept that we have been growing over the last really half a decade, even a bit longer, a bit slower, somewhat slower actually than main competitors. We don't like that. Specifically, we need a turnaround in our U.S. business. We'll get back on FDA, I'm sure. We want to preserve our China position where Elekta very cleverly have been early in the market, have localized our supply chain. Overall, when I look at the commercial organization, and as you know, I've taken the regions in direct report, we need stronger commercial execution. We will have to apply cost focus across all spend categories, standardizing our processes. I'll get back to organization, but we are looking at simplification.
It really starts with a new operating model. That's the starting point that then leads into a simplified organizational structure to target faster speed, faster speed on product development, operational execution, commercial execution, really with the goal of focusing on our customers and patients. On quality of earnings, we will work hard to make the link between EBIT and cash strengthen. These are some of the reflections I initially want to share with you. As we'll disclose in the end, we'll give a strategy update with further details during January. If we then look at Q2 specifically, and I'll do it fairly fast, a decent quarter, I would say. We did 1% organic growth, 2% on orders, strongest in Europe, 11%. We continue to see momentum of our product launches. That's good.
APAC saw revenue growth outside China, but it could not compensate for the double-digit decline in China. On China, it is quite positive that we are now seeing growth in orders. They had a depleted backlog. We knew that. We now saw in Q2 order growth. When we look at the momentum, it looks quite positive for second half skew towards Q4. Negative growth of 8% in the U.S., despite actually quite good order intake. Clearly, we need a commercial turnaround. I would say the commercial organization needs Elekta Evo, but we need a turnaround in the U.S. We did have growth in Latin America. One of my first actions as CEO was to change the reporting line of the regional heads reporting to me. We initiated an action to review, to make a comprehensive review of the order backlog.
That is what I want to update you on today. Compared to the order review presented in June, we have implemented, I would say, a little bit firmer interpretation of order criteria in areas such as delivery times, end customer side, down payment price, indexation, etc. There will always be a judgmental call. Is the license there? Is the site ready? Now we apply a firmer interpretation. It is predominantly old orders that we are now canceling. This action, I would say, means we should have better forecasting accuracy, both in terms of sales development and profitability. The cancellation is SEK 2.2 billion. I would say this is it. We do not expect further structural revision of the order backlog. That is for me important to communicate. I have been in it at great detail.
I would also like to stress that it has no revenue impact for this year or next year as such. There is no cash flow impact. We are not going to pay back any customer deposits. That is where we stand. I would like to end by saying it is quite important to take away that we have an order backlog that I consider at a healthy level, two times annual sales give and take based on last year's sale. We have a lot of business to look forward to, if you will. If I close on Q2, book-to-bill of one, all right, or rolling 12-month, importantly 1.09. We continue to see good momentum in Europe. Of course, I like to see over time higher net sales growth than 1%. That is clear. Good margin uptake, close to 38%. On EBIT, 10.1% versus last year, 9.8%.
If you adjust for lower capitalization and higher amortization, it's actually quite a significant improvement in, if you will, cash-based EBIT margin. You will outline, Tobias. If we look at year-to-date cash generation, significantly better than same period last year. Good to see that net debt versus a year ago has been reduced by almost SEK 700 million. That concludes, and I look forward to coming back to the operating model.
Okay. Thank you, Jakob, and good to have you on board here. I will then move into the quarter here a little bit more in detail. You mentioned that, Jakob, that we grew here in the quarter by 1%. This is done in constant exchange rates. We had a decline in our solutions operations by 4%, while our service grew by 7%.
I would also like to mention here that the product launches of Elekta ONE and Elekta Evo had a continued positive contribution in the quarter. Looking at the profitability, we land here in the second quarter at a gross margin of 37.9%, which means a 220 basis points improvement year-over-year. We see that our new products continue to contribute positively. We also have a higher share of our service business in the quarter. Our brachytherapy business, strong development, strong growth in the quarter. Price continues to be positive. As we had in the previous quarter, we have a negative impact from tariffs and FX. This negative impact is 70 and 50 basis points respectively, corresponding to a total of SEK 163 million in the quarter. The operating margin, adjusted EBIT margin, amounted to 10.1%, a 30 basis points improvement.
You are fully correct, Jakob, that we have a reduction in our gross R&D. When you see the impact here, net R&D is increasing in the quarter, driven then by both lower capitalizations and higher amortizations. Selling and admin expenses increased somewhat in the quarter, and this was selective investments in marketing and IT and a bit of the phasing of the Astro cost year compared to last year, as well as then some transition-related costs. We will come back, as you were pointing out, Jakob here, to the program that we are on here. Net income amounted to SEK 229 million, and adjusted earnings per share amounted to SEK 0.65. Let's move into the next slide. FX, I think that we have a similar view here of the FX movements as we had in the previous quarter. How does FX then impact our operations?
Yeah, the first point being is that, as you know, our reporting currency is the Swedish krona. When you have a strengthening of the Swedish krona versus the main currencies, USD and Euro, this means that the sales in dollars and euro actually becomes less worth in Swedish krona, which then leads to, in nominating terms, lower revenues and earnings in SEK, everything else equal, the translation effect as such. Secondly here, we also have more revenues and cost in dollars. When you actually then have a depreciation of the U.S. dollar versus our main cost currencies, euro and pounds, we also have then a favorable currency transactional impact in the quarter. As you see in this table, FX then had a negative impact of 50 basis points on the adjusted gross margin and 60 basis points on the adjusted EBIT margin.
Coming back here to Jakob's point here, we have a reduction of the net debt of SEK 700 million year-over-year, and it's obviously then driven by the cash flow generation. If you look now year-to-date, we have in the seasonal weak start since we're building working capital in the first two quarters to larger quarters later in the year, we normally have a weak start of our cash flow generation. If you compare this to last year, we are about SEK 900 million better when you look at the cash flow after continuous investments. When you look at the quarter, we improve our cash flow year-over-year by SEK 389 million.
This is then driven here, to your point, Jakob, to lower R&D spend, as well as a more favorable development of working capital here with more customer advances, as well as a reduction of accounts receivables. Our net working capital as a percentage of net sales is now a negative of 7%. If you then look at the cash conversion here, it amounts to 91% compared to 65% a year ago. If you then look at some more long-term trends and key financial metrics and look into the net sales, gross margin, EBIT margin, and operating cash flows, which obviously are all key metrics here for driving profitable growth and return to our shareholders, we have seen net sales on a rolling 12-month basis, which is relatively flat year-over-year.
However, we see a positive trend for both the gross margin and the EBIT margin. What we just were talking about is that we have also seen a positive development for the operating cash flow, where we had delivered a significant improvement year-over-year. If you then focus a bit on the outlook for the second half of the current fiscal year 2025-2026 and the full fiscal year, we reiterate our full year 2025-2026 outlook, where we expect net sales in constant currency to grow year-over-year. We expect sales in China to start recovering during the second half of 2025-2026. Furthermore, we expect a continued negative impact from tariffs and FX at current exchange rates. With that, I hand over to you, Jakob.
Yeah. Yeah.
If we move on in terms of driving improvements, we commenced, really 3 months ago, forensic, if you will, of Elekta Data 360 Review as a leadership team and together with the board to assess the situation. Without setting that analysis, we then defined the four must-win- battles, of which we are today disclosing the first one. We call it Simplify, Power, Speed . It is really about a new operating model. I have seen certain comments saying, "Oh, it is a cost-saving exercise." It is not. It is a new operating model. There are consequences of that new operating model that I will come back to in terms of cost-saving. The aim was really to increase the velocity of our product development organization, our commercial execution, and our operational execution.
The secret sauce of a company like Elekta, when we compete with the even larger enterprise, has to be speed, agility, customer intimacy, product passion. What we are trying to do with this exercise, and we will do it, is to simplify how we are organized. We eliminate complexity and certainly become a bit more assertive and insist on accountability. With accountability also comes the ability to empower teams. We move decision-making closer to our customers. In doing so, we approached the organizational review zero-base. We say, "Okay, these are the focus areas. This is how we want the operating model to work. What organizational size do we then need to support those priorities?" We have then moved it into a much more decentralized model with regional-based P&L.
We will take our region's P&L that will add up, give and take, to Elekta's P&L, again, to increase ownership mindset, make sure we drive decisions closer to where we meet customers, increase speed, agility, make people work as owners of their own business, if you will. We then look at this slide. There have been changes to the executive committee. It's not all of these boxes that are part of the executive committee, but they do report to me, with the exception of Neuro that reports to Brachy. Let me highlight some key functions here. We have made changes in the executive committee. We communicated that almost three months ago. We feel good about these changes. We have now hired a new CFO. Thank you so much to you, Tobias, for still being here in the interim.
We have hired a new head of HR soon to be disclosed. We have a search ongoing for a COO. We have strong regional managers. What we did do when we looked at how we are organized is to say, "How can we increase the span of control?" Some of the consequences I will outline on the following page really stems from that we have increased the so-called span of control from six to eight and a half. We have reduced organizational layers from nine to six. You can say, "Is that a big thing?" It's a big thing because it reduces the chains in the chain of command. It makes us more agile. It has significant consequences, not least on management positions. If we go on the next one, then I'll outline some of the consequences.
Based on the new operating model and based on the supporting org structure and a zero-based approach, we have then defined that we need to do a net reduction in our workforce, roughly 10%. We are 4,500 today, and we have identified 450. It will happen pretty quick. It has a major impact on material positions. The targeted cost reduction is no less than SEK 500 million. It is a net reduction. It will have full impact, our Q1, 2026-2027. You are going to start to see impact really from our Q4 this year. If we give a split, because some of the resources are part of our COGS today, 30% we estimate, our COGS goes into gross margin and 70% OpEx. Those numbers may change, but directionally, they are right. We are going to communicate with Q3 latest, the restructuring charts.
I'll just reiterate what it is, what is stated to the right. We are doing this to get speed and agility. We are doing this to firm up our accountability so we can empower our teams. Yes, absolutely, we need cost discipline across the organization. We are doing this to increase velocity across the border at Elekta. It's a big day. I would also say it's a tough day because we have to disappoint a lot of colleagues that they will no longer be part of the journey. Our job is to continue to be successful, financially successful, so we can invest in life-saving technology. That's what we are committed to. We look forward to giving you a further strategy update during January 2026. We are deliberating the date. We'll get back to you in due course.
We will have our interim report early March. We will invite for Capital Markets Day in June here in Stockholm and very much look forward to that with the leadership team standing behind updated financials. Thank you. Let me conclude here by saying good performance, strong performance in Europe. Yeah, Elekta Evo is making an impact. It's also a great product, I have to say. Gross margin improving. Cash flow, as you outlined, Tobias, continues to be better than last year. We have now disclosed our first must-win battle leading to a simplified organization. As I said, really with the view of accelerating execution. We have done a comprehensive order review. Based on firmer interpretation of criteria, we canceled SEK 2.2 billion, but no cash flow effect, no revenue impact.
Great. Thanks, Jakob and Tobias, for a little bit longer presentation, but it was very much needed in where we stand right now. We have still 30 minutes for a Q&A. I think Jakob went through the calendar. There is nothing to add to that. Try to keep the questions two at each time. If you have further questions, you can line up later in the queue. Everybody has a chance to ask a question. By that, operator, we are now open for a Q&A session.
We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their telephone. You will hear a tune to confirm that you have a handle in the queue. If you wish to remove yourself from the question queue, you may press star and two.
Questionnaire on the phone are requested to disable the loudspeaker mode while asking a question. Anyone who has a question may press star and one at this time. The first question comes from the line of Kavya Deshpande from UBS. Please go ahead.
Good morning, Kavya.
Morning. Good morning. Thank you for taking my questions. Two from me, please. First was just around the order review. I understand your reasoning with just applying stricter criteria on the back of the June review. I do not suppose you could provide any more color on sort of the regional exposure of the orders that were canceled. The second was just on the Evo in Europe. Would you be able to compare how it has been doing this quarter versus last quarter?
Appreciate you called it out on the call, but it was not called out in the press release, hence the question, and whether this strength was mostly upgrades or hold-by sales. I do not suppose you could provide color on that. Thanks very much.
Sure. I could do that. Yeah. We did the order review. As I said, we applied the same criteria, but in a firmer context. If we look at regions, it was predominantly our Middle East, Africa region. That is where we saw the biggest impact. It was old orders, some of them up to 5 years. There will always be a degree of subjectiveness. Do we think the site is going to be ready? Is there funding in this or that location? As I said, now we apply the firmer interpretation.
On Evo, up from last quarter in terms of units, marginally, and outlook good second half.
Great. Thanks.
Thank you very much. That's very clear. Thank you.
Thank you. We'll move to the next question, please, operator.
The next question comes from the line of Mattias Vadsten from SEB. Please go ahead.
Good morning, Mattias.
Hello, Mattias.
Good morning. Thanks for the questions. I will keep myself to two questions. I'm after some commentary on sales growth going forward, perhaps after 2025-2026. If we look recent 5, 10 years, Elekta has grown, let's say, around 3% per annum. Order momentum has not been there recently in some areas. It's understandable, for instance, China. With the cost savings also now ahead and the operational improvements you talked about, the third program, I think.
What kind of growth rate do you see doable for the company more structurally, let's say, midterm? Yeah. It sounds maybe difficult to outpace the growth we've seen in recent 5 years. Or am I missing something there? That's the first one. I have another one. Thank you.
We do not provide more guidance than what we have for this year, and that's a positive organic growth rate. On mid to long term, we will come back to that at Capital Market Day. On cost saving, I'd just like you to come back to what I said. We are adjusting the operating model to accelerate commercial execution. As a consequence of operating model, there are cost savings. Over time, we clearly need to grow, add up of the market. That's our ambition. We will come back with the detailed plan latest Capital Market Day next year.
You had a second question.
Thanks. Yeah. Yes. You disclosed book-to-bill for China, which is appreciated. It looks like the order momentum picks up. Could you also remind sort of how book-to-bill for China looked, let's say, last 12 months or fiscal 2024-2025, just to get a sense of where we are on China right now? That's my second one. Thank you.
Yeah. We had a book-to-bill roughly 1.3 this quarter, roughly 1.3 last quarter. I think rolling 12- month, as I recall, 1.14. I think the important to say, we recognize at Elekta, we are more bullish than most med techs on China, but we have the visibility we have. Elekta got in early. We have localized our supply chain. The market was strong. We had the anti-corruption campaign. It became much weaker.
If we look at our first half, we have seen the RT market up by a very strong amount. We are now seeing positive year-on-year order growth. When we look at our sales funnel, it looks like a strong both revenue order growth, high double-digit second half. That is the visibility we have, and we believe in that.
Absolutely. Absolutely. Your stare to that, Mattias, when you look at the book-to-bill here for China, it has actually been a steady increase. You saw the reported number. If you would look at the rolling 12, it has actually been a steady improvement here over the quarters here. It has been ongoing for a while.
Thank you very much. That is very clear.
Thank you.
Thanks, Mattias. We will move to the next question.
The next question comes from the line of Kristofer Liljeberg from Carnegie. Please go ahead.
Hello, Kristofer.
Hello, Kristofer.
Hi. Yeah, hi. How are you? Yeah, also two questions. First, coming back to that, I implied cost savings from the new operating model. It seems all else equal, that would add some 3 percentage points to the EBIT margin. I think you talked about this being a net effect. Are there some negative factors that might offset this? For example, you mentioned that you want to improve quality of earnings. One way of doing that is, of course, to stop capitalized R&D. If you were to do that, I guess that would, at least from an accounting perspective, remove part of the otherwise positive effect. If you could comment on that.
Yeah, we absolutely can.
Yeah, you should think that way, that we say no less than SEK 500 million, and there will be full impact on the margins with the split. I outline COGS and OpEx, but of course, come into EBIT. I think let's keep accounting separate. I'll just say that in general, we like to build a closer link between EBIT and cash generation. We have heard that from a number of you also, that you would like to see that. I agree. I'm not a big fan of too much capitalization. Some you have to do. We are certainly deliberating on what is the right approach going forward. That is accounting. I think we need to keep that separate.
Okay. Yeah, to be clear. The way you report EBIT, it might not improve the full SEK 500 million.
I would more say differently that the 3% you should expect with full run rate for Q1 next fiscal. Whether we will do adjustment and how we do capitalize is a separate topic. Frankly, we have not decided on anything except what I am saying, that I would like to see a stronger link between EBIT and cash flow.
Absolutely.
Okay. Thanks. My second question, of course, the importance here of getting Evo approved in the U.S. I saw you comment or, yeah, said to one of the Swedish news agencies that you expect to have an approval within the 880 days review period. Maybe if you could, yeah, talk about your confidence and how this process is ongoing with the FDA. Thanks.
Yeah. Yeah. We have been confident along the way. It is just taking a really long time. We submitted over the summer.
As you outline here, you have a 180-day window. There are periods in the submission process where the clock is stopped. You should say 180-200 days. We do expect to get approval within. Of course, it is not fully in our control. There is a regulatory body. Based on indications, we are positive. We have been positive all along the way. We are even more positive now than we were three months ago.
Yes.
Great. Thanks, Kristofer.
Okay.
We will move to the next question, please.
The next question comes from the line of Ludwig Germunder from Handelsbanken. Please go ahead.
Hello, Ludwig.
Hello, Ludwig.
I am from Handelsbanken. Thanks for taking my questions. I have two, please. I will take them one- by- one. The first one is around the regional restructuring of the P&L.
As a consequence of this, do you have any, or could you say anything about how incentive systems will change to drive the more local P&L ownership?
Yeah. Yeah, I could. And I probably will in due course. First, I would like to discuss it with the regional management team. Today, we are announcing the change in structure. Clearly, we want incentives to match the value creation of Elekta. It's very clear. I would, in general, like to see a stronger ownership mindset in the company.
Okay. Thank you. My second question is on the cost savings as well. You gave us the figure of SEK 500 million annually in cost savings. Would you be willing to give us some more flavor on the different parts and how they will move in, let's say, next year?
If you share up the OpEx, how should we expect different parts to move, given the SEK 500 million? What parts would we expect to decrease, and are the parts expected to increase?
Yeah. Yeah. Yeah. It's a good question. I think the guidance we give here is no less than SEK 500 million. The approach has been to start by saying, what is the right structure? Then we are down to now individuals. In general, we have been doing it to increase commercial execution and operational execution, and very importantly, avoid duplicate work, which we have identified, delaying, become more agile. I will not go into the specific details in terms of where we are removing the 450. As you can imagine, we have a town hall this afternoon. I think our staff deserves to be told first in greater detail.
I think what you should take away is that we do this for enhanced execution. As a consequence, there are savings no less than SEK 500 million. We are fully committed to, you will see the full run rate effect Q1 next year. That's not too far away.
You also had the allocation there, what's in the gross margin and what's below the gross margin.
Yeah. Good point. Yes. Thanks, Ludwig.
Great. Makes sense. Thanks so much.
Thank you.
We'll move to the next question. I think it's from Erik Cassel at Danske Bank.
Hello, Erik.
Good morning.
Hello. Good morning, everyone. First, I want to talk a bit about the software backlog and deliveries in Europe. I mean, we've naturally seen EMEA margins come up quite significantly.
I just want to get some sort of understanding on how much of that is driven by software. If possible, I'd like to know if the software book-to-bill is still positive in EMEA.
Yeah. I think we stated here, I think, as you alluded to here, we have seen a very strong contribution from, I mean, both in terms of the Elekta Evo per SC, as well as the upgrades here on the existing Linacs, what we call then Iris. When it comes to, we see a continued strong development here. You heard Jakob talk about the second half. That remains. That is what we still, we view it very positively.
Yeah. I can say. Yeah. Sequentially, Erik, we had double-digit growth sequentially on Iris and Elekta Planning.
Is that on orders or on deliveries?
Both.
Is the book-to-bill still positive?
We do not go in. It is actually, but we do not go in further details. In general, we keep our book-to-bill at a fairly aggregate level for competitive reasons.
Yes.
Okay. Perfect. Just the last question. Solutions seems to be down some 20% organically in Americas. I was just wondering, how much more is it down in the U.S. since that is the key driver? Lat-Am seemed pretty strong. How many more quarters of negative organic growth in the U.S. do you expect to see?
Yeah. We actually had a good order quarter in the U.S. here in Q2. We do expect that solutions will bounce back, obviously, when we get Evo FDA- approved. We look forward to our Q4 this year. We need to get reference sites upgraded.
We need to sell into our install base, make the market recognize an Evo platform, which is versatile and precise. It's going to be the grind of selling and competing.
I can also add a little bit of flavor without giving numbers that both the orders as well as the revenues are better in the US than on average for Americas.
Thanks, Erik.
Good morning. Thank you, guys, for taking my question. Landscape, obviously, Varian or Healthineers announced the plan to launch a new next-generation Linac platform sometime in 2026. I'm just curious kind of how you think Evo will stack up against that as you fast forward into 2026 and 2027, whether this is a concern for you. My second question is a bigger question, obviously, the ambition to return to market growth.
I know you guys do not want to guide, but I am just curious if you might be willing to at least give a little bit of timeline on when you think that is achievable. Is this already a project for 2026, 2027? Is there more R&D work that is going to take a bit more time? We need to wait a little bit longer. Any color you can give around that would be great. Thanks so much.
Yeah. I can take those. In general, I prefer not to comment on competitors' product portfolio. We focus on us. Of course, in our engine room, we benchmark. We have taken note of the same data points that you highlight. We look at our competitive situation here now, and we think we stack up. Of course, we have certain improvement areas. We have certain strengths.
I'm not going to disclose them all. That would not be a smart move. As I started out by saying, we invest 12% of revenue in R&D. We have a number of pipeline projects ourselves. Some exciting, some need tweak. Let's see how we stack up. I personally would say, and I lived that in other companies as well, being dedicated to RT and being willing to fund investment and being passionate about what you do from a product development perspective can take you very far. It should be the secret sauce of a company like Elekta. When we come to growth, yes, clearly our ambition is over time to grow at, I would dare to say, above market. No med tech company would want to lose market share as we've been doing for some years.
I've been very clear to the organization, very clear to the commercial part, but also to the product development guys that now it's time to shape up. In terms of when, I think let's come back when we have Capital Market Day. I think that's appropriate. It's not hip shooting, but it's really anchored in a financial plan.
Thanks.
Understood. I have to try. Thank you.
Thanks, Veronika.
Thank you.
We'll move to the next question. Jon Unwin at Barclays. Good morning, John.
Morning, Jon.
Morning. Good morning. I just had a question on the R&D expense. You've commented that 12% of revenue is, but also that you need to sort of focus on more commercially viable projects. Is there scope for that 12% of percentage of sales to come down over time as you focus that R&D intensity on the commercial projects?
My second question is on the midterm targets and sort of taking over the CEO role and how confident you are in the ability to increase gross margin to pre-pandemic levels and EBIT margin above 14%. Any color you can give on a timeline for those targets would be helpful. Thank you.
On R&D expense, what I can say is 12% is in general high. It is in many ways good because it is funded today in our cash flow, at least. What I stated was that when we look at both existing portfolio and future portfolio initiatives, we will have a strong commercial lens as well as scientific and feature lens to really understand what are we solving for. I think if you take, for instance, our MR-guided Linac, Unity, wonderful product, truly making impact in the market.
Commercially, we haven't achieved what we hoped for when we started out that project. We want to make sure that we learn from that when we move forward. Is there scope for further reduction? We'll see. I think it starts by saying, do we have the right projects in the pipeline? If we do, we'll keep at 12%. If we don't, we'll reduce. In terms of midterm targets, I'll restate, we'll get back to that in our Capital Market Day. I would say, though, I think there are opportunities to increase the gross margin, but I'm not going to say whether that's at or above our midterm guidance. We'll come back to that.
Great. Thank you very much.
Thank you.
The next question will come from Sten Gustafsson at ABG. Good morning, Sten.
Morning, Sten.
Good morning. Two questions on Evo, please.
Firstly, regarding going back to the FDA approval process, have they communicated with you that there is a delay related to the government shutdown? Do you think that has had any impact on the timeline for your approval process? My second question would be if you could remind me about how you plan to roll out the launch globally of Evo in China, Japan, and other key markets.
Yeah. To take your first question, no, no impact from shutdown. We have a good dialogue with FDA, actually very good. Secondly, rollout, yeah, we got Evo domestic- approved in China, so that's good. Focus is on ensuring market access. It's coming in. It's actually proceeding quite nicely. The sore spot is in the U.S., but I think we discussed that already.
Thanks.
It's already approved in China?
Yeah.
Excellent. Thank you very much. Yeah, we think so also.
Thank you. Thanks, Sten. Now we'll move to the next question from David Adlington at JP Morgan. Good morning, David.
Hello, David.
Good morning, guys. Thanks for the question. First one, just a bigger picture one on the 450 roles being cut. Just wondered how you think about eliminating that level of workforce, 10% of workforce, without having an impact on R&D, quality of services, manufacturing capacity, just how you're sort of thinking about that. Secondly, as you look into next year, Street's got mid-single digit top-line growth. How comfortable are you with that given the fact that all the growth has been tracking some way below that? Thank you.
If I take the first one, keep in mind we solve for something different than reducing headcount by 10%. We solve for speed, execution, accountability, delivering products faster to the market.
In doing so, we have delayed the organization, increased span of control. As such, if you do the math, then it has a very significant impact on managerial positions. We are not reducing frontline field service engineers. It is an office-based managerial reduction. We do it because we believe we can, frankly. We believe that it enables us to move faster with firmer accountability. We have had too many functions with duplicate roles, duplicate managers, and that is what we are resetting. We also take the liberty to be a little bit less corporate, a little bit more business-savvy. We are streamlining central functions across the board with due consideration to guardrails and controls. We feel good about that.
It is confirmed throughout that we should be able to move, I would have to say, faster than we are today from a commercial and product development perspective. In terms of longer-term guidance, I will stay at what we said we guide this year, positive organic growth rate, and then we will come back at the Capital Market Day. We very much look forward to that.
Thank you.
Thanks, David. Now we are coming up to the last question for this session. That is a question from Ludvig Lundgren at Nordea.
Hello, Ludvig.
Yes, hi. Thank you for taking my questions. Two for me. First one on gross margin. I wonder if you had any effect from tariff mitigation actions here in the quarter and whether you have some further pricing potential here moving ahead.
Yeah, we have some.
I think on average here that what we see as a net impact from the tariffs is actually that it drags down the gross margin in the quarter. Obviously here, to your point, and I think also what we alluded to in general, more broad terms, we will continue to work here on the passing through this cost through the value chain and also here addressing in terms of productivity as such.
Okay, great. Final one on the order cancellations here. I guess these were mainly orders that had very small or no prepayments connected to them. I wonder, looking at the remaining part of the order backlog, have all of the remaining orders some prepayment attached to them, or how does it look for the remaining part?
A very significant part. Typically, if it is public tender, we do not get prepayment.
We have some older orders that we have deemed very high likelihood will lead to revenue generation that are without a prepayment. In general, you should think that all orders coming in now from private sector will have prepayment or they have to be validated by me and CFO.
Yes.
Thanks, [crosstalk].
Perfect. Thank you very much.
Thank you, Ludvig.
Thank you.
That was the end of this call. Maybe before closing, final remark from your side, Jakob?
Yes, we are on it. This is a quarter of execution. As you may also sense, we have focused on what happens this quarter, next quarter, the next 18 months. We know that we are not at full potential. It's a lot of hard work.
I take a lot of comfort in that everyone from Board of Directors to management team to Elekta employees are committed that we know we need to change and we know we can do better. We do not do it just for our shareholders. We also do, but we also do it so we can continue to drive our purpose of building hope, invest in technology. As I started out by saying there is a huge unmet need for radiation therapy and there is a strong need for us to innovate and be a strong competitive alternative to the major player. I look forward to meeting all of you in future engagements. Thanks.
Thank you.
Thank you very much, everyone. Thank you.