Accelerating growth and profitability." That is the headline of the Q2 report from Surgical Science published this morning. To get some facts behind this, I have with me the CEO, Gisli Hennermark. Welcome.
Thank you, Mattias.
This headline is intriguing and reflects the numbers that came in higher than analyst expectations. Net sales amounted to SEK 188 million, and Adjusted EBIT landed on SEK 44.3 million. Can you give us a brief on the quarter and how this was achieved?
Yes. It was a great quarter. I mean, to keep on growing by 30% if you look in constant currency is a combination of a strong Industry/OEM, which is where we license our technology to med device companies that embed simulation in their products, where the license revenues that are very important for us, the royalty these companies pay grew. Now I'm not talking year-over-year, but I'm talking Q1 to Q2 from about SEK 36 million to about SEK 45 million. It's a strong growth. Even higher growth was in our Educational Products. This is our own simulators, where we do both the hardware platform and the software and work with the end users. It was extremely strong growth in that area.
I think it also shows, you know, the strength of combining what used to be Simbionix with Surgical Science with the best products under one roof, best service and support organization, best distribution partners, one cloud solution, and the customers are really responding to that. It was a very strong quarter.
Is this the balance between operating segments, Educational Products, and Industry/OEM that we can expect forward?
It depends on what timeline you look at. Over time, we expect our industry OEM revenue to grow faster. We've set financial goals, long-term financial goals, and we've been talking about educational products during this five-year period to have an average growth of 10%-15% throughout the period, and industry OEM with an increase in growth. It's of course really nice to feel that, you know, we are strong out of the starting blocks, especially when it comes to educational products, and that industry OEM is going well. You know, 10-15 customers within the robotic surgery segment, which is the most important one, but also other areas of industry OEM where we work with med device companies to help them with patient safety through simulation.
It's been a year now since the acquisition of Simbionix. Would you say that they are fully merged with Surgical Science?
I don't think it's a, you know, start point and an end point, but rather a continuous process. What I do say is that the one-year anniversary was a day of joy. I mean, we celebrated, and a lot has to do with getting people on board in one organization, and I really feel the motivation from the team. Of course, not all things are perfect, but overall, we are delivering extremely strong results, and perhaps more importantly, you have a team that's very motivated and inspired, and we're a simulation company, and we love doing simulation. I'm extremely happy with where we are one year after sort of the ink dried on the contract.
What is your view on further acquisitions?
We have been successful in our acquisition agenda. I think it comes down a lot to actually, you know, doing the homework, doing the proper analysis, but then also really working prior to the acquisitions, getting to know the people, you know, the main drivers behind these companies that we've been acquiring. You can see everyone is still with our company after the acquisitions and are continuing contributing. Going forward, acquisitions will be an important part of our strategy. It has been successful to consolidate a growing niche business, and we still have, let's say, white dots where we can do additional acquisitions.
Are you looking for a specific kind of companies? I'm thinking of geographical, where they are located and so on.
No, this is more about industry logic. When we make acquisitions, it's for a strategic reason, and that's why we also fully integrate all the companies that we merge in to Surgical Science. It's basically customer base, in particular in industry OEM with med device companies. It's application areas. We do simulation in a lot of different clinical areas. It's complementary technologies, and it's a very specific competence of software development. These are the sort of four factors that shape what we'd like to become part of Surgical Science. And also if you look in the rearview mirror, you see SenseGraphics 2019, Mimic Technologies January 2021, Simbionix in August 2021. I mean, they all fit the bill of those things. But most importantly are the people.
I mean, you know, business is not done between two Excel sheets. It's done between people, and you have to really understand the motivations behind the key people.
You're right that Surgical Science is on a good path. There are causes for concern regarding the global economy, lockdowns in China, war in Ukraine. How is Surgical Science affected today?
I mean, you see the figures from Q2. You know, to have an organic growth, constant currency of, you know, more than 30%. Adjusted EBIT, which we think is the most relevant way to measure profitability, meaning EBIT and then excluding acquisition-related depreciations on surplus values, was, you know, 24%. It's almost $1 out of $4 is profit. So far we haven't been affected a lot. Of course, if we now move into recession, and I mean we all read the papers, and that recession becomes really long and really deep, of course it will affect us like everyone else.
I think, you know, healthcare and the healthcare sector and the macro trends of increased focus on patient safety, digitalization in healthcare, those macro trends won't go away, even if we have a turndown in the economy. I'm optimistic.
With regards to the causes for concern just mentioned, two quarters now have passed since you communicated the target of net sales SEK 1.5 billion by the end of 2026. Are you more certain that you will achieve this today than in the beginning of the year when you communicated this?
We're used to setting high ambitions at Surgical Science and then actually delivering on them. We have a history of doing so. What I said in the Q2 report is that we're on a good path towards our long-term goal. I think in particular, maybe people have been surprised, maybe us ourselves has been a bit surprised of the strength in Educational Products. Maybe we underestimated that a little bit because the strong growth there is really nice to, if we talk about over these five years, to be on average between 10% and 15%, and we've been way higher now, in the beginning of this journey towards the financial goals. That's of course very nice to be sort of, you know, on a good path there, and it also builds a customer base.
We do have some revenue, in particular service and support agreements, and also growing subscription revenue from our cloud services that are very important, for us. If you look at having a larger installed base, that means those revenues can also, you have a higher chance of capitalizing basically on that installed base once you got it.
In July, we could read some news from you regarding the American investment fund Invesco Global Opportunities became a large shareholder with about 1.5%. I think they are the 13th-largest shareholder. What can you tell us about them? What's their strategy? Are they active or passive, for instance?
I think we have a really nice combination in Surgical Science of some long-term owners of flesh and blood. You know, we have Mr. Jan Bengtsson, who's the largest shareholder, and then Mr. Roland Bengtsson, who's also the Chairman. They've been with the company for more than 15 years. They didn't sell anything in the IPO. They've been really supporting our growth strategy. They've been diluted, but they've seen the value grow in their investment. We have a lot of mutual funds. When it comes to the mutual funds, they're typically not very active in their ownership in terms of influencing the direction of the company.
They are very, very important for us because they have been there for us when we have needed capital for acquisitions. We see a growing interest from foreign mutual funds. Also if you look at our cap table, I think one of our largest owners is Capital Group. It's an American company. There are several large international mutual funds that are among our big owners on the top 10 list.
I guess you receive more investor phone calls from overseas these days.
We get a lot of investor interest, yes. That's correct. You always have to balance it because, I mean, at the end of the day, we focus on our customers and delivering the best simulation for the benefit of patient safety. You need not to spend too much time on those things.
What can shareholders look forward to in the second half of 2022?
Yeah, that's a very open question, Matthias, but you know, we are at it every day, all parts of the organization. In a quarter like Q2 when we were selling, you know, our educational simulators, SEK 120 million, that's several simulators per day that we are assembling, quality assuring, delivering, installing, supporting. We basically stick to our plan, and that plan has really worked, and I hope it will continue working and that we will have happy shareholders even in coming quarters.
Thank you for sharing this with us today.
Excellent. Thank you for having me.