Elekta AB (publ)

Hi and good morning, everyone. My name is Peter Nyqvist, Head of Investor Relations here at Elekta. With me here in Stockholm, I have Gustav Salford, Elekta's President and CEO, and our CFO, Tobias Hägglöf, who's presenting the result. Today's agenda starts off with Gustav, who will present the highlights from the development during the first quarter of the fiscal year 2024-2025, as well as strategic achievements during the quarter. Then Tobias will, in more detail, go through the details of the financials in the presentation, and then we will end with Gustav giving us the outlook. And after the presentation there will, as always, be time for questions. Before I start, I want to remind you that some of the information discussed on this call contains forward-looking statements. This can include projections regarding revenue, operating results, 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 to our CEO, Gustav.

Thank you, Peter, and thank you all for attending our call. I will now focus on the key takeaways for the first quarter of fiscal year 2024-25. So you can see here that net sales increased by 1% in constant currencies and main driver was strong installations in the US. Gross margins came in at 37.8% at decline year over year related to inflation and reduced impact from inventory revaluation. However, the gross margin improved sequentially supported by an improved service margin in the quarter. The adjusted EBIT margin declined year-over-year, mainly impacted by the gross margin development, and we have initiated cost reduction activities to manage the OPEX levels. Tobias will go through this later in his presentation. The book-to-bill ratio improved to 1.10 from last year's 1.0 and the 12-month rolling figure for a book-to-bill ratio is well above 1, a solid foundation for future sales growth. At the end of the quarter, we announced a major customer win from the largest private health care provider in Mexico, Hospital Angeles Health System, amounting to 64 million dollars. And if we move to the next slide, I'll give you some more details on the sales and market development during the quarter. So you can see that group sales amounted to 3.8 billion SEC in Q1, almost equally distributed between our three regions. And based again on constant exchange rates, we delivered a strong 16% growth in Americas, driven by both North and South America. It's really encouraging to see that installations in the US are showing strong development and also that Canada and Mexico were also showing growth sales in Q1. The APEC region increased sales by 3% despite continued negative impact from anti-corruption campaign in China. But if you exclude China, the region grew by 29% with India and Korea as the main drivers. In the region of Europe, Middle East and Africa, sales declined by 12% compared to last year when the reading grew by 15%, driven by large installations in Spain and Italy. Most markets in the Middle East and Africa showed growth. And if we then look at the key components of our Access 2025 strategy, I want to highlight some strategic achievements during the quarter. An important strategic win for us that I mentioned before was of course the major order from the largest private healthcare provider in Mexico, Hospital Angeles Health System, including radiotherapy solutions, software and Electa S3, the Lexell Gamma Knife. The total value of the order was 64 million, with installations expected to start in December 2024. In the area of driving partner integration across the cancer care ecosystem, we today announced that we have entered into a joint venture with Ansheng, our Chinese software partner. This strategic investment aims to ensure Elekta's market-leading positions in China and accelerating the adoption of radiation therapy in the country. This is truly a sign of our commitment to deliver state-of-the-art radiotherapy solutions in China, and we continue to take actions to even further strengthen our market position. In the area of drive adoption across the globe, we received a unity with the University Hospital in Lund in Sweden. And the expansion of the MR-Linac technology is important as the system will be dedicated to pushing the boundaries of treating cancer. And of course, for me personally, I'm really proud to deliver the most advanced radiation therapy solution to the town where I grew up. Since we launched Access 2025 we have been accelerating innovation and recently we launched our new CT-Linux Electa Evo and treatment planning software Electa One Planning. And today we have the leading and most comprehensive portfolio in the industry with our MR-Linux Unity, Brackey Studio and in the middle you see Electa Evo and then of course we also have Electa Harmony. And then you have the Lecta One software suite and of course the Lexell Gamma Knife S3. And looking across this portfolio, we can now proudly say that we enable online adaptive treatments in all of our product lines. Neuro, Brachy, Linux and software solutions. Where our Unity has unique MR imaging and comprehensive motion management technology, the Elekta Evo now complements our Linux portfolio with a high versatility in terms of personalization and productivity. we will leverage our leading product portfolio to drive profitable growth going forward. And then if we take a closer look at Electa Evo, it comes fully ready for online adaptive treatments or can easily be upgraded over time if that is the customer's preference. It has best-in-class image quality due to the AI-enhanced IRIS technology, and it also 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 it's also vendor-agnostic to ensure it supports not only Elekta devices, but also other products in the market. Electa Evo has been well received among customers relating to the clinical needs and elevating personalized care as well as increased productivity. We are expecting CE and FDA submissions in the second quarter and we look forward to delivering the new solutions to our customers in the coming quarters. And with that, over to Financials and Tobias.

thank you gustav and good morning everyone so let's then start by looking into the q1 results in more detail during the first quarter we deliver a net sales growth of one percent in constant exchange rates we continue to increase our service business with the five percent growth year over year solution sales declined by three percent driven by europe and china just the gross margin amounted to 37.8 percent The decline versus last year is coming from inflation and pressure from material and salaries, changes in foreign exchange rates and reduced impact from inventory valuation. Sequentially, the adjusted gross margin increased by 120 basis points supported by an improved service margin. The adjusted EBIT margin declined to 7.4%, mainly driven by the lower gross margin. Increased operating expenses was mainly driven by higher administrative costs and higher amortization following the recent product launches. Net income amounted to 71 million SEK and earnings per share to 0.18 SEK. In the quarter, we continue to drive cost reduction initiatives with the aim to lower structural costs and enhance productivity across the organization. The target is to generate annual savings by around 250 million SEK at the end of the fiscal year 2024-2025 at an estimated implementation cost of 250 million SEK. In Q1, annual run rate savings of 70 million SEK were achieved with a limited financial impact on Q1. The implementation cost amounted to 109 million SEK and our reporting as items affecting comparability. In the seasonal week first quarter, cash flow after continuous investments amounted to 891 million SEC negative, similar to last year. Working capital as a percentage of sales improved to minus 5% compared to minus 4% last year. Taxes paid was lower than last year due to an R&D expenditure credit in the UK. In the first quarter, we have continued to make R&D investments in new products, solutions and software amounting to 336 million SEC and intangible assets of 61 million SEC. The rolling 12 months cash flow from operating activities amounted to 2.5 billion SEK, which is an increase of 900 million SEK year-over-year. Cash conversion amounted to 83%, well above our target of 70%. Now, over to our book-to-bill reporting. I will start with explaining the development during the quarter, and then I will give you the background of why we are changing our order reporting going forward. Looking at Q1, you previously heard Gustav, the book-to-bill ratio improved to 1.10. As Gustav previously mentioned, we received a large order for a value of approximately 64 million USD. Installations will begin during the third quarter of 2024-2025, with the last system expected to be installed during the first quarter of 2027-2028. Approximately 38 million US dollar has been booked in Q1 and the first deliveries are expected in December 2024. Let me then explain the background of why we are changing our order reporting. The regional order reporting is challenging to use for forecasting future sales as many larger deals leading to volatility in quarterly order growth are not tied to the sales growth in a specific quarter. They are rather distributed over a longer time horizon. The timeline from orders to revenue depends on various factors such as the size of the customer, region and whether it's hardware, service or software. The book-to-bill ratio is the most relevant indicator for sales growth. A consistent strong book-to-bill ratio over an extended period serves a solid foundation for future growth where Elekta has been able to deliver a book-to-bill ratio of more than one for a long period of time. The book-to-bill ratio is also in line with industry practice. When we have looked at industry peers as well as other listed companies, if reporting orders, book-to-bill ratio is clearly the most used metrics. When we then look ahead, we will move focus more towards the action markets, sales and profitability development in the quarter, supporting our ambition to reach our targets. When reporting the group total book-to-bill ratio, we will include both solutions and service. And lastly, we will continue to report total gross order intake as it's an important part of explaining the book-to-bill development. With that, I hand over to you, Gustav.

Thank you, Tobias. And I would now like to focus on our outlook for the first half as well as for the full year of 24-25. And as previously communicated, we expect the first half of 24-25 to be weaker compared to last year. And then 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 are expected to grow by mid-single digit for the full year of 24-25 with an improved EBIT margin. Electa is experiencing a strong customer interest in our industry-leading offering and a long-term underlying demand for world-leading cancer care solutions. And beyond 24-25, we will drive for an EBIT margin expansion to 14% and higher. So if we then summarize the first quarter of 24-25 for Lekta, we grew net sales by 1% in constant exchange rates. We delivered a sequential improvement in the adjusted gross margin of 120 basis points. We won a major customer win in Mexico, and we have initiated further actions to improve profitability, price increases, product launches, and efficiency measures. Thank you.

Thank you Gustav and thank you Tobias. Before going back to the Q&A or hand over the word to Gustav and Tobias, I just want to highlight the financial calendar and there is no major change here. Maybe just to highlight the event next week, which is the AGM on Thursday, September 5th. So that's the next event we have at Elekta. So with that operator, we are now open for the questions.

We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on the touchtone telephone. You will hear a tone to confirm that you have answered the queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only answers while asking a question. Anyone who has a question may press star and one at this time. Our first question comes from the line of Christopher Lillivary with Carnegie. Please go ahead.

Good morning, Christopher.

Thank you. Good morning. Hi. Two questions. First, on the service margin, was that back now to a more normal level after the weakness in Q4, and how much of the sequential improvement does that explain? Second question, related to China, if you could comment on the order situation specifically in China now. And based on that and orders last year, how you foresee sales in China coming quarters, more specifically, should we expect another big decline in the second quarter before the year-over-year comparison becomes easier from the third quarter? Thank you.

Thank you, Christoph. I think Tobias will take the first question and I will put the flavor on China.

Yes. Hello, Christoffer. Good morning and good to hear your voice again. So to your point here, yes, it's more back to a normalized level and it's actually a quite significant part of the the sequential improvement that we see sequentially.

And on that before China, what's your confidence that the weak service model was in Q4 was a temporary thing that we shouldn't see again in the near future at least.

I think that the work that we do and of course, there is, as you know, between the quarters, you have how much solution and service we sell in different quarters. But what we see was an improvement result of the good work and where we see that it's go back to normalised levels. And as you know, we strive here for and drive the profitable growth and that is across the P&L. And this is one of the part which is important for us to run this with a high level of efficiency.

Yes, and I can just reiterate that how important the service business is for Elekta, and we will continue to focus on that going forward, both for growth to our installed base, the upgrade business we now will get with the new product launches we do, and also efficiency and productivity measures around the world. So service will continue and grow in importance for Elekta going forward. If we then take the very important China topic, China is Selecta's second biggest market. It's a market where we have strong position, where we have localized a lot. We know the production, the software development, and now joint venture with Ansheng. And we also have a joint venture with Sinopharm. So we have a very strong position in China. And what we see right now and what's happening is that it's still impact from the anti-corruption campaign. that we have seen now for a year almost exactly I would say and if you then look ahead we have lots of customers dialogues and discussions about orders but also installation going forward so we've seen a gradual less impact in this quarter compared to the two previous quarters from the anti-corruption campaigns etc and we see the market is starting to come back we don't foresee it to come back fully in the next quarter but going forward in the third and fourth quarter we expect that that all that pent-up demand together with the big stimulus packages to to drive growth but the true growth comes really from from the big demand that we see in china for continued investments in in radiation oncology and linear accelerators and gamma knives and brachytherapy. So we're optimistic for the full year in China, but we foresee the next quarter will continue to be impacted, but less so than this quarter.

And when you say next quarter impacted,

is that orders or sales i would say both uh for next quarter we are not fully back to kind of uh pre the campaign levels uh but we we foresee that to happen in in the third and fourth quarter but what i'm i i see in the market in my dialogues with with customers and and our team there is that that the wheels are turning and and we we start to get back to normal activity so to say

and that should then be translated into orders and of course revenue in in the coming quarters here some in q q2 but Q3 and Q4 but if you look at the orders year over year i think second quarter last year was the first quarter when you saw that large drop yeah would you expect orders in china to be higher organically this second quarter versus second quarter last year?

I don't know. We don't guide kind of specifically on Q2 orders in China, but I expect much more activity that can be translated into orders. But we need to go through the quarter to see. But what I can say is that activity has significantly increased and we will translate that to orders going forward as well. But exactly what the number will be, we'll see that off the next quarter.

Thanks. Just the last one on China. Do you think it's possible for you to grow sales organically in China this year, year over year?

We'll see what the next quarters will show us. But I mean, we have a backlog. We have a strong operations. We have good opportunity for growth in China. So I think that's what we see. But don't expect it so much in Q2 rather than Q3 and Q4. And then we'll need to come back after year end exactly what number that translates to.

Sure. Thank you. Thank you, Kristoffer. We'll move to the next one. Please, operator.

The next question comes from Mattias Wadsten, SEB. Please go ahead.

Good morning, Mattias.

Good morning. Thanks for taking my questions. Maybe first, if we could talk a little bit more about orders for Q2 based on sort of tender patterns. And also, we're interested to see what you've seen so far, maybe outside China. I think you covered that. Are we looking for growth year over year or is that a bit tough given the India order that you had as help last year? That's the first one.

Yes, so I think orders last year, we had a large India order, as you mentioned, we had growth in the second quarter on orders. So we'll see exactly where we come in. We have a good activity, but where we expect most of the orders is to come from the new product launches. So some of that will be later in the quarter and primarily into Q3 and Q4, if you think about Evo and Electa 1, et cetera, and so on. So that is a bit further out. So we don't guide specifically on order growth in a specific quarter. uh but we have there's lots of of larger deals going on around the all the regions so we we just need to translate that into one orders as well um but but we'll drive for for growth for the full year especially but i don't comment on a specific quarter thank you gustav and then i think you had quite abrupt increase in solution sales in america as you mentioned

much higher than any i can see for a q1 historically could you maybe talk a little bit about where you installed more this quarter and if this is a timing effect or you know should we expect this good momentum to sort of continue also going forward that's my second question

Great question. So we got some installations in the US that came in. We worked hard, but they came in a bit earlier. We expected some of them to come in in Q2. They came in into Q1. So that's great, both on the MR Linux side and the CT Linux side. So that grew the US net sales, as we can see here. So it's a strong development. That will then have a bit of a negative effect on the next quarter because that's when we expected them. But we will continue to drive for strong installations of all our product portfolio in the US in the coming quarters here as well. And what we the feedback we've got is the new product launches is well suited for the US market. And we have the very important Astro Conference in the end of September, early October in Washington this year, where we also look forward to bring new product launches to discuss with customers to drive both order and revenue growth in the second half of the year.

Thank you so much. I will jump back.

Thanks, Mattias. Thanks, Gustav. We'll move to the next question, please.

The next question comes from the line of Richard Feldman, Goldman Sachs. Please go ahead.

Good morning, Richard.

Good morning. Thank you very much for taking my questions. I'll just do two, please. So the first one is on pricing. You alluded to pricing having a positive impact in Q1 with more to come. So my question is, how should we think about the magnitude of that impact through the course of the year? That's the first question. The second question is maybe a slightly more kind of medium term question. But in opening your press release today, the headline is further actions to improve profitability. So my question is, as you take those actions, inflationary pressures come down a bit, pricing is coming through. As all of that happens and you get better visibility on the margins trajectory, would you be willing to give us a slightly more specific timeline for the 14% margin target? Thank you.

Thank you, Richard. I will kick off with price and Tobias will continue with the profitability and outlook question. So price, we've been working hard with price for the last quarters. As you know, inflation kicked in. We have been working a lot with price increases, both on existing and new products. We first see that in the increase on the order side and now in Q4 we start to see price increases coming to the P&L as well as now in Q1. It's low single digit but the key thing is that the momentum is there and we start to see the order backlog increases coming into the P&L. We expect that to continue in Q2 and Q3 and Q4 as well. And it is a very, very important part of our margin improvement, both on gross and EBIT levels. But in addition to that, we work a lot on productivity measures on the gross margin, but also between gross margin and EBIT. because it's absolutely vital for Elekta to come back to pre-COVID profitability levels. And that's why we also set the 14 and above level going forward. And maybe you want to share some perspectives on that as well, Tobias.

Yeah, absolutely. Hello, Richard, and thanks for the question. But I can just echo the comments. I mean, when you look at this and combine the great support that we see from the recent product launches, the price increases start to be visible in the P&L and also the productivity actions that we are taking on. that just confirms to us on the path to actually reach the targets. And that is to reach an EBIT margin of 14% or higher. And I think all these metrics just confirm that path to that target. We have not provided a specific timeline, but we are confident to reach those levels.

Thanks, Richard. Okay. Thank you very much. Thank you. We'll move to the next question.

The next question comes from Veronica Dubajeva with Citi. Please go ahead.

Good morning, Veronica.

Good morning, and thank you guys for taking my questions. I have three, please, if that's okay. The first one is, and I appreciate you've changed the order of reporting structure, and I'm going to ask you a question that you don't want to answer, but I'm going to ask it anyhow. If I kind of look at the order growth, strip out Mexico, I think you would have been about 0% order growth year on year. Can you just give us a little bit of flavor within that, which regions were growing and which regions were not? And I guess specifically, I think last quarter you were talking about a subdued U.S. environment, whether that is something that has still continued on the order front specifically, or have you seen some easing there? So that would be my first question. My second question is just on the R&D capitalization rate in the quarter, and if there are any one-offs in there that explain the sort of increase, and just a reminder maybe for all of us on the line for how we should be thinking about the capitalization and the amortization for the full year. And then my big picture question, which is sort of a final question, obviously, and it's a little bit of a follow-on to Richard's, you know, lots of moving parts in the profitability area. You've taken a lot of costs out of the business. Once you are done with the restructuring that you've completed this year, do you still see more room for costs to come out? Or do you think that by the time we exit this year, the sort of path from here to the 14 will be dependent a lot more on the top line than on cost activity? If you can just talk through how you think about that. Thank you so much.

Thank you Veronica. I think we have order growth, we have R&D capitalization and we have cost kind of development going forward if I got your three questions. So I will start with the market situation and order side and R&D I think Tobias will take and we'll come back both of us maybe on the cost side and productivity side that's so important for us. if you take the the order in the book the bill ratio we we came in at the 1.1 as as we mentioned we believe that's a strong indicator for future uh sales growth uh so and then if you look at the market dynamics and we're happy to talk about the market dynamics of course uh and and you mentioned americas and if you take out uh let me see mexico um we you mentioned we would have been flat but I think overall for that market, we saw a good development in the US as well. Especially we'll highlight maybe Europe that we saw good dynamics and deals coming in on the European market as well. And then of course we look forward to China kicking in when they're out from the anti-corruption campaign. That's another dynamic. And then we have a strong strong market situation in in india if i highlight one market with a lot of activities and a lot of investments in healthcare on the private side maybe especially and oncology and radiotherapy and then you had a question on on the u.s subdued market situation I think now the Astro Conference is very important for us. We believe there's a need for investments in new Linux, both on the Emma Linux side, but also with the latest Gamma Knife S3, where we're very successful in the US market. Brachytherapy, we have the number one situation. So I think for Electa, it's more about creating those opportunities, those deals that would drive our book-to-bill ratio going forward. So we continue to focus on the US market to drive that growth across all the different products categories we have. So that's a bit what we see in the market side as of now in terms of deals and activities. And if we take the R&D question Tobias, the R&D cap.

The R&D question, what you will see throughout this year is that if we talk about the total R&D spend, that will actually go down gradually. It will be quite stable, but a slight decline over the quarters. In terms of the capitalization rate, it will stay fairly stable. It will be slightly higher here in the second quarter, but otherwise it follows pretty much the gross R&D development here. So that is what I can say. say about the and and that really follows the the project phases of the the innovation pipeline that we run here so yeah that follows that pattern clearly

Yes, and on the cost side, we will see the leverage going forward after this year. I think, as you mentioned, we now drive productivity initiatives, cost savings initiatives across the company to get back to better margin levels. We'll focus a lot on that during this year. But I think you're right in your comment, Veronica, that going forward, most of the leverage on the EBIT margin and gross margin side will come from improved gross margins from new product launches and price increases. We'll always work on cost. We'll always work on productivity. But from age two and onwards, the leverage will primarily come on the gross margin side. That's the plan.

And Gustav, would you also say, as you think about the path from whatever margin we end up this year to the 14%, that's going to be mostly gross margin driven or OPEX driven?

Gross margin driven.

Okay. That's great. Thanks so much.

Thanks. Thanks, Veronica. Thank you. We'll move to the next question. Please, operator.

So the next question comes from the line of Julien Dormois. Jeffries, please go ahead.

Morning, Julien. Yes. Hello. Hi, gentlemen. Thanks for taking my questions. I have two, really. One is very much focused on the short-term trend, and I know you guys don't want to comment on a specific quarter, but given the developments we saw in the first quarter with slight sales growth but margins still under pretty heavy pressure, should we expect pretty much the same dynamics to stand in the second quarter before getting much better in the second half? That would help us, obviously, model a little bit more precisely what we should expect on a sequential basis. And the second question is coming back on China. You have mentioned that you would probably expect the stimulus program to help at some point. I suspect you probably do not have more information at this stage, unless I'm wrong, but when could we expect or when do you guys expect to hear more from the ground on what we could expect on this side?

Yes, let's break it. So Tobias, if you take the short term Q2 question and I'll take the China question.

Absolutely. Thanks for the question, Adrian. To your question, the answer is yes. We expect the first half here to be weaker, both in terms of sales and also profitability. And then, rightly, what you just mentioned here, that we then see the pickup, as also previously stated and communicated, throughout the second half, supported by the action and initiatives that we just were talking about.

So we've had a good start of the first quarter, but we don't change the outlook for the first half or not the second half either. And then coming back to China, it's the stimulus program have not had major impacts yet because of the anti-corruption campaign that is ongoing. But we expect it to have impact going forward. And lessons learned from the history when this happened once before, what is it, one and a half years ago, I think that had a big impact also on orders in China and then installations when you get these kind of stimulus packages and low interest loans to do replacements of the installed base of linear accelerators. So we expect it to have an impact going forward. But we will drive our activities. I think that's the key thing. It's in our hands to drive the orders. It's our hands to drive the installations and new product launches, et cetera, in China. And then I think we more see the stimulus program that's something that could support and further fuel that. But we see it in our own hands to create the order and revenue growth in China in the coming quarters here. Thanks a lot.

thanks to julian and then we'll move to the next question please operate the next question comes from the line of lisa clive bernstein please go ahead good morning lisa hi hi good morning i just wanted to ask about some the market dynamics in the us specifically around uh unit uh around view raise bankruptcy a while back uh what sort of interest you're having in unity Also, just are you seeing any commercial activity from you, Ray, or are they completely out of the market at this point?

Thank you, Lisa. So on the MR Linux segment and Unity, I think over the last year, it's been kind of dramatic events for Vue Ray, our former competitor. I think they still have some operations. Part of it was acquired and they continue to maintain a bit of the installed base. Some of the installed base is not up and running. I mean, then for Lekta, we are driving the Unity consortia, all the activities, sales activities on Astro. So we see a very good funnel in the US and globally for Unity. Because of all the clinical outcome that has been coming out and we've also seen great results, we've seen hyperfractionations down to two fractions for a prostate, for example. So the trend is continuing that MR and RT and MR adaptive Linux is the way to go going forward as well. So we don't see much of ViewRay at the moment, if that's the specific question, and we are driving Unity growth going forward and installations.

And I suppose, and the question, they are servicing, it sounds like some of their installed base, but not all of it, in the areas where they're no longer servicing machines, are you able to, or have you sold any Unity Linux into those facilities? Or do you expect to in the coming quarters?

As mentioned before, both in the last year, we sold into those situations. I agree to that. And we continue to do so. And because many of the users are devout MRLINAC users and really believe in the technology and want to continue with that technology going forward as well. And then ElectaUnity is the best option going forward. So we have those. We have won those deals. We communicated a couple of them last year, and we continue to drive for that growth for Electa Unity.

Okay, great. Thanks very much. Thanks, Lisa.

Thank you. So we'll move to the next question, please, operator.

As a reminder first, if you wish to register for a question, please press star and one on your telephone. Star followed by one. And the next question comes from the line of Sten Gustafsson, ABG Sonderkolle. Please go ahead.

Good morning, Sten.

Good morning. The first one is a bit of a clarification. In the CEO letter and also during the call, you have talked about price increases. Have you increased your prices again recently or are we talking about the one you implemented about a year ago?

Yes, I start with that question. So how we work with it, we increase the prices in all our systems, our quoting systems and so on. And that you often do during a quarter, during a month, etc. And then throughout, when you quote, you win the deal. That deal will be won at a higher price level compared to, say, previous years. Then we install that deal maybe 12 months after. But we continue all the time to evaluate the impact from inflation on our inputs and material costs. And then we reflect that in a yearly or quarterly process in our quoting tools. And then that goes out to quotes, to higher prices, to installations, to better margins. So that's how we do it. So it's not a one-off exercise. It's something we work with all the time.

Okay. And you have continued to raise prices recently then, I guess. How much of the current backlog reflects sort of the new price level as of end of last year or a year ago, would you say? Is it half the backlog or one third of it or...

I don't have a specific number, but something in between those numbers would be my assessment right now. So you will see that coming out. Those deals will come out during next year and the year after, the majority of those deals, I would say. and that's why we're so pleased to see Stan both in Q4 and in Q1 that that that is kicking in also in the P&L both on the solution and service side because that's absolutely crucial for gross margin improvement because inflation has impacted our materials our salary levels etc and now we see a path to offset that effect by higher prices also coming into the P&L it will be a gradual

impact over the coming years, you could say.

Yes, because as I mentioned before, you update it in a system and then you deliver it quarter of a quarter. So you will not see a spike in a specific quarter. That's not what you should expect. It will come gradually, as we see now.

Fair enough. And then secondly, on the EVO and new software, did you say that you expect the C-Mark to come this quarter, in your second quarter, and also the 510 , Or do you file the 510k this quarter?

Yes, we said submission. That's what I said a bit earlier in the presentation. So we'll submit both for CE and FDA in the quarter. So then we can market and sell the products in those markets as well. And then for FDA clearance that often takes three months, something 90 days, something like that can take a bit longer and then you can install the machines. But that's often the time it takes for the orders to go from signed order to start of installation.

So the FDA approval is then perhaps not likely to come during the calendar year 24. Maybe early 2025, is that correct?

I mean, I cannot say exactly how long that process will take. For CMARC, it's more submission that we do. But for FDA approval, often what you refer to is these 90 days. But it depends a bit on how much questions you get. So it's very difficult for me to say a specific date for it. But the positive thing that we then can do after submission is to go and market the product in conferences and so on in Americas as well.

That's good. And is this also for the new software? Or has that already been cleared?

Some of it has been cleared. If it's not a medical device, you can sell it. And some of it needs to be approved as well. And that will also happen during the coming quarter.

All right. Excellent. Thank you very much. That's all for me.

Thanks again. Then we'll move back to Kristoffer, I think, operator.

Exactly. We have a follow-up from Mr. Lilleberg. Please go ahead, sir.

Perfect. It's actually a follow-up on Sten's question by coincidence. So did you have evil orders here in Europe in the second quarter? And based on the interest you see, what's your confidence in the amount of evil deliveries in the second half of the fiscal year and How important will this be for the We're all smart in improvements. Thank you.

Thank you, Christopher. Ivo is very important for Elekta. I think those of you that participated in Astro, you really felt the fantastic interest of the customer in the product, both if you want to do a full installation of a new Linux, but also if you want to upgrade with some of the imaging capabilities and adaptive capabilities into your installed base. What we've seen the development of that customer interest throughout the quarter is I would say it has increased. When we look with our regions out in a year, it is even more interest than we experienced three months ago. So that's a positive driver. We start to take orders where we can, when you can take an order that is kind of contingent on CE approval, etc. So we start to also translate that into orders. And then, of course, the key thing is to get to CE submission and FDA submission and then FDA approval. But I think the wheels are turning faster and faster on the Evo side and we are very positive on the customer interest we have seen. It's a technology that they really want to install. It's a new way of treating with adaptive treatments that's absolutely crucial. image quality, image capabilities has always been kind of at the heart of elect has been doing over the last decades. And this is a perfect fit into that strategy in into our purpose. So I think big interest now it's about translating that into two orders and then installations. And the orders will start to come during the second quarter and onwards and installations will start to come during the third and fourth quarter, I would say. It has a positive impact on the full year number that we have in our outlook, but it will have an even more impact, of course, into the next year. We will have four full Evo quarters, so to say, and Electa One quarters.

And what has been the customer feedback on what I expect is a pretty large premium price versus the previous high-end product you have?

We often, of course, discuss value rather than price. But what we've seen is that they really believe in the value that this product will bring them into. They will be able to do different types of treatments as well. And that will and is translating into a higher price level as well. We haven't communicated any specific prices, etc. And we're still in the early days. But the first indications we have is a good development.

Do you think it will be possible to shift the majority of high Linux sales from Bursa HD to e-book?

That's the plan, yes. So I think it's great for Elekta to now have a fantastic product in this high-end CT adaptive segment. So I think there will be a big transfer from Versa HDs into Evos going forward, yes. Thank you. Thank you.

Thank you, Chris Hoffer. Thank you. We'll move to the next question, please, operator.

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

Good morning, Robert. Yes. Morning. Thanks for taking my question. My first one was just to give us a bit more color on pricing in the backlog. And then the second one was just in terms of where the backlog is sitting now versus a year ago. Has the backlog continued to expand or have you kind of wound that down as your sales accelerated in this quarter? Thank you.

Thank you, Robert. I think on the prices, just Stan asked a bit of questions around that as well. I don't know if I have too much more to add. We have been raising prices over the last, what is it, six, eight quarters. We start to see it coming through also in the P&L. It is around a third to half of the backlog that has been kind of positively impacted and we will continue to deliver on that in the coming quarters and years.

And then the backlog.

On the backlog, I don't know exactly what, I don't have the exact numbers, but it has increased flat, similar levels as last year. And I think what you can see there as well is we look at the order growth in the year. You can get the feeling for that addition to the backlog from last year. Right now, for us, it's about to deliver that backlog into net sales and installations.

Thank you. Maybe just as one follow-up, just around the current financing situation of customers, are you seeing any sort of changes in credit conditions or financing for customers in emerging markets particularly, or is that not something that's changed at all over the last six or 12 months? Thank you.

I haven't seen any big change, but the discussion I'm having is that some of our customers, quite a few, are looking forward to a lower interest rate, lower inflation side, because low inflation results in lower costs for constructions. I think that's a key thing for the industry as such. and then lower interest rate is especially on the private side it's easier for them to to finance a new new green field hospitals and cancer clinics and radiotherapy clinics and and often in emerging markets where we strong as well so i hear more positive discussions going forward on on those two factors on the inflation and the interest rates in driving growth And then, I mean, the China stimulus package is in a way a part of that because that is low interest loans to replacement cycle in big parts of China.

Thanks, Robert. Thank you. Thank you.

We'll move to the next question.

The next question comes from the line of Julian Odo, Bank of America. Please go ahead.

Hello, Julian.

Hi, good morning. Hi, good morning. Thanks for taking my questions. The first one on revenue and China specifically. So if I understand correctly, China, you're not certain to see growth for the full year anymore. And Q2 is not yet in strong recovery mode for this country. I mean, I was just wondering, the I mean, like most of your peers, they have a kind of cautious approach on China recovery timing. I mean, you will start probably to see a strong order from Q3 onwards, but you have a six to 12-month lead time. So, I mean, any assumptions in terms of revenue recognition and if we have the time to see the benefits on the P&L for this year. And the second question, super quickly, on the mid-term targets, the beyond 2024, 2025, the 14%, is it from next year onwards, or is it still mid-term, so it could come in the coming few years? Thanks.

Thank you, Julian. I'll start with China. And Tobias, maybe you can take the outlook question going forward. So China, and I know there's been a lot of interest, of course, in China over the reporting cycle after the Q2s in the medtech industry. And I think we share the perspective that it's still impacting the anti-corruption campaign. I think what we see for Elekta with the technology portfolio we have and the interest in radiotherapy specifically in the investment cycle, we start to see that in Q3 and Q4, we start to see and have plans for good installations. And then exactly what that will translate in terms of revenue growth for China in the year, we will see. But I think the wheels are turning faster and faster in China, and we will translate that into growth in the second half, I would say, for Elekta. But what the full year is, we need to come back to. Because as many other medtech companies are saying, there are still factors in China that is impacting us here now.

And I can ask that. Thanks. Sorry.

No, just like a quick follow up. So you don't need to have the orders first and then need to wait six to 12 months to install it. I mean, you probably install the backlog that you have already in China. That's what you mean?

Yeah, we still have China, but China is often quite the quick time between orders to revenue. And we also have a factory and software development in China that we can deliver from directly. So we can have a quick turnaround between order and installation in China for sure.

Yes.

Yes and thanks for the question and maybe repeating myself but I think I mean in terms of the our financial targets here and the midterm target I mean I think actually the comprehensive approach we're taking here supported by the product launches the price increases and also taking the command over the coast here will result in for us to achieve the targets of reaching EBIT margin of 40% or higher determined to do and so we are very confident in that. We haven't provided a specific time point on that.

Thank you. Okay, perfect. Thank you very much. Thank you. And we'll move to the last question of this session. So please, operator.

And today's last question comes from the line of Oliver Reinberg, Kepler Shriver. Please go ahead.

Good morning, Oliver. Hi, good morning. Thanks very much for squeezing me in. Three quick questions. Firstly, on the sales dynamics. So I think you talked about that you've seen some kind of pull forward effect in the U.S. market. So can you just give us a kind of flavor how significant was that? And can we still expect sales growth in the second quarter on the back of that? So is there also a certain risk that there may be a sales decline? That's question number one. Secondly, on the cost savings, you talked about you're targeting 250 million analyzed cost savings. I think a larger part of costs have already been booked in Q1. So can you just give us a flavor of the 250 million? How much do you expect to contribute to the P&L already this year? And then thirdly, I think in your prepared remarks, you talked about that he has less benefit from inventory valuations. So I just wanted to check, have you already seen any kind of inventory valuation upwards in Q1 this year as well? Thank you.

Thank you, Oliver. I think I'll take the sales question and Tobias will follow with the cost and the inventory valuation question. But if we start with sales, I have to just clarify, did you mean US only in the comment on Q2 or elected total?

No, basically US. how much the US pull forward effect is for the group.

Okay. For the group, not such a major effect, but for the US or America's reported numbers in the quarter, the 16%, quite a significant effect. So we are then expecting that some of that will have a negative impact on the Americas in Q2 because we got that volume into Q1. But for the overall elect, it doesn't have a huge impact. It is relating to some CT-Linux and MR-Linux projects in the US.

And can we say half of the 16% was supported by Paul Ford?

You can do that evaluation.

Okay.

And then, hello, Oliver, a question here on the spend reduction initiatives here. So out of these 250, 150 approximately hit this year, and then the rest will then be year-over-year impact into next year.

So 150 million you're already going to realize this year?

Yes. Okay. Okay. Thank you. Yeah, sorry.

Take that question again.

And in your presentation slides, you talked about that the margin was supported by less support from inventory valuation effects. I mean, we obviously had the big benefit in Q1 last year. I just want to check if there was anything else being upward to evaluate in this Q1.

and the answer is no so that was related to q1 last year where we had exceptionally strong development for both the us dollar and inflation so this year and that is so that is just related to the year-over-year bridge from last year's gross margin

Great, thanks. Okay, thank you all for all of these questions. But before ending, I would like Gustav to close the call with some remarks.

Absolutely. Thank you to all of you for dialing in to our call here today. What you can see, what we've done in the quarter, just to summarize a bit, is we have really taken actions to improve profitability. It is what we discussed a lot around price increases that you've seen a bit in Q4, but now also in Q1, and there's more to come. we are continuing to working with efficiency measures and cost reduction initiatives and and the target is to generate annual cost savings by around 250 million at the end of this fiscal year and the key thing as we also discussed throughout the call but also in the q a is the very positive and strong impact that our new product launches electa evo and electa one will have going forward. And they have been very well received among the customers. And it is expected to have positive impact on our profitable growth going forward. So with those short remarks, thank you for dialing in.