Elekta AB (publ)

Hi, and good morning, everyone, and welcome to this second quarter investor and analyst call. My name is Peter Nyqvist. I'm heading up investor relations at Elekta. With me here, I have, for the first time, our new President and CEO, Jakob Just-Bomholt. And welcome, Jakob, for the first call, and hopefully many to follow. Together with Jakob, we have our CFO, Tobias Hägglund. Jakob and Tobias will present the results for the second quarter and in the fiscal year of 25-26. So we'll start off with Jakob giving some initial reflections on his first quarter as CEO, followed by a summary of the Q2 financials, including the order review announced today. Then Tobias will go into the more details around the financials and the NECTA's outlook. Jakob can then present the change in operating model and the organization structure leading to the cost reductions that we announced today as well. And after the presentation, we will, as usual, be available for a Q&A session. But before I start, I want to remind you that some of the information discussed in this call contains forward-looking statements. These can include projections regarding revenues, operating result, cash flow, as well as products and product development. This statement involves risk and uncertainties that may cause actual results to differ material from those set forth in the statements. With that said, I will hand over the word to you, Jakob.

Thank you very much. So let me start by talking a bit about some of the initial reflections and then give highlight on Q2, then Tobias, you will go into Q2 financials in greater details, and then importantly, we'll get back to electa reset, if you will, our new operating model. But on initial reflections, before I go into the details here on that slide, I would just say, fundamentally, I like what I see. I'm now four months into the position. Obviously, perspectives will modify somewhat, but I do think what we will outline here in terms of strength and challenges and opportunities will set the direction for the company ahead of us. We have been very open. Electra is not performing at full potential as incoming CEO. I think that's great. It gives us a lot to do. It also gives us an opportunity to do better. When we look at the company, we don't feel and I don't feel that there are structural headwind. Of course, we have competition like for any company, but the challenges are really within our control to face, and that's what we're about to do. Today, we disclose our mushroom battle one. We call it simplifying power speed, but I'll get back to it. But let me go a little bit in details with some of the reflections, and if I start on the positive side, you know, it's not positive. Cancer burden is increasing. You all know that. Cancer incidence is on the rise. But fortunately, due to aging population and growing population, we see more and more that cancer is a chronic disease. So you get treated, you're cured, you come back, and then you're using elective equipment again. Then the second major trend is that there is a shortage of professionals. I've heard numbers up to a shortage of 80 million. So that really speaks for us as a vendor into the industry to innovate, to support the professionals with speed and better treatment and more precision. At Electra, if I turn to the right, We are well positioned. We are number two. We are not number one. That's in many ways attractive position to be in, but we are clearly number two. Radiation therapy is an attractive and growing med tech segment. We look at the segment likely to grow faster than the average med tech segment. Then we have many strongholds built up over many years in key markets outside U.S., strong in Europe, strong in many Middle East Africa markets, strong, very strong in China, strong in a number of Asia Pacific regions. But clearly, what we also imply here is that we are not strong enough in the U.S. and I'll get back to that on some of the challenges and opportunities. We are the only dedicated, 100% dedicated company focused on radiotherapy, I think it's such a strength. Because when you're dedicated, you have to have product passion. You have to focus on your customers. You have to execute fast. We have a well-recognized brand. And what I truly cherish coming from a company with more indirect sales force, we have a direct sales force. So we are really in control of our commercial execution. When we look at R&D spend, we have been willing to spend on innovation. I think that's right because when you look at the graph again to the left, there is a need for us to innovate. We need more precision. We need more speed. We are not mature or end of the road in terms of innovation. When you look at gross spend, we spend roughly 12%, so it's very high for a medtech company. So it's certainly sufficient to realize what I would call future best-in-class solutions, because that is the future of electric, that we have best-in-class products, highly innovative, and the current spending run rate supports that. And then we have, if you will, a razor blade model. So we sell our solutions, but then we supplement that revenue generation by more predictable, profitable software upgrades, but also service markets. And as you see, our service business continues to grow. There are a lot of strengths. We have fairly asset-light. We have, as you will outline, to be as good net working capital. Our physical CapEx requirements are relatively low. So there are many things to like about Electa. And if we go on the next page, then importantly also we have a strong portfolio logic. If I just speak a little bit to it, then perhaps many of you know, but Electa, The products are complementary, both from a brand commercial but also workflow perspective. So if I start from the right, we are building software that really connect the different modalities because that's a customer need. And often when we tender, it's not only a Linux, it's bundled with other products as well. But our Gamma Knife was started at Electra. That is the gold standard for stereotactic radiosurgery of the brain. And we are uniquely positioned and clear market leader. Same for brachytherapy, actually. It's highly targeted, internally delivered dose for specific cancers. It's not for all. It's cost-effective, so it's also attractive for emerging markets. And very often it complements a Linux treatment, so you can get a boost of and then you get your Linux treatments or the other way around. And then we have our Linux, and we are the only one with both MR-guided and CT-guided Linux. So the CT-guided Linux is really the workhorse for high-volume broad cancer treatment, and MR-guided is the top of the line with ultimate precision. So I want to take away, my takeaway is, and hopefully yours as well, The portfolio logic is good. That's not where we have a challenge. We don't need to slice off or do big portfolio changes. It really makes sense. But then, of course, if we get into improvement areas and we also believe in the statement that we are not at full potential and the industry is attractive, then what do we need to look at? If we look at gross margin, it's too low. We used to be in the 40s, better up actually in the 40s. We did see a dip post-pandemic or during the pandemic, and we never really recovered. And if we look at it now, we have too much single source, too much supplier dependency. Some of them take advantage, and we will double down on continuous engineering to make sure that that we have a relentless cost reduction focus in the years ahead. There's not a quick fix, but it's going to happen, and it's certainly viable. Then when we look at our 12% gross spend on innovation, I do think we need to become more focused, more commercially driven. Electra comes with very strong scientific expertise, roots strong within academia, I would certainly push us to be a little bit more commercially focused when we take innovation bets in the future. And then, of course, over time, we need to grow at or above the market. When we look at our growth rate, we have to accept that we have been growing. over the last really half a decade, even a bit longer, a bit slower, somewhat slower, actually, than main competitors. We don't like that. Specifically, we need a turnaround in our U.S. business. We'll get back on FDA, I'm sure. And then we want to preserve our China position where Electra very cleverly have been early in the market, have localized our supply chain. And then overall, when I look at the commercial organization, and as you know, I've taken the regions in direct report, we need stronger commercial execution. We will have to apply cost focus across all spend categories, standardizing our processes, and then I'll get back to organization, but we are looking at simplification. But it really starts with A new operating model, that's a starting point that then leads into a simplified organizational structure to target faster speed, faster speed on product development, operational execution, commercial execution, really with the goal of focusing on our customers and patients. And then on quality of earnings. we will work hard to make the link between EBIT and cash strengthen. So these are some of the reflections I initially want to share with you. As we'll disclose in the end, we'll give a strategy update with further details during January. We then look at Q2 specifically, and I'll do it fairly fast. We did 1% organic growth, 2% on orders, strongest in Europe, 11%, so we continue to see momentum of our product launches. That's good. APAC saw revenue growth outside China, but it couldn't compensate for the double-digit decline in China. But on China, it's quite positive that we are now seeing growth in orders. They had a depleted backlog. We knew that. We now saw in Q2 order growth. And when we look at the momentum, it looks quite positive for second half skewed towards Q4. Then negative growth of 8% in USA, despite actually quite good order intake. but clearly we need a commercial turnaround. We'll say the commercial organization needs but we need a turnaround in the US. We did have growth in Latin. Then one of my first actions as CEO was to change the reporting line of the regional heads reporting to me. And then we initiated an action to review, to make a comprehensive review of the order backlog. And that's what I want to update you on today. Compared to the order review presented in June, we have implemented, I would say, a little bit firmer interpretation of order criteria in areas such as delivery times, end customer side, down payment price, indexation, et cetera. There will always be a judgmental call. Is the license there? Is the site ready? And now we apply a firmer interpretation. It's predominantly old orders that we are now canceling. But this action will tell you we should have better forecasting accuracy, both in terms of sales development and profitability. The cancellation is 2.2 billion. I would say this is it. We don't expect further structural revision of the order backlog. That's, for me, important to communicate. I've been in it at great detail. I would also like to stress that it has no revenue impact for this year or next year as such, and there's no cash flow impact, so we are not going to pay back any customer deposits. So that's where we stand. I would like to end by saying it's quite important to take away that we have an order backlog that I consider at a healthy level two times annual sales give and take based on last year's sale. So we have a lot of business to look forward to, if you will. So if I close on Q2, book to bill of one. All right. Rolling 12-month, importantly, 1.09. We continue to see good momentum in Europe. Of course, I like to see over time higher net sales growth than 1%. That's clear. Good margin uptake close to 38%. On EBIT, 10.1% versus last year, 9.8%. But if you adjust for lower capitalization and higher amortization is actually quite a significant improvement in, if you will, cash-based EBIT margin. And then you will outline to be, but if we look at year-to-date cash generation significantly better than same period last year, and good to see that net debt versus a year ago has been reduced by almost 700 million cents. So that concludes, and then I look forward to coming back to the operating model.

Okay, yeah, thank you, Jakob, and good to have you on board here. So I will then move into the quarter here a little bit more in detail. You mentioned that, Jakob, that we grew here in the quarter by 1%. This is done in constant exchange rates. We had a decline in our solutions operations by 4% while our service grew by 7%. And also would like to mention here that the product launches of Elekta 1 and Elekta Evo had a continued positive contribution in the quarter. Then looking at the profitability, we land here in the second quarter a gross margin of 37.9%, which then means 220 basis points improvement year over year. We see that our new products continue to contribute positively. We also have a higher share of our service and business in the quarter. Our break in Euro business, a strong development, strong growth in the quarter. Price continues to be positive. And then here, as we had in the previous quarter, we have a negative impact then from tariffs effects and this negative impact is then 70 and 50 basis points respectively correspondingly to a total of 163 million stack in the quarter the operating margin adjusted EBIT margin amounted to 10.1 percent to 30 basis points improvement and you are fully correct Jacob that we have a reduction in our gross R&D. When you see the impact here, net R&D is increasing in the quarter, driven then by both lower capitalizations and the higher amortizations. Selling and admin expenses increased somewhat in the quarter, and this was Selective investments in marketing and IT and a bit of the phasing of the ASTRO cost here compared to last year, as well as some transition-related costs. But we will come back, as you were pointing out, Jacob, here to the program that we are on here. Net income amounted to 229 million SEC and adjusted earnings per share amounted to 0.65 SEC. So let's move into next slide. And FX, I think that we have a similar view here of the FX movements as we had in the previous quarter. So how does FX then impact our operations? The first point being is that, as you know, our reporting currency is the Swedish krona. And when you have strengthening of the Swedish krona versus the main currencies, USD and Euro, this means that the sales in dollars and Euro actually becomes less worth in Swedish krona, which then leads to, in nominating terms, lower revenues and earnings in SEC, everything else equal, the translation effect as such. Then secondly here, we also have more revenues and cost in dollars. And when you actually then have the depreciation of the U.S. dollar versus our main cost currencies, euro and pounds, we also have then a favorable currency transactional impact in the quarter. And as you see in this table then, FX then had a negative impact of 50 basis points on the adjusted gross margin and 60 basis points on the adjusted EBIT margin. Coming back here to Jakob's point here, we have a reduction of the net debt of 700 million SEK year over year, and it's obviously then driven by the cash flow generation. If you look now year to date, we have in the seasonal week start, since we're building working capital in the first two quarters to larger quarters later in the year, we normally have a week start of our cash flow generation. But if you compare this to last year, we are about 900 million SEC better when you look at the cash flow of the continuous investments. When you look at the quarter, we improve our cash flow year-over-year by 389 million SEC. And this is then driven here, as you point, Jacob, to lower R&D spend as well as more favorable development of working capital here with more customer advances as well as reduction of accounts receivables. And our net working capital as a percentage net sales is now a negative of 7%. If you then look at the cash conversion here, it amounts to 91% compared to 65% a year ago. And if you then look at some more long-term trends and key financial metrics and look into the net sales, gross margin, EBIT margin, and operating cash flows, which obviously are all key metrics here for driving profitable growth and return to our shareholders, is that we have seen net sales on a rolling 12-month basis, which is relatively flat year over year. However, we see a positive trend for both the gross margin and the EBIT margin. And then here, what we just were talking about is that we've also seen a positive development for the operating cash flow, where we have delivered significant improvement year over year. If you then focus a bit on the outlook for the second half of the current fiscal year 2025-26 and the full fiscal year, we reiterate our full year 2025-26 outlook where we expect net sales in constant currency to grow year-over-year. We expect sales in China to start recovering during the second half of 2025-26. And furthermore, we expect a continued negative impact from tariffs and FX at current exchange rates. So with that, I hand over to you, Jacob.