Elekta AB (publ)

Good morning, everyone, and warm welcome to the presentation of Electa's third quarter 2022-23. My name is Cecilia Ketels, and I'm head of investor relations at Electa. With me here in Stockholm, I have Gustav Salford, Electa's president and CEO, and our CFO, Tobias Häggler, who will be presenting the results. And today's agenda starts off with Gustav presenting some highlights of the development, and then Tobias will give you details on the financials, and the presentation ends 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 on this call contains forward-looking statements. And these can include projections regarding revenue, operating result, cash flow, as well as product and product development. And these statements involve risks and uncertainty that may cause actual result to differ material for those set forth in the statements. And with that said, I hand over to you, Gustav.

Thank you, Cecilia, and good morning, everyone, and thank you for joining the call. So, to kick off, during the third quarter, we continue to focus on the execution of our strategy, Access 2025, and I would like to highlight some of the key and important initiatives we have been driving during the quarter. We continue to invest in innovation with customer utilization in mind. And one of the key areas that is really driving Access 2025 forward. We're focusing on the new Linux platform, software development, and the Unity platform. And it was actually amazing to see that during this quarter, we also saw the benefits of our innovation as reaching patients. The first patient being treated with advanced radiotherapy motion management using Electa Unity, or MR-Linac, happened in Utrecht in the Netherlands. And in the UK, in Sheffield, The first patient ever were treated with our latest gamma knife system, Elekta S3. These moments are so rewarding for Elekta and everybody working here, but also for our customers and their patients. We are continuing to drive adoption and access to cancer care across the global scale. And most recently, by going directly into the growing Thailand market. We're also doing a lot of digitization and process excellence initiatives, and our cost reduction program is progressing very well. It is vital that our strategy around access 2025 is delivered in a sustainable way, and that we can measure and reduce our environmental impact. And a key highlight in the quarter was that we got our science-based target validated here just recently. And I'll come back to that. So if we take a look at our markets and orders, we return to a healthy order momentum, growing orders with 9% in the quarter. In America, orders increased by 3%, and both North and Latin America showed growth. The latter was driven by strong order intake in Mexico after winning multiple public tenders. In EMEA, orders were flat compared to last year. Europe showed double-digit growth on top of last year's strong growth and was driven by two big tenders in Spain and Italy that we mentioned before. This slowdown was reported both in Middle East and Africa. but it was really dominated by the Middle East due to weak markets in places like Egypt and Turkey as a consequence of their domestic macroeconomic situation. In APAC, orders increased by 27% based on constant exchange rates during the third quarter, and the high growth in the region was explained by strong development in China, supported by public investments into the medical devices in the country, but it was also a great momentum in Southeast Asia, both in the emerging countries like Indonesia, but also mature markets like Korea. During the last year, we have extensively worked with price initiatives across our business lines and regions to offset the impact from the higher component and supply chain costs. Price realization for new orders has shown good progress, and we see that also turning into our P&L. We continue to also have a very strong order backlog of 43 billion SEC, and this is really a stable foundation for driving installations in the coming quarters across our regions. And if we look at the installations and our revenue, the order backlog conversion has been a key priority in the third quarter, and we delivered a strong revenue growth across all our business lines of 8%. The installation volumes in Americas and EMEA was strong, resulting in double-digit revenue growth in these two regions. APAC was impacted by lower installations in China due to the wave of COVID cases in December and January. But we expect Chinese volumes already to recover in the coming quarter. Americas grew with strong 15%. And it was both the North American market and the U.S. had strong double-digit growth together with Latin America. EMEA grew with 16%, and both Europe and the Middle East and Africa contributed with strong growth in the quarter. APEC came in at minus 3%, and that was really explained by the large impact on the COVID cases in China in December and January. The recurring revenue service came in at 3%, and we had a strong Q2 with 7% the second quarter, and in the third quarter, our installed base grew with 5%. So at the end of the period, Electa has an installed base of approximately 7,100 devices, of which 5,200 units were Linux, MR Linux, and Lexel Gamma Knife systems. And to support improved access to cancer care around the globe, we signed an agreement to acquire business assets from a current distributor in Thailand, Premier Business International. And with this local presence, Electa will increase the commitment to the Thailand customers while strengthening the position in the market with substantial further potential to improve and give access to the best cancer care. And if we turn a bit to electa unity and paradigm shifting journey we're driving with the MRLNAC. You can see some of the evidence here. And if we look at the prostate SBRT treatments, you can see that from our MR-Linna consortium is really driving this development and what's possible in radiotherapy. And if you take a deep dive into prostate cancer treatments, and this is a large indication, as you all know, You can see that there was a recent publication from the Momentum study, and this is the largest study on prostate, and it's driving with five fractions and was analyzing the side effects. And this study shows that ultra-hyperfractionated MR-guided radiation therapy is effective and safe. And the next step will be to move towards two-fraction treatments with MR-Linac unity, which, of course, will dramatically reduce cost of care. But there was also other key milestones for prostate treatments with Unity. And in Australia, at the St. Vincent Hospital, they have done the world's first simulation-free treatment ever. And this is a really big step in shortening the treatment time that is benefiting, of course, both the patients and the cancer clinics. So... If we then turn another highlight of the quarter on the sustainability side, in February, we achieved official validation of greenhouse gas emission reduction targets and our science-based targets from the organization Science-Based Targets Initiative. And this really means that the LECTA's emission reduction targets have been validated to be ambitious enough to support the Paris Agreement. and that our carbon reduction plan is aligned with climate science, and really we need what we need to do going forward. So if we look into the different scopes and how we address them, for scope one and two, we have set two science-based targets. It is about reducing emissions by 46.2% from scope one and two over the next 10 years. It's about transition to using 100% renewable electricity by the end of calendar year 2030. And if we look into scope three, it is about cutting emissions from the use of electric products by 55% per radiotherapy treatment course over the next 10 years. It is also about engaging our suppliers to sign up for science-based target until 26 and 27. So with that update, I would like to hand it over to you, Tobias.

Thank you, Gustav, and good morning, everyone. Now, starting with the Q3 financials. Total net sales increased by 8% organically in the quarter, with strong installation volumes at the end of the quarter. Installations grew by 12% compared to last year. This was achieved despite continued challenges in the supply chain and fewer installations in China due to a large number of COVID infections. Geographically, we saw strong growth in the U.S. and in May. Our adjusted gross margin was 38.4% and increased both sequentially and year-over-year. Improvements were also seen in our expenses. Expenses in constant currency and adjusted for items affecting comparability decreased both sequentially and year-over-year, resulting in an improved adjusted EBIT margin of 10.7%. We continue to see a clear impact from FX in our P&L. Foreign exchange rates had a positive impact on our gross margin while being negative on the EBIT margin. So let's look into our gross margin bridge. Our adjusted gross margin increased to 38.4% in a quarter. The health and net sales growth contributed positively with 320 basis points. Foreign exchange rates had a positive impact of 150 basis points, mainly driven by the strengthening of the US dollar compared to last year. The strong solution growth led to a negative mix effect, impacting the gross margin by 100 basis points negative. Looking into the supply chain, overall freight rates have come down, but we still have component shortages and inflation pressure from material and component prices. In total, the high supply chain cost and inflation had a negative impact of 200 basis points. Then, looking to our expenses and constant currencies and adjusted for items affecting comparability. All in all, the operating expenses decreased by 1% both year-over-year and sequentially as we continue to see the results of our cost reduction initiative. Selling expenses increased by 1% year-over-year in third quarter driven by more in-person meetings. Sequentially, our selling expenses declined by 6%. Our administrative expenses declined year over year and was somewhat up sequentially due to investments in digitalizations. Net R&D expenses declined year over year, but increased sequentially as we had higher amortization in the quarter. So let's look into our R&D spend in more detail. Gross R&D has declined sequentially from the peak in Q1, as previously communicated. Sequentially, capitalization decreased, whereas amortization increased in third quarter. On a rolling 12-month basis, gross R&D as well as net R&D declined. Our cost reduction initiative has progressed well and according to plan. Our expenses are declining. During the third quarter, the initiative has reduced our spend by another 70 million SEK year-over-year, leading to a total reduction of 120 million SEK for the first nine months of this fiscal year. This leaves us well on track with the planned year-over-year savings of around 200 million SEK for the full year. At the end of April, we expect to have reduced the annual run rate of spending by 450 million SEK. As previously presented, 150 million will come from COGS reductions, 200 million from optimizing R&D spend, and 100 million from lower-end selling and admin expenses. The year-to-date cost for implementing these cost savings amounted to 263 million SEK, of which 64 million impacted our gross income. Moving over to the balance sheet. Our working capital has been impacted by strong sales growth by the end of the quarter. The build-up of inventories has been an active choice of securing installations and managing supply chain challenges. The high level of shipments towards the end of the quarter generated an increase of receivables and accrued income from which we will get paid in coming quarters. Then look into our cash flow. EBITDA amounted to 684 million SEC in a quarter. The working capital buildup amounted to 445 million SEC, resulting in a cash flow from operating activities of 225 million SEC. Our continuous investments amounted to 389 million SEC, mainly driven by R&D investments in the Linux family and software to strengthen our product offering. All in all, our cash flow after continuous investments was 163 million SEK negative. Now, let's turn slide and look into our financial position. Our net debt to EBITDA ratio amounted by the end of the quarter to 1.46. We have upcoming maturing debt in March, which we have refinanced after the Q3 closing in February. Through this refinance, we have increased our available funds to more than 3.9 billion SEK. And we increased our debt portfolio duration to 4.1 years. All in all, we have a strong balance sheet and a solid financial position. Over to you, Gustav.

Thank you, Tobias. And now I would like to take you through the outlook. So looking into the coming quarters, we continue to see an uncertain macroeconomic environment that they will be continuing. However, we saw in Q3 and expect going forward an improved order backlog conversion supporting revenue growth. We have some component shortages still, and we believe that inflation will remain. This is putting pressure on margins. However, at the same time, we are driving the cost reduction initiative that's contributing positively that you have already seen. The long-term market trends is really supporting growth and investment in high-end radiotherapy equipment and margin expansion for Electa. So looking at the midterm, the midterm outlook until 2024-2025, it is unchanged. So we are having net sales CAGR of above 7%, EBIT margin percent expansion, and a dividend policy of at least 50% of net income. So to summarize the quarter, we see that the demand for radiotherapy continued to improve in the quarter and supported our order growth. We managed our supply chain challenge as well and could ship throughout the quarter And we have a strong order backlog conversion, driving installation volumes and revenue. And we also see that the cost reduction initiative is progressing according to plan, supporting profitable growth going forward. So thank you for listening.

Thank you, Gustav. And before we open up for questions, I would like you to save the date, 20th of June. This is when we would like to welcome you all to our facilities in Crawley, which is close to the Gatwick Airport, for a capital markets day. And more information about the agenda and the timing will come when we move closer to the event, of course. So let's switch over to the operator and answer your questions. Please, operator, go ahead.

We will now begin the question and answer session. Anyone who wishes to ask a question may press star and 1 on their touchtone telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the queue, you may press star and 2. Participants are requested to use only handsets while asking a question. Anyone who has a question may press star and 1 at this time. The first question comes from the line of Matthias Wadsten from ACB. Please go ahead.

Good morning. I have a few questions. I'll probably take them one by one. First one, if you could maybe expound a little bit on the very strong orders in APAC, the 27% year-on-year constant currencies. Are there any particular drivers here in Q3 suggesting we should be cautious, or is it just really higher activity out there now, particularly maybe in China. And then looking at the comp for Q4, both last year and rolling over a few years, it looks quite similar. So just how we should think about this in APAC, really.

Gustav here. So, yes, you saw very strong growth in APAC, 27%. The key driver was that the governmental programs in China in December giving out interest-free loans to public hospitals and the hospitals investing in cancer care. That results in new licenses. That was a significant driver of this growth. But we foresee that to continue because the Chinese market, as we mentioned before, throughout COVID-19, has been quite low on the order side and now we expect it to go through an investment cycle again. But it was not only about China. It was also, as I mentioned before, the Southeast Asian markets and Australia and New Zealand. But I think a key growth drive also going forward is China when it comes to orders. And we have a positive outlook for, I would say, APAC market activity and demand.

Good. Thank you for that. And in terms of the expected sort of supply chain improvements for Q4, you alluded to in the Q2 report, to what extent have you seen that already now in Q3 given, you know, margin expansion year on year already now and also with the solutions growth in the quarter and how does your expectancy for Q4 at that, you know, back in November compared to what you see right now? Yeah. That would be my next one.

A great question, of course. We had a very strong finish of the quarter. Logistic change has improved. Easier to get sea freight. It's cheaper to get sea freight as well. That's important for us. Air freight the same. It's much cheaper. It's easier to get hold of. Road can be challenging, a bit costly still, lack of drivers and so on. But overall, there's been a big improvement, and I foresee that to continue to improve going forward as well. Then if you take the procurement and manufacturing side, there are still components that's difficult to get hold of, for example, chips. And we work with that on a daily basis to get hold of them for our production. But I don't think that's something specific for Electa. It's for the industry and many other industries as well. But if you take overall, I foresee that logistics chains and the supply chain will gradually improve going forward. And we saw a really good development here in the last month.

Thank you very much for that. Maybe the last one for me before I jump back. On the gross margin, trying to set aside aspects here, it looks quite strong given there is 61% of sales coming from solutions. So could you maybe discuss the mix a little bit within, you know, within installations, the installations you've done and, you know, how you see it going forward? Is it something we should keep in mind here? Maybe that's my question.

You saw in the bridge, I think that Tobias and Tobias can add as well, but you saw in the bridge that the solution service mix was there because we had a very high growth of solutions. But within that solution growth, there was a good product mix. So that was quite profitable compared to the previous quarters. So that always, as you know, changed quarter by quarter depending on what we install and deliver. But in this quarter, the solution product mix was favorable, I would say.

Thank you very much for that.

Thank you.

The next question comes from the line of Eric Castle from ABG. Please go ahead.

Hello. Good morning. So I just want to... follow on on Mattias' question. So I'm thinking about how much we can actually extrapolate the strong margins in this quarter. I mean, when we head into Q4, as you said, I would assume that there's still some cost pressures and supply chain issues, maybe also more volumes going into China, which would make solutions still a bit more dilutive than normal on gross margins. But is it fair to assume that, you know, the leverage from higher volumes can offset that dilution effect, or is it rather more reasonable to expect gross margins actually coming down Q1, Q2, Q4?

Thank you, Erik, and a great question, of course. And let me break it down into the different components here. As we all know, for electric, it's important with growth to get leverage on gross margins. That's kind of a starting point. But if you look into the gross margins, you will have inflation or material cost component prices. Some of these components are difficult to get hold of. There will be higher prices of those. But at the same time, you get leverage on this gross margin that's related to personnel like engineers or manufacturing workers and so on. So we see a bit of that leverage going forward as well. But I think the inflation will impact parts of our material costs. So overall, that's what we refer to in the outlook as well. There will be some of that cost pressure on the gross margins going forward. And then it, of course, depends on how much growth we can drive from our order backlog in order to get that leverage we want on gross margins and then further down in the P&L.

But do you think those effects will rather improve gross margins Q&Q or make them go down?

I think it's important to say, I mean, as we always say, but I will say it again, that, I mean, we are driving for revenue growth over the 7% and for EBIT margin expansion. So that is true for the coming quarter as well.

Okay. Thank you. Then I was just wondering if you could be a bit more specific on how much of the tenders in Italy and Spain you actually booked this quarter, and how much is coming in Q4?

Yeah, regarding the Italian deal, we booked the majority in Q3 here, and we also booked some of the Spanish here. We do not provide explicit numbers on that, but that's how it looks like.

Okay, thank you very much.

Thank you.

Thank you.

The next question comes from the line of Oliver Reinberg from K-Pressuro. Please go ahead.

Thanks very much for taking my question. The first one would be on China. So can you just share any kind of color, what kind of sales development you have seen in China in the first nine months and any kind of thinking how quick can now be a kind of recovery be in terms of steepness when the market is now opening up? That would be the first question, please.

Hi, Oliver. So China, it's been okay, I think, installation volumes, but not on a growth trajectory over the last three quarters. But what we see right now is that the orders are coming back. Better access to hospitals. There was a huge surge in COVID cases in December, as also in the news. But now we get very good access to the hospitals for installations going forward. So we foresee that growth happening over the coming quarters in China to install a lot of Linux. The exact number for China for the three first quarters, I don't have that information.

Okay, thank you. And the second question then on services. So obviously service growth was a bit weaker while it's normally a relatively stable business. So can you just provide a bit more color what happened here? And I assume that pricing was probably already a kind of support factor. And if you could quantify the kind of price effect in the service growth, please.

Yeah, so service, our target is always to grow service more than install-based growth by adding value to the customers. We did that in Q2. That was a 7% service revenue increase. In Q3, it was 3%. Of course, we want to drive higher numbers there. But then you need to break down the drivers in the quarter, what it was. I think when you get growth in markets with greenfield installations that have a lower service contract pricing, even if you raise those prices, that will have a bit of an impact on overall service revenue growth. So it's the market mix that in some quarters can have that impact. But over the rolling 12 months, over the longer period of time, we always want to see that our service revenue growth should grow faster than our install-based growth. But that didn't happen this quarter.

Perfect. And can you give us any kind of feeling what was the net price support in service growth?

I don't have the exact numbers, but I think on the pricing overall, we've seen on the solution side that we have raised our prices, and we mentioned that before, 5% to 10%. Then it's, of course, about price realization as well, exactly what you get in the safe situation. On the service contracts, yes. we always want to reflect the inflation in the specific country. So that is very different. They're often linked to CPI clauses. So that could be low than an APAC because the inflation is lower, but higher in places like Europe and the US.

Okay, thank you. And then the last question, if we just take this kind of component, inflation, supply chain and pricing all combined, Can you give us any kind of early indication how you think about these elements moving to the next fiscal year? So I guess pricing may be a certain net support. I guess in supply chain, there's a lot of improvements. The offset is obviously inflation. So any kind of color, if we take this combined before any kind of cross-cutting, is it overall kind of a blend? Would it rather be kind of slight negative or even a slight positive?

Yeah, great question, Oliver. And I think looking a bit further out, talking about the drivers again, then as logistics costs as a percentage of revenue, I assume that to improve as it has already in this quarter going forward. So that would be a positive driver. Material component shortages, I think that will improve if you take a 12-month horizon, but the prices are high because of availability. If you take the inflation, I think that's the most difficult part for all of us. to evaluate exactly how that will hit on salary increases and components and so on. So I think that we need to follow quarter by quarter how it develops. And then overall, I think for Electa to have the accessibility to our customers to do the installations, that's absolutely key to get the revenue growth so we can get the leverage on the gross margin. So that's just sharing my thoughts on those drivers that you were talking about.

But any kind of, is that overall a kind of offsetting each other, or do you guess if we take this in isolation, will there be further drag next fiscal year?

Our ambition is to improve our profitability and modern expansion quarter by quarter. So the conclusion of that is a net positive.

Okay, perfect. Thanks so much.

The next question comes from the line of Richard Anderkans from Handelsbergen. Please go ahead.

Right. Good morning. So, thank you for taking my question. So, the first question on the contribution margin per region. So, nice pickup quarter of a quarter, four percentage points in both Americas and APAC, but rather muted 1% quarter of a quarter move in EMEA. And EMEA contribution margin has been significantly pressured. How much of this contribution margin pressure comes from the tender activities? And is it reasonable to believe that EMEA can return to pre-pandemic contribution margins with these large tenders in the order book and delivery, so to speak?

And yes, that would be my short reply. So if you look at the quarter, there is impact when you have these larger deals, independent of what region or country it is. You often get a bit lower average prices. then you will earn that back on after-sales opportunities. It could be service contracts and so on. So I think that's important to say. And then overall, I see we will drive good margins from the Maya region going forward as well. But there is some impact on installations of the larger tenders in the quarter.

All right, thank you. That's helpful. And a second question, if you can elaborate a bit on on the sort of price realization and the overall margin profile of the large order volumes coming in from China now. Do you sense any pricing pressure or margin challenges there? You know, obviously value volume based procurement has been, you know, a point of discussion in recent years, et cetera. So it'll be interesting to hear a bit more flavor on the margin dynamics in China. Thank you.

No, so margins in China, you shouldn't see China as a low margin market. They often want the latest technology, the best available cancer care treatment devices and so on. So we have a strong margin position in China because of that they want the latest technology. And I think I don't see that will change going forward. They have a huge need. I mean, linear per million of population could be somewhere around maybe one and a half, two. So a big need for more cancer care out in the different regions. And I think we will deliver that with a good margin going forward as well.

Great. Thank you. That's all for me. Thank you.

The next question comes from the line of Julien Odu from Bank of America. Please go ahead.

Hi, good morning, everyone. Thank you for taking my questions. So the first one, assuming, let's say, so it's on orders. So assuming a large part of the Italian tender was booked in Q3, let's say 75%, according to my math, it would imply that EMEA orders decreased by, let's say, 20% at constant currency. Could you spend just a bit of time explaining what's such a momentum in this region?

Yeah, I can answer. Hello and good morning. I think, first of all, when you look at it, I mean, this is an essential part of our business to participate in this deal. So it's whether to include or exclude it. But I think, I mean, yeah, we see a solid order development in Europe. And that is also something that we see ahead as well.

little bit longer perspective on that question if you go back to q3 last year it was a really strong growth there as well from europe so i mean we we showed two consecutive quarters uh year-over-year with strong growth and part of it came of course in this quarter from the larger italian tender

Okay, thanks. Which means basically excluding tenders. I mean, the core business is not growing so much in Europe. I mean, that's mostly driven by tenders, right?

The European market is a tender-based market to a very large extent.

Okay, great. Thanks a lot. Next question on EBIT. I just noted an important part of one of in this quarter and a big chunk relates to impairment of facilities. I think you didn't have it in previous quarters. Can you maybe also explain what it is exactly?

No, this is a part of our cost reduction initiatives that we are looking for all costs and what we don't necessarily need to use. We shouldn't use it. So it's actually a, as we have gone through, I mean, for all other costs, it's actually to go through, I mean, the building, the facilities that we have and what do we need to use and what we don't need to use. So this is actually, it's part of that and will also be one of the contributors for the cost savings ahead.

Okay, great. Thanks. And maybe if I can squeeze the last one. You saw an uptick in installations toward the end of the quarter. Just how do you see installations in the next quarter? Do you expect it to be up sequentially?

We are positive, as we also see in Outlook, that a good order backlog conversion also in the fourth quarter, driving growth.

And seasonally, as you know, Q4 is our largest quarter.

Perfect. Thank you very much. Have a good day.

Thank you. Thank you. The next question comes from the line of David Adlington from JP Morgan. Please go ahead.

Morning, guys. Thanks for the questions. Maybe just a follow-up from Julian on the European orders. I've done the same math in getting down, you know, to the high teens, into the 20s in terms of X, just the Italian order, never mind Spain. So I just wondered, you sort of point out sort of macro headwinds from Egypt and Turkey. There seems to be a lot of headwind just in those two markets, but also, I suppose, looking forward from here, if that is the headwind, do you expect those to resolve? Yeah. Second question is on cash flow, obviously negative 1.2 billion in the first nine months. Just wondered what your thoughts were on the full year outlook and how that might improve from here. And then finally, just in terms of the capitalized R&D, just wondered when that's going to become a headwind to margins as that capitalized R&D comes back onto the P&L. Thanks.

Thank you, David. So one question on Middle Eastern Africa was my understanding, one question on the kind of nine-month quarterly cash flow, and one question on capitalized R&D. But if I start with... Middle East and Africa question. Yes, there is impact, of course, hyperinflation in both Turkey and Egypt and in parts of the other markets. It's not just those two countries. But in the region, you see some impacts on kind of investment and you have a high interest rate and so on. And I think that that will not go away in the next quarter. But overall, of course, Middle East Africa is a huge region and you have many economies that are investing in cancer care as well. But if you would take the two biggest contributors in the third quarter, it was those two countries. The nine-month cash flow, Tobias, maybe you can take that question.

Yeah, absolutely. Good morning, David, and good to hear you. So just to explain that we built the inventories and what the high sales growth towards the end of quarter is, what you see that this is actually converting into receivables, which we then will get paid here in coming quarters. So that means that we are looking into a healthy cash flow here in Q4.

And then it was the capitalization question as well.

Yeah, could we repeat that, David?

Yeah, just wondering, obviously, the capitalized R&D continues to outweigh the amortization. Just wondered when we're going to see a more normalization of that and what sort of impact we should be penciling in in terms of headwind for margins maybe next year.

Yes. So actually what you will see here is that the gross and net R&D will gradually come closer here in the coming years. And in terms of the P&L impact into next year, you will see a higher rate of a gradual increase of the amortization leading to a net impact on the P&L.

Is that something you're able to quantify in terms of what might happen to absolute R&D spend or percentage headwind on the margin or anything like that?

Yeah, so what we're seeing here is that in terms of the gross R&D, that has stabilized. In terms of the gross R&D in percentage of sales, we expect that to continue to decline. In terms of the... capitalization rate that is driven by the facing of the projects it might be slightly lower and in terms of the amortization that will be a gradual increase so some extent on the the p l into next year but i wouldn't over accelerate it as well thank you thank you

The next question comes from the line of Robert Davies from Morgan Stanley. Please go ahead.

Yes, thank you for taking my questions. The first one was just had on the backlog. You obviously mentioned higher levels of conversion in the coming quarters. Just if you could give us some sense of where pricing is sitting in the backlog, that would be helpful as the first question. And then the second one was just on the competitive environment, I guess, across the different regions. You obviously had quite... quite high variability and different sort of order strengths in different regions. I'd just be interested to see if there's anything kind of material changing on the ground in terms of competition. Thank you.

Thank you, Robert. So, the background question. So, on average, you know, booking policy, we book orders three years. If you get the multiple-year order for service contracts, it's five years. But on average, for LINAC, it's between one, one-half year. If you take MR LINAC or Gamma Knife into that range as well, between order and start of installation. So... Most of it happened before, a big part of it happened before we did all of these price increases initiatives that we have done through, say, the last year or so. So you will have some of the installations that go out now. That was priced before the inflation kind of kicked in. And that's what we're delivering right now. It's impacting a bit on the gross margins. But we see better price points going into the order backlog. And I think we have a good mix in the backlog to deliver in Q4 and Q1 and so on as well. Okay. On the competitive side, I mean, by market and so on, I think we are seeing good development across the different markets for Elekta. If you look at the revenue side, we had a very strong Q3. I think that was a highlight for us compared to the competitive situation. So I'm optimistic in, I would say, all our markets there. It's always different dynamics. We are strong in, say, places like China, emerging markets, parts of Europe as well. We have big opportunities, I would say, in America overall to take more share. So that's something, of course, we are driving for. But overall, I'm kind of optimistic that our model of being, you know, really focused on cancer care radiation therapy together with strong partnerships in all these regions will really drive a good development for Electa going forward.

That's great. Thank you. Thank you. Thank you.

The last question comes from the line of Thomas Arno. from Marble Bar Asset Management. Please go ahead.

Hi, thank you. Sorry, Mathias Tarn. I have three questions, if I may. The first is on the acquisitions of distributors in emerging markets where we've seen you acquire over the last two years, I think Egypt, Philippines, Malaysia, and now Thailand. Just I appreciate it's probably small investments, but just curious to understand the accounting effects from these transactions. For instance, these distributors have any, or did you have receivables outstanding to them in any way, or did they carry inventory? And if so, how is that treated? The second question is on service contracts. Could you elaborate, explain if these include any, are they indexed for inflation in any way? And if so, what would have been for the like-to-like growth in service orders? And then the third question is looking at the filings from your German subsidiaries. and I appreciate it's a small market, but it specifies that your market share there amounted 35% last fiscal year, down from 57% three years ago. So I'm just curious. I know it's a small market, but is this in a way specific to Germany, or are you seeing the same trends in other developed markets, and how do you expect to claim that? Thank you.

Thank you. Thank you for those questions. I think on the When we go into new markets, like, as you mentioned, Egypt, we've done it in Mexico, it's Thailand, of course, it's Indonesia. The key thing there is that when a market becomes, say, around 30, 40 of an installed base, that's a good time for Elekta to enter because we have an installed base to work with. We want to come closer to our customers. We want to service them and connect them to the wider kind of Elekta. And then we often acquire the asset or the company in that area. country from the distributor because they have built up that market of course and so accounting wise then you get more service revenue because that's the key thing we have solar products into those markets but it has been the distributor that had the service revenue So that's often a good business case for us to then acquire. We get profitable service revenue, and we also get growth. And the key thing is that we also come closer to our customers. So that's kind of the strategic background, and it's often a good investment case as well for Electa and why we go into new markets. On the service order side, and I think I said that already earlier in the call, that in most of our service contracts, we have what we call CPI clauses that's linked to inflation in that specific country. And then that will be added once a year when you review the CPI development in that specific country. So it varies country by country what the levels are. On the Germany disclosure, I need to take a look exactly on those numbers that you were showing, but I think it's not an indication for the overall European market share or anything like that. That's quite stable. And I would say, Mattias, if you take a look in this industry on the market share developments year over year, They are quite stable, but they will, of course, fluctuate a lot if you take a small market in relation to the total sales of Electa like Germany and do that analysis. So I think you need to look at regional level or global level to really understand the market share development.

And I can also just add here on a general point here that I'm in here doing these acquisitions in general, this asset light. So it's just a comment there as well.

Thank you.

Thank you. We have a follow-up question from the line of Eric Castle from ABG. Please go ahead.

Thank you. So I just have a follow-up on the market share comments that you just did and on that being stable over time. I mean, your key competitor is guiding for 9% to 12% growth in 2023 based on a good macro environment. But is there anything in the competitive dynamics that makes you think that you could potentially lose market share in 2023?

No, I mean, I shouldn't comment on our competitors' guidance if I start there. But we guide for more than 7% on the revenue growth. But I don't see any big change in that competitive dynamic or the market share and so on. I think we have good opportunities to grow our market share in many markets. So that's kind of what I would like to add to that question. And then I think... comparing is more and more difficult to compare us with competition because they're part of a larger international company as well as they are going into areas where we are not not part of as well so we are really really focused and that is our strategy to be focused on radiation therapy with strong partnerships so it's you need to take that into account as well when you look at growth rates Okay. Thank you very much, Gustav. Thank you. Thank you.

And if there are no more questions, we thank you for calling into this presentation. If you have further questions arising during the day, please do not hesitate to reach out to myself or us here at Elekta. And with that, we wish you a good remaining day. Bye-bye.

Bye-bye. Thank you. Thank you all.