Elekta AB (publ)

Good morning everyone. My name is Peter Nyqvist and I'm the Head of Investor Relations here at Elekta and I've just completed my first quarter here at Elekta. And with me here in the studio in Stockholm I have Gustav Salforth, Elekta's President and CEO and our CFO Tobias Hägglöf. Who will today present their results? Today's agenda starts with Gustav presenting some highlights in the development during the quarter as well as some of the strategic achievements we have done throughout the year as well as the quarter. Tobias will give you more details on the financials and Gustav will end the presentation with Lekta's view on the outlook. After the presentation there will be, as usual, time for questions as well as answers. But before we start, I want to remind you that some of the information discussed on this call contains forward-looking statements. This can include projections regarding revenues, operating result, cash flow, as well as products and product development. These statements involve risks and uncertainties that may cause actual results to differ materially from those set forth in the statements. With that said, I would like to hand over the word to you, Gustav.

Thank you, Peter, and good morning, everyone, and thank you for attending our call. I will now focus on the key takeaways for the full year. And we look at the full year, you saw that the net sales increased by 5% with growth in all regions, which is strong considering the challenges we have had in some markets like China, where anti-corruption campaigns has impacted order intake as well as sales significantly. The adjusted EBIT margin increased by 150 basis points to 11.8% and we delivered an adjusted EBIT of over 2.1 billion SEC. We have strengthened our product portfolio by launching the market-leading Elekta Evo, an AI-powered, CT-adaptive and highly versatile Linux. And together with our comprehensive software suite, Elekta One, this Linux will be able to drive both increased personalization and higher productivity for our customers. We delivered a strong operating cash flow of the continuous investments of 850 milliseconds, more than double compared to last year. And a strong cash flow is a proof point of an efficient business model. And going forward, we will continue our activities to structurally improve working capital. The board proposed a dividend of 2,40 kronor per share for fiscal year 2023-2024 and underlying support of Elekta's strong financial position. And if we now look into the key takeaways for the fourth quarter, we saw that the market conditions in the quarter were challenging, reflected by a weaker-than-normal sales development, The quarter showed a decline in net sales by 2%, mainly driven by lower installations, particularly in mature markets like Europe and the U.S., The adjusted gross margin amounted to 36.6%, driven by an unfavorable market mix and inflation pressure on material and salary costs. The adjusted EBIT margin amounted to 13%, down from last year due to inflation and higher operating expenses, mainly related to the recent product launches. The order intake in the fourth quarter declined by 1%, mainly due to lower market activity in Europe, while APAC showed double-digit growth, mainly driven by China, where several unity orders were signed in the quarter. Order intake in China continues to be impacted by the Hong Kong anti-corruption campaign. However, gradual improvements have been seen towards the end of the quarter. Looking at the order backlog, it is still on a robust level amounting to over 44 billion SEC and the book-to-bill ratio was strong with 1.28 in the fourth quarter. Rolling 12 months, book-to-bill ratio was 1.09, a platform for future growth. During the quarter, we announced the strategic partnership with GE Healthcare's MIM software, strengthening and complementing our software suite Elekta One. And with the addition of our acquisitions of Philips Intellectual Property for the treatment planning system Pinnacle, we are now very well positioned as a leading provider in software solutions and we're reaffirming our vendor agnostic commitment. I am not satisfied with the outcome in Q4. While a challenging market and increased spending driven by product launches partly explain part of this performance, we will improve profitability going forward. And this will involve reducing our cost of goods sold and operating expenses. And also, we must leverage and we will leverage our recent product launches to enhance our financial results. And now over to our strategy, Access 2025, that we continue to deliver on in Q4. And if you look at the key components here on the slide, I wanted to give you some highlights from the quarter. And of course, in the area of accelerate innovation with customer utilization in mind, we did this continued acceleration by launching Electa Evo, a new CT-adaptive, highly versatile Linux. And I'll come back to that. In the areas of driving partner integration across the cancer care ecosystem, we have deepened the partnership and collaboration with MIM software that's owned by GE Healthcare by providing the best-in-class software solutions to our Linux portfolio. And when it comes to driving adoption across the globe, we have continued our journey, converted former U.S. centers to our MRLINAC program with ElectaUnity, and we see good potential going forward in this journey. and now to something i'm very very proud of that we have launched in in the in the quarter at estro for example is that with these recent launches of the new city linac evo and the treatment planning software electa one planning we have truly accelerated innovation in the market and the radiation therapy field And we have the leading and most comprehensive portfolio in the industry that you can see on this slide. With our MR Linac Unity, our image-guided Brackey Studio, our Electa Evo as well as the Electa Harmony. our Elekta One software suite, and of course, the Lexell Gamma Knife Esprit. And looking across this portfolio, we can now proudly say that we will enable online adaptive treatments in all our products lines, Neuro, Brachy, and Linac solutions. Where Unity has a unique MR imaging and comprehensive motion management technology, the Elector Evo now complements our Linux portfolio with a high versatility in terms of personalization as well as productivity. And no matter the incidence or the clinical need, we have the comprehensive offering to match our customers' needs. And we will leverage these products to drive our growth and financial performance going forward. And if we look a bit closer at our latest addition to the portfolio, Lecter Evo, that was launched at Estra with great customer feedback. It comes fully ready for online adaptive treatments, or it can also easily be upgraded over time for the customer preferences. It has best-in-class image quality due to the AI-enhanced IRIS technology, and it leverages our new treatment planning system, Elekta One Planning, powered by MIM. This new software offers AI-driven auto-contouring, faster dose calculation and planning, and is vendor-agnostic to ensure it supports not only Elekta devices, but also other products in the market. ElectEvo gives us a unique position in the marketplace. It is an adaptive CT Linux with a versatility only comparable to other CRM Linux and the adaptivity that allows for either online adaptive from the start or an upgrade from offline to online over time. And depending on the customer preference. Furthermore, our installed base of Versa HDs, including those in our order backlog, are now upgradable to online adaptive Linux thanks to the Evo technology. And this adaptivity offered by Evo, together with the standalone planning software, both provide great leverage to our existing installed base and provide new avenues for margin and creative growth. And for Electa Unity, we saw a lot of positive market momentum in the quarter. Our customers are continuously realizing workflow efficiencies in their clinics, with a recent example in Australia, where they treated 20 patients in one day, fully what we call adapt to shape. And we see that adoption is increasing across the globe. For example, another unity transition in Italy and strong recent momentum in India. And at the recent MR-Linna consortium meeting at Estro, more than 100 abstracts were showcased, further underscoring the clinical benefits of our unity. And of course, one of the key focus areas in Access 2025, which lies in the heart of everything we do, is to contribute to a world where everyone has access to the best cancer care. And I am very happy to be able to communicate that we now have provided radiation therapy access to 260 million people in underserved markets. Well on track to reach our target of 300 million people until fiscal year 2024-2025. And this not only means that we provide best-in-class solutions to people worldwide, it also means that we extend our footprint and will be able to continue to deliver profitable growth as our installed base continues to grow. And we will continue this journey during fiscal year 2024-2025 and we will reach our targets. Now over to the financials and Tobias.

Thank you Gustav and good morning everyone. We will start with a full year overview. During full year 23-24 we delivered a 5% net sales growth in constant exchange rates with revenue growth from all regions. China grew despite challenging market conditions with the ongoing anti-corruption campaign. This is a sign of our strong position in China and we continue to gain market shares. We continue to increase our service business with a 6% growth year-over-year, where our solutions business grew with 4%. Adjusted gross margin amounted to 37.5%. An unfavorable market mix and inflationary pressure was offset by leveraging revenue growth combined with cost control. The adjusted EBIT margin expanded to 11.8%, an increase by 150 basis points compared to last year. The increase derives from higher sales as well as further leverage on our operating expenses where our focus on cost control has paid off. The EPS grew by 38% compared to last year. If you then continue with the development during the fourth quarter, net sales decreased by 2% in constant exchange rates. This was driven by slower market activity in Europe and challenging market conditions in the US. We grew sales in APEC despite negative impact from the anti-corruption campaign in China. As we are stating in the outlook, we expect the first half of 2024-2025 to be weaker due to challenging market conditions. This will be particularly evident in our mature markets. Adjusted gross margin amounted to 36.6%, a decrease by 120 basis points compared to last year and 30 basis points sequentially. The market mix in the quarter had a negative impact on the margin as emerging markets show strong growth. We have also seen continued inflationary pressure waiting on the gross margin. The adjusted EBIT margin amounted to 13%, a decrease by 320 basis points compared to last year. The decrease is mainly driven by the lower gross margin and higher operating expenses related to recent product launches. In order to mitigate the impact from mentioned cost increases and inflation, we will intensify our activities by focusing on reducing COGS and our operating expenses. We expect cost savings to mount to half our previous program initial during fiscal year 2022-2023. The majority will be visible in OPEX with a gradual impact, which will in particular improving EBIT during the second half of current year. More details will be given when we report our Q1 earnings. Then, looking more in detail into our expenses in constant currency and adjusted for items affecting comparability. All in all, expenses increased by 12% year-over-year, mainly driven by product launch-related cost. Sequentially, OPEX increased by 8%. During the fourth quarter, selling expenses increased by 5% year-over-year, driven by selective investments in customer activities and commercialization of product launches. Administrative expenses excluding non-recurring items increased by 7%. Selective investments in IT was made in the quarter. Net R&D expenses increased by 20% year-over-year due to higher gross R&D and amortization costs following our product launches. We remain focused on our innovation pipeline. During the fourth quarter, we launched Electa Evo, a city-adaptive Linux as well as new software features strengthening our Electa One software suite. R&D is the ultimate way for us to improve our profitability by launching market-leading product solutions. It is key for us to continue to deliver new innovations to improve our margins, particularly the gross margin. In the quarter, gross R&D increased sequentially by 30 basis points to 12.2% of net sales on a rolling 12-month basis driven by higher gross spend. Net R&D increased by 30 basis points sequentially to 7.7% of net sales on a rolling 12-month basis, mainly driven by higher gross spend and amortization cost following the aforementioned product launches. Cash flow after continuous investments amounted to 872 million SEK in a quarter, resulting in an increased cash flow by almost 500 million SEK for the full year. Cash conversion amounted to 77%, well above our target of 70%. Networking capital as a share of sales ended at minus 10% in the quarter, a significant improvement versus Q4 previous year. The improvements compared to last year were mainly driven by lower accounts receivables and that accrued income has come down due to strong collections from projects in Southern Europe with longer billing terms. We've also had higher prepaid income deriving from the US and China. And as Gustav mentioned, the board suggests a dividend per share of 2.4 SEC, the same absolute level as last year. This represent a payout ratio of 70% of the net income. And as Gustav said, underlying elect us strong financial position. With that, I hand over to you, Gustav.

Thank you, Tobias. And I would like to end today's call with our outlook for the first half of the fiscal year, fiscal year 24-25, as well as for the full year. We expect the first half of 2024-2025 to be weaker due to challenging market conditions and tougher comparables in Europe and China. During the second half of the year, we expect sales and profitability to pick up from new product launches as well as productivity measures. Net sales for Lekta is expected to grow by mid single digit for the full year of 24-25 with an improved EBIT margin. We are experiencing strong customer interest in our industry leading offering and beyond 24-25 we will drive for an EBIT margin expansion to 14% and higher. And we will continue to drive access to the best cancer care and creating shareholder value. Thank you.

Thank you, Gustav. So now we follow up with a Q&A session. But before that, I would like to draw the attention to some dates for the financial calendars. We are, as you probably see on this slide, changing the date for Q1 numbers. We were supposed to present on September 5th, but the new date now is August 28th. just so you can have that in your calendar. With that, I would like to hand over to the operator so we can start with the Q&A session. So please, operator.

We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one 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 question queue, you may press star and two. Participants are requested to use only handsets while asking a question. Anyone who has a question may press star and 1 at this time. Our first question comes from Eric Castle with Danske Bank. Please go ahead.

Hello. Hi. Good morning, everyone. So three questions, if I may, and I'll start with the first one. How sticky are the inflation effects? in service? I mean, do you need to renew the contracts to offset inflation? And then implying that that could take several years to execute on or is it more short term?

uh we start with that question hi eric it's it's gustav here uh so we saw inflation impacting the salary levels of our service engineers for example some of the spare parts on the material cost as well we have set some of that effect with cpi clauses in our impacts but you're correct that impact we have here in the in the last quarter Looking ahead, we will continue and have continued to bring CPI clauses to our backlog and our service contracts, and we will work with productivity on the service business across Elekta. So we will drive for higher gross margins on the service business going forward as well, and the CPI clauses will kick in to a larger extent. And when we also drive the installed base globally and have that increase, we will see that the service contracts kicking in the years after. And we also have seen that our service revenue growth is growing faster than installed base. So it's really about productivity. It is about CPI clause increases, and it is about installed base growth. And that is what we'll drive in the next year.

Okay, thank you. And next one, considering that EBIT came in, you know, 22% below the Q4 guide, which was given during this quarter, it makes it seem like the visibility currently is quite poor. So, I mean, what sort of visibility do you actually have that you will see the improvements that you guide for into 2025?

So we're not pleased with this quote, Eric. I said it in the call and I think the EBIT margin were lower than what we expected. It came in especially in some mature markets like Europe and to some extent US as well, lower than expected. I think we have a clear view given the clear view of the first half and the second half what we see currently. I think the transparency has increased with China now coming out from the anti-corruption investigations and I think I'm optimistic on that. And I also see that we have better transparencies in markets like Europe and in the US. So I'm expecting the transparency to increase quarter by quarter going forward as well into the next year. But again, we're not pleased with the last quarter, absolutely.

And you had a last question as well, Erik.

Yeah, just a quick last one. Yeah. I don't know whether it's best for Gustav or Tobias to answer this, but I'll ask it and you decide. I mean, you say on slide 15 that you'll address inflation pressure by cost cutting again in COGS and OPEX. But if we are to see the sort of volume growth and better pricing, as you said previously, why is there a need to accelerate cost cutting further and implicitly slim the organization again? Does that really rhyme with the sort of sales and volume growth that you're getting for?

Eric, I think you'll get both of us on this question. I'll kick off and then Tobias will add. But yes, I think we work a lot with productivity across all our processes. That's absolutely vital going forward. And we see a lot of automation, digitalization. We start to see AI impacting our cost base as well in a positive way. So productivity is key, both for gross modern expansion and EBIT modern expansion. But we are also ring fencing key areas of investment. And that could be, for example, software rollout that is so vital for the great products we now have and to drive software growth going forward. So we will have areas that we invest in, but there will be many areas that will drive productivity into the next year.

Hi Eric, and I can just echo what Gustav was saying. I mean, here we... We are on a journey driving profitable growth and we will continue to do that. And to actually drive productivity is a part of that equation. And when we do that, that will be a combination of actually driving out costs while we also selectively invest in areas where we see that we get leverage and paid off from that. It's a matter of taking command over the P&L and the financial performance moving forward.

Operators, we'll move to the next question, please.

Our next question comes from Christopher Liljeberg with Carnegie. Please go ahead.

Thank you. Two questions for me. The first one, coming back to your visibility and if you could explain why you think visibility is better now than three months ago. I agree that there's a difficult year-over-year comparison, of course, particularly in the first quarter, maybe also in the second quarter. But after you reported Q3, it sounded like you had the positive or expected the positive momentum for installations also in the first part of the new fiscal year. So that's my first question. And then the second question relates to gross margin and what you could say to convince us that it would eventually improve again. Now you're talking about reducing COGS again, but that's something you have said for, what is it, two to three years, and nothing happens with the gross money. You have talked about price increases starting to impact positively. We haven't seen that either. So I think more explanation here is needed. Thank you.

Yeah, and it's warranted as well, Kristoffer. So if we look at that, we'd start with a transparency or visibility question into the first half of next year, and we then go to gross margin. It's two great questions for this quarter, of course. And on the visibility side, I say again that for the first half, we had quite strong performance last year. It was 8-10% revenue growth. it really came from installation of the european projects that we got in the spanish and italian tenders so the big eu recovery programs after covid that drove good revenue in those two quarters and then of course china we had good um installation volumes in the beginning of that year So that was two effects that we don't get into this year. That's, I would say, the main reason why we say it will be a weaker first half. At the same time, we will then drive for the product launches that we will get regulatory approvals for us on more during the summer so we can start to sell more and get the orders in the autumn and then install them in the spring, I would say. That's kind of a logic for next year and the transparency we have. And we have a great interest on the orders for products like Electa One and Electa Evo to drive that. And then I think it has been helpful with getting better visibility on the China installation plans and also how we see the order intake coming in. But of course, there's a lot of geopolitical turmoil around the world that we mitigate and manage to the best of our abilities. And that's something we always do at Selecta. But this is the best visibility we have at the moment. If you look at the gross margin... Could I follow up there?

Correct me now if I'm wrong, but if I remember correctly, after third quarter, you were quite upbeat about what the installation... you were quite a bit about the installations for you know also in q1 last year i think you phrased it early also the first part of of the new fiscal year so what is it that has changed because You should have known about the difficult comparison.

Of course. So the difficult comparison were known. But I think if you look at the CapEx MedTech market or kind of the company being reported, we've seen a more challenging market conditions overall, I think, for MedTech CapEx in the last quarter. And we see some of that effect in the next two quarters. Then we have the comparison effect for, as we said, with China, with Europe. However, what I would say specific for Elekta is all the product launches we've now done in the Q4 that we will roll out. And we also have a good opportunity on the ML Linux side and the Gamma Knife side and the Brackey side to drive that growth. That's more in our own control, so to say. So I think it's been a bit weaker overall medtech CapEx market, Kristoffer, compared to two quarters ago.

How confident could we be about installing the new product launches already this fiscal year? Isn't there a risk that that will slip into the next fiscal year instead? Given that you seem to be dependent here on the second half being very strong.

What I mentioned, one of the investment areas we've had in last year and will have in the first half as well, will be kind of installers of our software technology as well as for the new Evo, as well as the Unity area. So that's an investment area as we've taken a decision to continue to drive. And that is what will drive our installations and therefore revenue. So that's how we're driving that growth. And can I turn to the gross margins, Christoffer? Yes, thank you. So I think for Elekta, and as we say, we will take the gross margin back to pre-COVID levels. It has taken longer than we wanted and expected. I think the inflationary pressure has been larger and longer than we expected, say, a year ago. So that's one driver. And then we have had a bit of supply chain turmoils as well during the last couple of quarters that also impacted. So for Lekta, and I can assure you, it's the highest priority myself and Tobias are having is to drive gross margin improvement over the next quarters and years in order to get back to pre-covered levels and also get to ebit margin of 14 and higher that will come from from procurement activities of material cost productivity initiatives on the service and installation side as well as good cost control on our opex so we have a very clear plan and we will deliver on it into next year

Thanks, Gustav, and thanks, Christopher, for those questions. We will move to the next question, operator.

Our next question comes from Mattias Badsten with SAP. Please go ahead.

Hi, Mattias. Hi, thanks. I will limit myself to two questions. I mean, you've commented quite a bit here on the previous questions on sales going into the first half of next year, but Could you maybe quantify a little bit what kind of sort of decline we are looking at to start the year perhaps in the first quarter? And then perhaps also comment a little bit on the orders dynamics year-over-year in H1 as well. That's the first one.

Yes, I will start with it and Tobias will add. So if we start with the market expected order side, it's not as you know, something we guide for. But if you look into the first quarter, we will not see a lot of orders for new product integrations or implementations or launches that will come later in the year. So we see the market also on the order side to be a bit weaker. in the first quarter and the first half, I would say, to then pick up in the second half. On the revenue side, of course, service will always grow with installed base and higher. We are a bit more optimistic on the America side, but we see these challenging conditions, as we mentioned many times here in the call in Europe and China, but that will then improve.

in the second quarter and onwards that's what we can see on the installation side yes and then i can ask the um echo that so so um it is very much about i mean the comparables in in europe we have china where we've seen the orders picking up and and but that we have an impact here from the order intake throughout this year You will see a decline here into the beginning of this year in Q1 and that is following these impacts.

Thanks so much for that. The next question is on the gross margin. If you could try to explain a little bit more on the negative market mix, maybe single out a few installations and markets in particular. and then comment a little bit on this development because nine percent growth in service should really help the gross margin for electa in my opinion given the solutions coming down this much and then maybe going forward i mean in terms of the market mix do you expect that to remain weak let's say going into q1 and q2 to drive gross margins down year over year or or am i misunderstanding anything there that's my second question

no but i i think you're on it here i mean we do expect a um a weaker start of next financial year here and that is coming as you say from from lower activities in our mature markets which also had a impact here in q4 i would say though that there are good reasons to actually see that sequential improvement into next fiscal year both looking at the revenue development the gross margin development and the ebit margin development partly of that is due to the market dynamics but it's also a matter of the very positive feedback and outcome from the new product launches that we launched here that will take some time before it move into revenues and therefore we also talk about the second half of the year 24 25 but that is also the rationale why you actually start with a softer start here in terms of both the revenue gross margin and ebit margin in terms of the gross margin q1 last year you also had a certain impact here from the both at that point of time a very strong market mix and a positive impact from the inventory revaluation here as well. So that I think that you should take into consideration. But for the full year, we aim at what just Gustav said, mid single-digit growth, gross margin expansion and EBIT margin expansion. So we will continue the journey here on profitable growth and that we are fully determined to do.

And on the service margin, I think you're right, gross margin, that you should expect with good service growth, a higher gross margin because it's a higher gross margin segment compared to solutions. But we had a lot of inflation impact on salaries and higher material costs as well that we will expect to reduce going forward and get the productivity on the service expenses. that is a very very important part of of of the gross margin journey and and that is new product launches and this is to answer both i think christopher's and matthias question that the best way to raise gross margins in this industry is to launch new products and it's also to launch new software So when you see Electa Evo being then installed, as well as software to be installed, Electa Spirit to be installed, Electa Unity to be installed, Electa Studio to be installed, that's when you see the gross margin improvements. So product launches, new innovations that will get to higher prices and thereby a growing gross margin as well. That's the key thing. But we are taking responsibility and also working a lot with our productivity as well as cost reductions across our P&L.

Thanks. Thank you very much. Thanks, Mattias. We will move to the next question, please, operator.

Our next question comes from Richard Aderkrantz with Handelsbanken. Please go ahead.

Hi, Richard.

Hi, thank you for taking my question. Sorry for the sound quality. So when you say 14% and above EBIT margin, sort of beyond 24-25 year, do you mean you will reach 14% or plus in 25-26 fiscal year, or is it an undefined horizon just any year beyond 24-25 fiscal?

uh hi richard uh no we haven't put a specific date on reaching that but we're saying we'll get to 14 and higher in the periods after 24 25 so we haven't put a specific date you're correct okay so we should not expect it for 25 26 then that's not what i'm saying i'm just saying that we haven't put a specific date on it okay

A question on the Chinese trade-in stimulus programme that's in the making.

so have you seen any signals of increased activity there or and when do you expect to see a pickup in order activity following this program thank you yeah thank you no so we see positive on the stimulus packages now in in china uh post anti-corruption period of say 12 months we expect we saw the orders coming back in q4 and that's one of the highlights in these reports from China. We also saw unity orders being signed with Elekta. So that was very positive. And going forward, I expect, and that's my experience with China, that often both when things stop or when they start, that goes quite quickly. so talking to our chinese organization i'm i'm positive on the year but i cannot say exactly what month or quarter will see the the bigger improvement but gradual improvement throughout the year big demand for our products and elect has a very strong position in the chinese market thanks gustav and thanks richard for those questions please next question operator

Our next question comes from . Please go ahead.

Hi, Veronica. Hi, guys. Good morning. I hope you can hear me. Just a very quick one. Just curious on your description of the competitive environment and the demand environment. Listening to the other folks in the market, they have actually noted better capex dynamics, not more. So I'd love to understand what you think is different for radiation oncology that is explaining the slowdown in the market dynamics that you've explained. Thank you.

Thank you, Veronica. Looking at the capex medtechs that I know many of you do in the last quarter, you have seen lower revenue growth numbers, close to zero or a couple of percent up. That I think what you've seen in our space, if you say that's radiotherapy and imaging. So I think that was lower compared to the last five quarters, so to say. So a bit of a slowdown. I think the industry is kind of positive on the need for products and installation going forward that that will open up. But I think I've seen from other industry parties that they're a bit cautious on the next couple of quarters and also a bit on China as well in the MedTech CapEx environment. That's what I see. But if you take a 12 or 18 months perspective, I think we share the industry's positivity on driving growth and revenue growth and modern expansion.

Great. Hi, Veronica, are you okay with that? Yeah. Okay. Thanks, Veronica, for that. We'll move to the next question, please.

We're moving with Patrick Ling, NTNB. Please go ahead.

Hi, Patrick.

I mean, given that we've known that there's been this anti-corruption business in China for quite some time, I mean, what was it that changed since the Q3 report on that front that made you actually be so positive after the Q3 report that the Q4 would be strong, that didn't really materialize during the sort of the last two months of the quarter? And how has that changed to make us in the market to actually believe that you have visibility? That's the first question.

Yes. Hi, Patrick. I think we show good numbers for orders in China for the Q4. We saw unity orders. We saw underlying growth. That's what we're referring to. It's coming back. However, when you look at installations in China in the next half of Q1, Q2 this year, that's a difficult comparison because the order numbers were low in Q3 and Q4 in the fiscal year 23-24. But what's positive and what we want to highlight, we have the same view that China was growing orders in the fourth quarter and that we're also showing in the quarter report.

But given that you actually stated that EBIT would be in line with Q4 EBIT, I mean, that... would imply that installations also in China were expected to be higher for Q4. So was there anything dramatic that changed that? Because, I mean, you gave the guidance when you had two months left of Q4.

So that was, Patrick, that was not about China. That was about the US and Europe. That's often a bit higher margin markets compared to the Lexa average. So that was not about China. It was more about mature markets being slower on the installation side in the fourth quarter.

Great. Okay. Second question. I mean, what will be, I mean, what's the average time since you took orders for the orders that you will deliver from the backlog going out into fiscal year 2024-2025?

We often say it's a year, roughly a year. Of course, it depends on product and how many years the orders are for. But often it's a year between when you take the order and installation. But it can be anything from six months up to two years. and if you have multiple years it could be a public tender year could be up to five years because maybe it could be three or four linux throughout that that period so it depends but on average around one so you have a bit shorter time for our bracket products and and average about the linux and then a little bit longer here for the gamma knives and unity

okay great and then then my last question I mean you talked about improving gross margin that you need new products be able to improve gross margins but I mean if we go back a little bit and look at your gross margin say and 12 years ago it was almost 10 percentage points higher than what you have today is that a sign that you haven't developed enough products or is it the sign that The customers are actually much more skilled buyers than what they were 10 years ago.

Now, the key reason for that is where the growth has come through throughout those years. It's been high growth, emerging markets driving a lot of that revenue. So compared to the revenue mix we then had 10, 15 years ago, that was relatively more than mature markets as I see it. so that that's the main reason for it when we say when we want to get back to pre-covered gross margins then we're more referring to the 40 41 percent that we saw in the period of say 2016 17 18 19 and then we saw the big drop to say 37 so so the journey now the path is back to the around 40 percent okay great thank you thank you thank you patrick

we are ready for the next question operator our next question comes from david adlington and jp morgan please go ahead hi david hey guys i hope you can hear me okay uh just coming back to the first half i just wanted to be able to give some quantification of how much we should be modeling to be down through the first half just so we don't get any further surprises and and assuming we are down like a mid-single digit what underpins your confidence in what should be approaching double-digit growth to hit your billion numbers in the second half. And then just on China, I just wanted to also hear any thoughts, not just on anti-corruption, but any potential tailwinds from the Russian-announced stimulus plan.

Sorry, can you repeat the last two sentences, David? It was a bit of a bad line. I couldn't hear.

Yeah, just on China, so outside of the anti-corruption rolling off, There is some reports of a stimulus plan for hospital care. I just wondered what you were thinking there in terms of potential tailwinds.

Yes, absolutely. So if you take the first year, we're not quantifying the exact effect in the first half, but it will be weaker than the first half of last year. That we can say, so to say. And then you have the pickup in the third and fourth quarter on the revenue and margin side. And I will repeat it because it's so important that is linked to more installation of Electa Evos, Racket Studio, Electa One, all the products that we now developed and have been launching together with Electa Esprit installations. So I have a strong product portfolio that we will now install in the second half, driving that growth. I mentioned a bit earlier the China stimulus packages, but I'm happy to take it again that overall the China packages are very positive for Elekta. We have a strong position there. We have a strong local partner. We have local manufacturing and development facilities. So we expect those stimulus packages to drive Medtech CapEx as well as radiotherapy in the quarters going forward, first as orders and then as revenue. What's positive with China is often quite a short time period between order to revenue. So we expect that effect into this year as well.

Okay, thanks, David. Thank you. No problem. So next question, please.

Our next question comes from Stan Gustafson with ABG. Please go ahead.

Yes, good morning. I want to go back to your comments regarding challenging market conditions. And it sounds like you're saying that the capex spending on hospital level has slowed down in mature markets. What exactly or when did you notice this slowdown and what makes you confident that it will improve going forward? I mean, the installations you planned for Q4 were on old orders that had already been booked, so I'm not sure I understand the connection there. And also, if you could, my second question would be on if you had taken any orders on EVO already now, even though it's not approved yet.

Yes. So we start with the first question on the conditions. When we talk about revenues, really about installations. So it took longer to install some of the products that we had in the backlog, especially for US and Americas, as well as EMEA. So it took longer. On the overall CapEx environment for orders, Stan, I expect that to take off at some point in time again, both in the US and I think, as we always say in the US, Elekta has a good opportunity. Because we have a low market share in the US, we can grow that market share with our new product portfolio. So we are optimistic on that. But in terms of installation, that took a bit longer in the quarter and we expect that to come back then those installations throughout the next year. positive on China and you have also countries like India and Mexico and Indonesia where I expect to see good growth both on orders and revenue throughout the next quarters next years so I think that's the overall market conditions and so your second question that was

taken any Evo orders?

Yes, we need to have regulatory clearance for CMARC and FDA approval, so we expect most of them to come in as orders after the summer, but we have many, many great ongoing discussions when it comes to to evo order so i'm very positive about about the momentum and for those of you that were at estro the big trade show in glasgow i think you saw that evo was the talk of the show it was the key product launch at that very very important trade show and that will be translated into orders and revenue in next year

And also I can just add that there is also a willingness to pay for these extra features and functions that we equip the new solutions with which is also healthy if you look at the more long-term financial perspective.

Okay thank you. Just as a follow-up on the first one, when you say it took longer to install, is that related to the that the hospitals were not ready or is it sort of on on your behalf that that um when you when you when you make the installations that there were some hiccups uh along the way or or what exactly is the reason behind the the the longer installation time yeah

It's not on our side, Stan. It's really about the projects, building works, etc. that's been taken a bit longer. Some of that industry has been pressured in places like Europe and US, and I'm sure you follow that. I think that will ease in the coming quarters and we will have faster turnaround on the project buildings in hospitals and cancer centers and so on. And I also expect the cost and inflation in that area to actually go down because one thing is sure that both Europe and the US needs more capacity They have huge cancer backlogs, they have a lack of staff, and they need efficient new innovations in the radiotherapy field in their Linux to make sure that they can take care of their cancer patients. And I believe that their product portfolio right now is very well suited to cater for that need. And of course, Evo will be a highlight. where you can both work with the personalization as well as the productivity for those patients. So when those building construction supply chains will become faster, we are very much ready to deliver on our new technology.

Thanks. Thank you. Thanks. So next question, please, operator.

Our next question comes from exactly the inverse time. Please go ahead.

hi there um i just had a few questions on the evo launch uh and specifically around uh the design of this platform so is this just um an upgrade to existing machines what sort of uptake do you expect in your installed base over the next say three years um and is it just and once those updates are requested Given that it's not a delivery of a new machine, will there be a shorter delivery time?

Hi, Lisa. For sure, it is a new platform. It is a new machine. So Electa Evo is a significantly improved image quality. it's enabling adaptive workflows and that's the key trend in the industry right now and it's also both offline and online adaptive so that you could with the image quality with the upgraded image quality the new up the new image quality on the machine together with with the new software platforms you can then do online adaptive treatments on a c arm linac And I think that's a big, big need in the market, and that is what we will deliver on. I expect this to be a big part of our volumes when it comes to high-end premium Linux. And this is very important as well, because this is a segment that I think Elekta and I are very pleased to have the market-leading Linux in. Because that's the segment we also see more functionality, you see higher margins. So that's the key launch for us overall. And I do expect that to be a big part of our volumes going forward, especially after the summer and onwards. It's also the capability that we can go to the installed base and with a significant upgrade, enable the image quality as well as the adaptive workflows on Versa HDs in the installed base. So you have both these two opportunities, but it is a new platform.

Okay, so clearly the selling new machines But for those who want to hold on to their Versa HD for a while longer, they have the option for an upgrade, basically.

Yes, and I think that product strategy and that plan for Electa is the right one because a lot of our installed bays really want a path to go to online adaptive treatments that will be a key functionality of radiotherapy clinics in the years to come.

Okay, that's clear. Thank you. Thank you, Lisa. So we're getting close to the hour. So with Lisa's question, I think we will finalize the Q&A session. But before closing the call, Gustav, you would like to have some final remarks.

Thank you for all your questions and thank you for listening in. We have been driving profitable growth and an improved working capital and cash flow situation in the fiscal year of 2023-2024. We are not pleased with the performance in the fourth quarter. But if you look for 2024-2025, we expect the first half to be weaker due to challenging market conditions and also tougher comparables in Europe and China. But during the second half, due to many of the drivers we have been discussing in the call, We expect sales and profitability to pick up from the new product launches as well as productivity measures. And that net sales for Electa is expected to grow by mid single digit for the full year 24-25 with an improved margin. And if we look ahead then, based on the very strong customer interest we have for our market-leading product portfolio, and look beyond 24-25, we will drive an EBIT margin expansion to 14% and higher. So with that, I would like to thank you all for listening in and look forward to talk and discuss with you soon again. Thank you.

Thank you.