Ladies and gentlemen, welcome to the Cephra Q1 Report. For the first part of this call, all participants will be in listen only mode and afterwards, there will be a question and answer session. Today, I am pleased to present CEO, Torben Kronander and CFO, Mats Fransen. Please begin your meeting.
All right. Thank you very much. So this is Torbjorn Ander, and we will start the presentation, and I will see next slide when you have next slide. Also, please note that you can e mail questions to us, and you can also come in with questions at the very end of the presentation. So I will start.
Next slide. The value we create for customers, etcetera, we will have a short recap of what we do at the company. Imaging IT is mainly taking care of images in hospitals. Parallel to the electronic medical record systems, AMHS are handled in huge numbers in modern health care. And we take care of those.
We start with radiology, which is still the largest part, and also introducing cardiology and pathology. And we are unique in the world that we have all of those images in the very same system. We have secure communication, which is our encrypting business area that was original sector, sector stands for secure transmission. We are selling very high end, especially mobile security solutions on the level where governments and authorities can trust them on the secret. And the strategic level is the highest possible level.
And then we have a greenhouse of things that might become big or a little greenhouse of things that do not really fit into the other areas, and we call that business innovation. In that, we have research, we have orthopedics and we have medical education. Next slide. We work with increased productivity and quality medical imaging of patient care. Productivity is key in the new area of demographics and increasing number of people who are not perfectly healthy.
We are also increasing cybersecurity in society. We are a little more than 800 employees in 14 countries currently, and we also do a lot of research that contribute to a healthier and safer society long term. Next slide. Highlights from our Q1. We had a very strong growth in order bookings and cash flow, which is interesting.
This is despite the COVID-nineteen situation that affects most of the world currently. We have an increase of 2.5x in order bookings for this quarter, and we had a good cash flow per share for the quarter. Normally, Q1 is slow on cash flow. The order bookings, though, we should point out that we have huge variations between quarters, and you shouldn't go too much extrapolation based on this. Individual orders might be, in some cases, very, very large and be spread out over a long time into the future.
Next slide. Our 3 financial targets are all fulfilled, and these are in order of priority. Fidelity, we count that by equity to assets ratio that should be above 30%. This is critical. We sell equipment and systems that are absolutely vital for our customers.
They cannot buy that from customers who are not viable and stable financially. So trust is important and then financial stability is, of course, also important for shareholders. So we are 58.1% equity asset ratio. 2nd priority is profitability. We see this more as a hygiene factor.
We have no lack of IDEs and possible to grow, but we should at least do good business doing it. And we should we don't want to get too low in profitability. So we say target is 15%. And if we go above 15%, we should invest that money in growth instead. But we should be above 15% and we're current 18% coming back.
And then growth of profits, which is our prime target, even though it's priority 3, is where we should invest that profit in that we do not simply count as profit. We have there an EBIT per share growth target over a 5 year period of 50% increase in EBIT per share per every 5 year period. We are currently more than double of that at 102.3%. So everything is okay for these financial targets. Next slide.
We should also point out that variation between quarters have increased further. It will decrease long term when we go into our new financial model, but we now have very large orders coming in from very large enterprises. And when these go live, we recognize a software part of them, which means the variation between quarters can be very, very large. And we should point out also for the future that looking on these historical variations might not be a perfect way of predicting us because the variation will probably increase in the COVID-nineteen situation and because we're also delayed by customers of allowing us to come for installations and that delays everything. And we don't know exactly how this will turn out as no one knows what COVID-nineteen is going to end when finally will end, but right now we don't know when.
Next slide. As for COVID-nineteen impact, that is a very hot topic all over the world right now. In Healthcare IT, we see that exhibitions and travels are canceled. Of course, exhibitions is short term a gain because they cost money and so to them cost money. But long term, it will impact future sales.
We meet our new customers on these exhibitions, and it might affect us long term. Now our order from first point of contact until we finally get the order is a long time. It might be 1 to 2 years. So this might impact us in the future. We also delays in deliveries, as I mentioned before, due to restrictions.
So this is a financial strain, people on-site. We can do smaller go lives and upgrades, etcetera, remote completely. But for the large ones, we need to go to the hospitals. And several hospitals, especially in the U. S, have simply banned all visits from external people during COVID-nineteen.
It's easing up a little bit now, but we still see these restrictions in place in many places. We also see that elective procedures are on hold, and that has a large impact on especially the privately operated hospitals, not the least in the U. S. Elective surgery, elective procedures is where most of these hospitals make the bulk of their revenues and profits. And especially if you have reconfigured hospital to be COVID-nineteen hospital and then those patients doesn't even come.
Of course, the financials of the hospitals are in deep into the bed. And that has an impact on us, not only I would say especially on the orthopedics business innovation area. So it is completely orthopedics is almost completely stopped in many many countries. On the upside, we see tele diagnosis also doctors want to work from home. And not the least in pathology, this has been more or less impossible without digitization.
So we've seen increase in demand in pathology due to that also, pathologists would like to work from home. But we also see other areas as well where communication and home market has increased. We also see that post COVID-nineteen patient imaging volumes may overwhelm hospital terms and that will drive demand for efficiency. I mean, if you have a slow IT systems that many of the incumbent systems are very slow and cumbersome to work with. And then of course, that drives the need to replace the systems so fast the systems operate.
In the cybersecurity markets, we see also that expeditionals and travel cancel with the same impact as sort of health care IT. We also see but we see on the upside increased demand for cyber security and mobile crypto solutions, mobile workplaces, not the least. People working from home want to be secure and we see that cybercrime has increased during COVID-nineteen. And of course, you want to sit at home, but be as safe as in the office and then you need new equipment. So we see an increase in demand.
Next slide. Highlights on secure communications. We have seen increased order bookings. We also signed a framework agreement with EU Authorities for encryption systems, which is very good because then we can sell all of the EU without procurement. And we can also note that we still not do not have adequate margins in communications, but we have done a lot of growth initiatives there.
So that explains that. Next slide. Our growth initiatives in secure communications is especially mobile and secure workplaces. People want to be on the move, people want to sit at home and people need that to be as safe, as secure as if they were working in the office. This puts completely new demands on both systems and encryption links to the office from homes.
We see critical infrastructure as society is vulnerable and we see increasing demand for protecting electricity, frame networks and distribution and also production and also other energy sources. And we also do high speed network encryption systems for very high speed and very secure network encryption that demand is increasing. Next slide. Highlights on Business Innovation. First, I would say that we had a strong negative impact from COVID-nineteen, especially in business innovation and not the least in orthopedics.
But we see also remote medical training. We had a very interesting collaboration with a few universities where all the medical students are at home, and they are actually teaching them remote using our training systems, which before was only a virtual dissection table, but now also it's available in iPads and things like that. And that has taken a huge leap forward. And in orthopedics, we see implant motion analysis, which is a way of diagnosing if prosthesis is stuck or not. That also had a hit by COVID-nineteen, but we see underlying work in that business being very healthy.
Next slide, the trend in Business Innovation, Sacral Implant Motion Analysis, of course. As I mentioned before, we also have 10 years of more or less the same technology for research and then, I mean, clinical studies based on for prosthesis. The clinical research or studies for CFOA prosthesis is fixed or not, has been very complex and we have simplified that a lot. We also sell to these implant manufacturers for their studies. We call that CTMA, computer tomography micro emotion analysis.
The medical education, as I said before, we see cloud based content subscriptions and not the least for all the students of large universities. And in research, we have a large focus for AI for medical applications. Next slide, Imaging IT Solutions. We have increased order bookings primarily in our largest markets. We have a good trajectories, not the least in the U.
S. We're also expanding our customer base in the U. S. And other markets, U. S.
Being the strongest. And we've also seen that our largest orders to date, which was New South Wales in Australia, is now operational with the first hospitals, which is a very good thing that we are now live in the first of these first part of these very large delays. Next slide. The growth initiatives in Image Energy Solutions, we have new markets, direct and indirect and the newest countries with the start of direct cities is France and Canada. Now entry into new markets very slow in a trust basis as such, you have to create references and then we have to spread the word around.
But we have excellent new references both in France and in Canada for this. In Enterprise Imaging, which is kind of what we say as taking over now, not only gradually, but all the imaging for an enterprise, We see digital pathology where we receive our FDA approval in the spring. And we've seen increased demand for that, not the least because of COVID-nineteen situation, as I said before. And we also see an increasing demand for cardiology combined with radiologists' imaging systems. We are focusing on the U.
S, especially that's the world's largest market. We top customer satisfaction and we have a small background market share that explains opportunity for us. So we are concentrating our focus on the United States. Next slide. I leave the word to Marc Franzen, our CFO, who will inform us, please.
Thank you, Torbjorn. So please go to the next slide. We see that, as we have touched on previously, that all the bookings and the net sales have a bit of a diverse trajectory right now with a very strong order intake. And it's concentrated to be, let's say, the big three geographies being the U. S, Sweden and the U.
K. And as for net sales, we saw a contraction also adjusting for currencies. The currency situation we are now finding ourselves in is actually, I guess, the big difference from a pure financial external standpoint really, this is the Q1 for 2 years. We have for 8 consecutive quarters reported that the Swedish krona has grown weaker actually against our main three currencies, the U. S.
Dollar, the euro and the British pound sterling. But now it's reversed in all three of those, which I guess comes as no surprise for anyone. Next slide, please. And the pandemic effect, to the size it can be discerned is mainly focused to the U. S.
As it's been previously touched upon as well. We did did not cancellation, I would say primarily, but rather delays as it now stands. That also goes for some hardware refreshes that also has been postponed. I'll come to that later on,
but we do
see some interesting other movements in terms of cash flow that has actually gone the other way around. We do mitigate this quite significantly with and in the short term, it's again the trade first and the travels reduced significantly, way significantly. But in the long run, that's obviously not sustainable, I would think, even if we go to more of a remote based perhaps environment, but that's yet to be seen. And deployment for new customers are more, I would say, exposed to code disruptions. So that's for that.
Next slide, please. So the sales trend, we saw strong order intake, as we said, both for Imaging IT and Secure Communications. And as for Imaging IT, it didn't only refer to the Enterprise Imaging or the PACS, the Picture Archiving and Communication System generally, but also in cardiology and pathology. And as Torbjorn mentioned, one important milestone was that we had 2 out of the 11 healthcare organization being operational in Australia and New South Wales, which is good to know that this is up and running now. That order was signed in 2019, and it's a 13 year duration on that one.
So there aren't that big effect in the short term, obviously. And the business innovation performance, you can see that it comprises it's the business incubator. The Orthopaedics and Education previously touched upon. And aside from the generics of being quite a small operation with the volatility that comes with that, we also found ourselves in the product shift in both of these business lines. And on top of that, we had the COVID challenges with a headwind as it now stands.
So with that, please go to next slide. The earnings trend, it's the net effect doesn't seem that big, but it's an inflow of business and a delay. So business in Imaging IT in the short term. Then on top of that, we have the strongest Swedish krona, which tips the scale in the Q1, I would say, on an aggregated level. Communication had a significant portion of project based development revenue, which inherently has lower margins until entering the delivery phase, and that puts a burden on the profit levels in the short term.
And as we also write in the report that we do see some slower growth than expected for critical infrastructure as it now stands. And we our assessment is that it's due to COVID related shifts in customer priorities in some cases at least. And so that's about that. That's for group eliminations. 1 you might wonder how can you make money on group elimination.
Well, this is a delta from last year where we had made provisions in for bad debts according to IFRS 9, and we are fortunate not to have to do this this quarter. We I think we have a healthy situation in terms of the accounts receivables, which also I think
the cash
flow supports as a conclusion. Next slide, please, for the final for the finale. We did see a quite spectacular shift in terms of Q1 cash flow performance. I wouldn't make too much of that in terms of extrapolation, but you have sometimes to celebrate the small victories. We also have lower investment compared with last year.
And in combination, I would say, with an internal increased internal focus on cash flow for pandemic uncertainties, it's a good thing to have a good strong liquidity situation given the uncertainties that we're now seeing in the markets. So with that, next slide then back to you, Torbjorn.
All right. And then I come back a little about our way forward. Next slide. Our focus forward is high customer satisfaction continued to that. That's been a successful path.
It's a long term strategy that pays back to shareholders and employees over a long time. Also, employees and culture that high customer satisfaction is impossible to obtain unless you have happy employees and you have a good culture in the employee and the staff for delivering that quality to industry customers. Profitable growth, we want to grow, but we want to grow in a profitable fashion. We could probably grow or we could grow faster if we took profitability down even further, but we won't. We want to be profitable and grow.
That's the reason we have that 15% target for margin. And then we want to say we think what the is going to be. I'll come back to that in just a moment. In our business, it's a very fast moving field in IT and Informatics, in cybersecurity as well as in medical informatics. And when we do investment today, we need to invest for how the world will look 4 to 6 years ahead of us.
And we need to be good in predicting that playing field. And we have historically been very good at that prediction, which not the least digital pathology in the same system as where the only shows. We started that investment 8 years ago, and we were spot on. Today, we do have competition in Tatolio, but there is no other company currently who does Tatolio and Regioli in the same system, which is, of course, it's a huge money saver for Stoltz if they get both of these sold in 1 single system. Next slide.
We will continue our efforts to be have happy customers. As last year, we were investing in class, which is the U. S. Study. We came up top on U.
S. Large hospitals, which is, of course, our prime target market. But we also won the small hostel market in U. S, which is very nice, but it's not a focused market. But it shows what an attitude and employees can have because we serve all customers equally well.
In Canada, we won best in class for the 1st year, and of course, that's nice because that's a new market and a new growth market for us. Next slide, scale where the puck is going to be. I said productivity and health care is at core of society's needs. And I think we will see even more of it now after COVID-nineteen because all of those ships that needed to be replaced, they're still there. And the production of health the demand will be very large when COVID-nineteen is over.
And of course, productivity then becomes even more important. Add to that the demographic situation all over the world. So we can consolidate all in medical imaging for a large hospital into one single system, which we are unique in. So for, of course, other companies will come there, but we were head of at Warner. We do have huge demands on improving workflows and interaction, People want to consult, people want to work from home and we have systems for that as well.
And then we use AI. We have several employees or quite a few actually that use their time now and exclusively working with AI to drive efficiencies. We do believe you can replace decisions or acknowledge not in any foreseeable time, but you can make them more effective by using AI wisely. We also see a huge demand in the security area of secure mobile workplaces, as I said before. And the main reason, of course, people are more mobile now and people who have now learned to work from home and they want to be safe, as safe as in the office but sitting at home.
And that will increase demand for mobile workplaces and also secure communication channels, both between enterprises and buildings and authorities, but also from home to the office. And we have some completely new areas, implant motion analysis, as I said, for Orthopaedics is a very interesting area. A lot of unnecessary operations are done in replacing an implant, both a very expensive and also dangerous operation to do and that is absolutely needed and we can determine if that is needed or not. And we can digitize, but only imaging a digitization of hospital services, just in its infancy. Yet only Sweden and a few other countries have now a large market share of the total being digital.
And we are number 1 in the most digitized country in the world, which is Sweden currently. Next slide. We also see that we will increase recurring revenue. Paper usage has been improving in all different areas of IT to be improved value for both customers and vendors. Customers want to pay in equity.
They don't want to pay if things doesn't work, and they don't want to have large capital investments if they can avoid it. And that has actually increased now with COVID-nineteen because liquidity, of course, of the households are reduced. And for vendors, of course, it provides a very long flow of cash. The new business model, second one, that was presented in the last report, will play a very important role in sector future. And as we thought that, adoption would be quite slow, especially in the U.
S, we've seen now an increasing number of customers being interested. It will not impact this year financials. The lead times are too long, but we see that a very important part of our sector in our future going forward. And the transition to the new payment model, we course, as I said, will be over 7 years. But COVID-nineteen has indeed accelerated it, especially in the U.
S. Next slide. How do we handle the pandemic? We have important our customers do a very, very important job. They keep people healthy.
They keep the hospitals operational. They keep society working when society needs it the most. Our job is to give them the tools and provide the tools that work. So making customers okay, support and servicing is key most important in these times. Then of course, in order to do that, we need healthy and well employees, and we also emphasize on that one.
And then we need financial stability to be able to continue to do this. So we are quite conservative in our way of handling finances. Next slide, philosophy, shareholders, as I've shown before. Our strong belief is that we have happy customers, happy employees, a good position in markets that grow and indeed, ideally, a market that has to grow as both health care, especially in the demographic situation, but also cybersecurity, the market must grow by external force. You have good position in these and reasonable cost control.
You shouldn't use your shareholders' money in unnecessary things, then shareholders will be happy long term. I think we have proven that over the years. Next slide. This kind of concludes our presentation here. Please feel free to come back to with questions.
The next reports and annual meeting, the annual meeting will be next Tuesday in Lindshopping, but it will be virtual this time. We have a few people here, but we will resend this over the network as well. November 27, we have our 6 month report and Q2 presentation March 12th, and we have a 9 month report and presentation. Please also remember that we consider your feedback on these meetings and presentations. We'll modify them based on the feedback we get.
Please fill in this link, what you think, and we'll try to make them even back in the future. And with that, I'd like to open up for questions and give the word back to moderator.
Thank you. And our first question comes from the line of Carolina Ilvind of Danske Bank. Please go ahead. Your line is now open.
Hi, good morning. So just two questions from me. The first one regarding orders. So you have press released many orders here over the past month and also for Imaging IT area. And this translated into a strong order intake in the quarter.
I understand that orders are volatile between quarters, but what do you think is the main driver behind the increased order intake? Because one would expect hospitals to have lower CapEx budgets as a result of the pandemic, but it seems the demand for your products is very large and you're getting large orders. So if you could just talk a bit about how you think about this?
It's difficult to say
as a sales. Individual orders are very large. I think these are investment decisions made a long time ago, and many of these customers have what do you call them? IT systems are not adequate for today's workloads, and they need to replace them because it slows them down. They are not growing with the demand, and they need to replace them.
So I think we see a trend of where the old IT systems they had before is all replacement today, except for pathology, and that is still not a huge chunk of the order intake. We see this is mainly due to the incumbents, the old systems are not keeping up, and they need to replace them. And then with the large orders, it kind of it goes into clusters like this.
Okay. So the pandemic stood for digitalization there?
I would say it doesn't affect it very much. It has affected a little negative, but not substantially. We have seen a few customer in the U. S. Who has actually postponed all plans for purchasing a system to the future.
In normal times, probably the order intake would have been even a little bigger, but it has not affected significantly.
Okay. And just one more on installations. So you say you had some challenges during the quarter. Could you elaborate a bit on how those challenges work in the beginning of the quarter versus the end of the quarter? So I understand stability and so on, but just to get the sense on how that changed with time now.
It's all over the quarter. I wouldn't say there's a big difference at the beginning and the end. I mean, if a hospital has more or less shut down all visits, they have. And the U. S.
Is quite severely affected by COVID-nineteen, not much more than we see here in Sweden at least. So we don't we see reducing effects now and the disease is decreasing. But in substantial parts of the U. S, it's still very active, and we see no big difference from the end to the beginning from the beginning to the end of the quarter. People if we can't go to the large hostels, it's very difficult to do large do large go lives.
Okay. Thank you. That was all from
me. Thank you.
Thank you. Our next question comes from the line of Christopher Liljeberg of Carnegie.
I have a few questions. Maybe I'll take them 1 by 1. First one coming back to order source. I'm also a bit surprised positively surprised by the strong orders in the quarter. But you also mentioned that these were planned or the investment decisions were made a long time ago, how do you see the risk for orders slowing now in the next coming quarters due to the pandemic and or hospital budgets being capped, etcetera?
What we do see is a shift towards our new financial model. People still need to replace the systems, but they prefer now to pay as they go. And the volatility of their business, of course, has increased. They don't know how far this will be gone. And if they take a procedure, it's better for them.
So we see a shift that was faster than anticipated to the software as a service model or pay as you go model. Now this will affect our cash flow when these orders come in, but we think we will get a sum of these orders anyways now. We don't know the impact. It depends a lot on the different hospitals, and we see huge differences. Some hospitals have turned very, very defensive and do not want to do anything.
And some hospitals simply say we have to invest because this will go over. And when it goes over, we have so much to do that we need to be highly, highly, highly productive. So they have increased their efforts to do the installation. And it's now our business is difficult for it normally, but the volatility has increased for the order intake as well. We don't know, to be frank.
But it we think it will be okay, but we'll see a faster shift to the new financial model than we anticipated.
Okay. Thank you for that. And then when it comes to sales in the quarter, down almost 8% organically, maybe difficult. But is it possible to quantify how much of this lower sales is COVID related, I. E, that you couldn't do installations that would otherwise have taken place?
And how much is just normal variations between quarters?
We normally have a lower Q1. As you know, that's a seasonal variation. But we have had an impact definitely in this quarter based on COVID-nineteen and also the currency. I mean, if the currency had been the same, we would have been about a par with the last just same quarter despite COVID-nineteen. So COVID-nineteen has had an impact, definitely.
So we know that we would have gone live with several installations that we couldn't do now. We're simply in wait hold mode until we can come there and go live with Hospice.
And do you see this situation continue now in the second quarter so that we should expect a lower than normal second quarter as well?
I would say that the it's very difficult to predict. I think we will see the quarters go up and down in a way we have not seen before and even before, we were up and down. It might be that it goes up an individual quarter, breaking the seasonal variation we typically have and goes down in a quarter we normally are good. It's so much fluctuations and so much differences that it's very, very difficult to say. We see and it's also very different, different areas.
I mean, the U. S, we have a huge impact. In Europe, not so much actually, despite that Europe has been locked down and so on. So but in the U. S, especially, it's even more difficult to predict than normal.
And we you might see a contra variation in quarters compared to normal here going forward.
So Q2 could then be even stronger than normal, if you're lucky?
Well, provided that luck, we are very happy because there. Now it I would say that it could be counter normal, and it could also be normal. We actually, very honestly, we don't really know. It depends. Some of the go lives are very near in time, but we need to come into the hospitals, otherwise we can't do it.
Okay. And final question relates to breaking costs. Of course, a lot of temporary savings, as you highlighted. Does this mean we should expect operating costs to remain at this same level in the second quarter? Or are there some seasonality playing a role here and also maybe traveling or picking up a little bit again?
No, I think we should expect these numbers to come in lower than on a, let's say, a regular basis, regular year, definitely. But I wouldn't make too much seasonality. So I wouldn't expect them to be on the same extreme low level as we have had. And in the longer run, that's detrimental to the business, I would say. So we hope this will increase counterintuitively because that means we could get out to the customers.
But we won't be back to normal in Q2 on cost base, no.
Okay. Yes, maybe a final one on the cash flow or the working capital release. I guess this is partly due to what sales were done helping account receivables.
Yes. You could say that it's from a mechanical point of view. You get you don't fill up with new receivables to the same extent. In some cases, customers have actually been eager to pay up upfront to make sure we are on a go and not get stalled in or that they would get their funding cut.
Great. Thank you very much.
Thank you.
Thank And there are currently no further questions from the audio. I will now hand back to the speakers.
All right. And we have received no e mail questions either. So I will say that this concludes the presentation, and thank you very much for listening. And please, as I said before, give us feedback on the presentation and the format, and we'll listen and modify going forward. You very much and goodbye.