Elekta AB (publ)

Good morning everyone and a warm welcome to the presentation of Elekta's first quarter 2022-23. My name is Cecilia Keters and I'm Head of Investor Relations at Elekta. With me here in Stockholm I have Gustav Salford, Elekta's President and CEO, and our CFO Tobias Hägglöf who will be presenting the results. Today's agenda starts off with Gustav presenting some highlights of the development and then Gustav Tobias will give you details on the financials and the presentation's end with Gustav's view on Elekta's outlook. And after the presentation there will, as usual, be time for your questions. But before we start, I want to remind you that some of the information discussed in this call contains forward-looking statements. And this can include projections regarding revenue, operating result, cash flow, as well as products and products development. And these statements involve risk and uncertainty that may cause actual results to differ material from those set forth in the statements. And with that said, I hand over to you, Gustav.

Thank you, Cecilia. And hello, everyone. And really thank you for joining the call here in the morning. And I would like to start with how we delivered on a strategy during Q1 and really moving towards an improved access to the best cancer globally. So if we look at our strategy access 2025 and how we have executed during the quarter, you will see, for example, in supporting the strategic pillar of accelerating innovation. We launched Electa S3, the new Lexel Gamma Knife platform during Estro in Copenhagen in May. And we received C-Mark for S3 earlier this week, enabling people with brain disease, cancer and other tumors to benefit from the most advanced Gamma Knife platform. We also continue to drive partner integration. One example is the strategic partnership between Keiko Health, our leading digital therapeutics platform in cancer care, and Roche, a leading global healthcare company, to deploy digital tools to provide real-time system management by patients and healthcare providers. We continue to drive adoption across the globe. And one example is that we got clearance for Harmony in China in the quarter. So we now have local production of full Linac product lines in Beijing. This is really about made in China for China. Another example of adoption is the MR-Linna Consortium meeting in Houston, where 75 members of the consortium presented advances in their clinical and technical research, utilizing the groundbreaking treatment platform and increasing adoption. But the primary focus during the last quarter has been on the resilience and process excellence initiatives across our organization to mitigate the current supply chain challenges. And in addition to the program, we're now launching a cost reduction initiative to support modern expansion going forward. And both Tobias and myself will come back to the initiative later in the presentation. But I would like to also look at the order development. And you can see that EMEA and APAC reported healthy growth in the quarter, but Americas showed a decline. And in total, orders declined by 11%. So if we start with Americas, you see that the order decreased by 43%. and this is decline was mainly explained by strong order level in a comparing quarter and also the year before in the q1 but also some underlying cautiousness in the u.s customers investment decisions due to the macroeconomic uncertainties and longer decision processes On the positive side, we are happy to report that the second Unity MLINAC was ordered by RWU Barnabas Health in New Jersey, and the first Excel Gamma Knife ever was ordered to Panama. In EMEA, the order intake in Europe was supported by orders from the regional Spanish hospitals following the large public tender announced earlier. And a good development in other important radiotherapy markets such as Germany, France and the UK. The Middle East and Africa continue to show growth, including a large order to Nigeria in West Africa, a comprehensive deal with Kaduna Cancer Center, including Unity, Harmony, and Alexel Gamma Knife, really supplying the best available cancer care treatment opportunities to Nigeria. Orders in APAC returned to growth despite a slower market in China due to the lockdowns. And during the first quarter, order intake increased by 9%. The growth was driven by the development in mature markets such as Japan and Korea, but also the Indian market. One example from Japan is the order from Taikyo University Hospital, including in Harmony Pro and Kaiko. The Philippines and Indonesia, where Lekta most recently opened sales offices, continued to show good growth. We also had more market and customer-facing activities in the quarter with increased physical customer activities. For example, Estro, WAPM, the consortium meeting, and that this is following a long period of restrictions and hybrid meetings. We also now see that our sales funnel is really developing well over the last couple of months and going into the second quarter. But if you look more on the revenue side, you see that Electa experienced challenging market conditions in the quarter. Revenue grew, but supply chain disturbance continued. Installations came in at a similar level as last year, and service drove the growth in the quarter. We increased our prices to mitigate the impact of inflation, but it would take some time before the increases translate from our order backlog into higher profitability. The combination of continued headwinds from supply chain challenges, component shortages and increased inflation led to high cost levels and continued pressure on EBIT margin. We expect these headwinds to continue during the year and impact our cost base. We are therefore accelerating our ongoing resilience and excellence program and launching a cost reduction initiative to support modern expansion throughout the year. We plan to adjust the organization to the current situation and reduce our cost base with around 450 million Swedish krona on a run rate basis by the end of this fiscal year. The initiative focuses on driving synergies between our business lines across regions and through a newly merged product development organization and driving efficiencies in administration and support functions. Tobias will go through the initiative in more detail in the next section. So now, over to you, Tobias.

thank you gustav and good morning everyone i will start this with covering the q1 financials and and then just as just mentioned here finish my part with describing our cost reduction initiative in more detail in the presented numbers you'll find adjusted numbers the adjustments relate to items affecting comparability which are cost taken for implementing our cost reduction initiative So, starting off with the Q1 financials. As Gustav showed earlier, despite continuous supply challenges, our revenue grew by 3% organically in the quarter. Geographically, revenue in the Americas grew by a healthy 7%, with solid sales in the US and strong sales in Canada. Our operations in EMEA grew slightly by 2%, positively impacted by higher installations in Italy and Spain. In APEC, revenues were in line with previous year. We continued good growth in China despite local shutdowns. Our adjusted gross margin improved in the quarter, both sequentially and year-over-year. Expenses grew year-over-year, but declined sequentially. Finally, while FX had a positive impact on a gross margin level, exchange rates hedges had an adverse impact of 420 basis points on our operating margin. All in all, our adjusted EBIT margin declined by 270 basis points year over year. So let's turn slide and look into our gross margin development in more detail. Our adjusted gross margin increased by 180 basis points year over year. This improvement is explained by the following. Just as I mentioned, we had higher revenues, which contributed positively by 120 basis points. We had an improved mix, both from selling relatively more service than solutions, as well as a positive product mix. This effect contributed positively by 250 basis points. FX had a positive impact on gross margin level of 110 basis points, mainly driven by the strengthening of the US dollar. This was partly offset by higher supply chain costs and inflation, which had an adverse impact in the quarter of 300 basis points. Now, let's turn the slide and talk about our expenses in the quarter. Selling expenses increased by 14% in the first quarter. This was driven by more market and customer-facing activities such as the Estro, AAPM and the MR Linear Consortium, and general easing of restrictions for traveling and exhibitions compared to a year ago. Our administrative expenses increased year-over-year but declined sequentially. Net R&D decreased year-over-year. Capitalization was higher since more projects are moving to capitalization phases, while amortizations declined year-over-year. Sequentially, net R&D increased following the increase of gross R&D. All in all, expenses grew by 3% year-over-year in constant exchange rates. So let's look into our R&D development in more detail. In line with our plan, gross R&D increased in the quarter in order to strengthen our innovation pipeline. In the coming quarter, gross R&D expected to stabilize and then come down as a consequence of our planned spend reductions. Capitalizations increased compared to last year, but were stable sequentially. So now let's turn slide and look into our network and capital development. Our net working capital continued to follow a normal seasonal pattern. As percent of sales, it amounted to minus 4% in the quarter, which is the same level as Q1 in the previous years. During the quarter, we built some more inventory to secure future installations under the current extended lead times within the supply chain. So let's turn the slide and talk about our cash flows. EBITDA amounted to 379 million SEK in the quarter. Following the build-up of working capital in the quarter, cash flow from operating activities amounted to approximately 200 million SEK negative, resulting in an operational cash conversion of 67% on a rolling 12-month basis. Our continuous investments amounted to almost 400 million SEK, mainly driven by investments in our innovation pipeline and a strengthening of our product offering. All in all, our cash flow after continuous investment was about 600 million SEK negative. Now, let's turn the slide and look into the details of our cost reduction initiative. So, as Gösta mentioned, we have now launched a cost reduction initiative within the resilience and excellence program, which includes measures to drive synergies and enhance productivity across the organization. This initiative is estimated to lower our annual gross spend by 450 million SEK when fully implemented. Out of the 450 million SEK, one third will come from COGS reductions. 200 million SEK from optimizing R&D spend and 100 million SEK from lowering selling and admin expenses. About half of the lower R&D spend will contribute to higher earnings in our P&L and half will reduce the investments building up in the balance sheet. By the end of this fiscal year, we estimate to reach a spend reduction of approximately 200 million SEK from the initiative. Since the initiative is just starting, the savings are still to come in the following quarters. For the convenience of measuring the underlying performance, we define non-recurring costs for realizing the spend reductions as items affecting comparability. In total, we estimate these costs to amount to approximately 400 million SEK. In the first quarter, implementation costs amounted to 14 million SEK. Over to you, Gustav.