Sectra AB (publ)

Good morning and welcome to Sectra's financial report presentation with CEO Torbjörn Cronander and CFO Jessica Holmqvist. My name is Helena Pettersson, investor relations officer, and I will be the moderator of the Q&A session. The chat function is open from start and if you write questions, management will answer them after their presentations. And with that, over to you Torbjörn.

All right, thank you very much. Welcome to this presentation. And I will commence the presentation now. We will discuss interim highlights that will be done by me, the financial development, my Jessica. Then I will discuss a little our way forward, and then we have the Q&A session. Please, as Helena said, ask via the chat function or email if you don't have a chat. That's how we adapted afterwards. So our business operations sector is imaging IT, which is the biggest part. We handle all images in hospitals. I'll come back to that later. And this is the largest operation, but also the one that is most affected by the big change from a license-based upfront model of sales to a recurring revenue model, where almost all customers in the future will pay for usage instead. And then we have secure communications to the right. That is actually our regional business sector, secure transmission sector. And that is encryption, that is selling very high-level encryption systems and communication systems to national authorities and defense systems around the world, or around Europe, obviously. We're not selling outside of Europe and NATO. And then we have business innovation, which is really our greenhouse for new ideas, kind of entrepreneurial ventures that we pursue. And the newest one there is Genomics IT, and I'll come back to that a little bit later. Highlights from the quarter, we are building a strong and future-proof business. We have very high customer satisfaction, which is very satisfying. All real business is built on high customer satisfaction. And this is the core sector, how we operate, how we try to run or build our culture in the company. Then we have also seen a very large order intake over the quarter. The biggest one is, of course, the entire province of Quebec in Canada, which is more or less a country. They do equivalents about the size of Sweden in one single order, our largest order, et cetera, today. Rapid progress in transition to asset service model. mainly in imaging IT where we're changing the upfront license sales to a service. This change is going even faster than we ourselves anticipated. More or less all business in the UK, the US and Canada is now as a service model and increasingly also in Europe. This is a big hit short term and short-term meaning over several years where we lose the upfront license model we had before. But long-term, it will be good for shareholders as well as customers. And of course, when you do such a big transition, you have large investments. If you get a big order like the one in Quebec, there is a lot of cost upfront that you don't get paid for until the customer begins to pay after a year or so of installation fees. We are transforming as a service model, as I said, and then we measure the recurring revenue growth. And cloud recurring revenue is exactly that positional model. That is when we take an earlier license sale that we got paid for upfront, and we move this over a long period of time instead. And that has grown 36%. We have had large growth there for a long time. But now the figures are on a level where 36% begins to make a real impact. And that's over six months. Then recurring revenue as a whole includes cloud recurring revenue. That includes the old systems, the old installation-based service contracts, which of course has grown less rapidly. But as it includes the cloud recurring revenue, that has also grown substantially. And then we have the churn, which is super important in a cloud or in a service model. And when you get paid for usage, it takes a lot of effort to get people in to this complex. And then you don't want to lose customers and start paying. Our churn is very low, about 0.5%. Main churn is in education, actually, which is a small business part, but that we see. We see the main churn, and that's people who have bought a terminal, a big table, historically, and then they get initially a usage contract. But if they don't prolong that, which in some countries people do all the time, then we lose that customer. We have even lower figure on that if you take imaging IT. Happy customers is something we believe in. We think that's the only way to grow long-term for any healthy and sustainable business. We have contract order bookings up 39%. It's a tremendous growth, and that's mainly the Canadian Quebec order. But we also grow in other areas as well. Net sales increased by 8%, despite that we're moving the upfront license sales to long-term. We still grow in the top line. And profit-pay share was down this quarter. Now, I should remind you, as I said at the end of the last Q1 presentation, that the quarterly variation separates large It's very, very difficult to predict on a quarterly basis. You have to look at 12 months running if you're going to see a trend, etc. And this year, this quarter, some business was moved into Q1 and some perhaps comes later. But it's, again, very large variation between quarters. The financial targets for the group are fulfilled. We have the priority one, which is our stability equity assets ratio. At the end of the period, we provide systems that are crucial for our customers. They cannot fail. Hospitals stop if our system stops. And if the military or a country are to trust us with the most important secrets, we cannot be financially unstable. so having a good equity asset which is important our target is about 30 we are at 48 despite that we actually paid out uh dividends or actually a redemption program uh this uh oh then the second priority is profitability there's a hygiene measure etc margin as such is not our main If we increase, that's a one-time increase, but we should at least do healthy business. So we have a profit margin of 15% that we shouldn't go below. We are at 16% despite all the large investments we do right now for the cloud business. And growth of profits, and that is our main target, but it's priority number three, the two hygiene measures of before, that should grow more than 50% per share over a five-year period. And we are currently more than double that, 111%. In secure communications, it's interesting. These were, for many years, a little of a problem child with us. It didn't grow, and we had not enough margins This has now changed both internally because we have a very good culture there now and new management, but we also have a world around us because it's a war in Europe and more insecure. This business is driven by that growth in the market as well. Now the sector is fast growing area. Order intake includes our encrypted telephones on secret level and also increasingly network encryption. That is, when you want to encrypt between two buildings, for instance, or into two different cities, you want very high-level encryption there at very high speeds, and that is an area where we're very strong. We had also patent settlement there that will have positive impact, not this reporting quarter, but the next reporting quarter. And coming back to that sector has an extensive patent portfolio. We had many patents in different areas. One of those is a US patent within mobile VPN, virtual private network solution that would usually have license to use corporations as part of a one time setting. It's been a discussion between us and them of if they infringe or not. And we decided together that they can license our patent instead. And that resulted for us in a net impact in Q3 that will lead to almost 100 million kronors as a one-time profit increase in communications and thus the entire concept. Business innovation highlights orthopedics IT. We have good profitable growth. Musculoskeletal disease is increasing and prosthesis or implants is also growing a lot. We do products that intend to get the right prosthesis into the right person. So preoperative planning. We increasingly also do postoperative analysis, which is growing healthily. And that is the evaluation of a prosthesis afterwards, that if it's stuck or not, if it's not stuck, it should be re-operated. But if it's stuck, even if you have pain, it should not be re-operated. And revision of a prosthesis is very dangerous and very costly. So we can prevent some of those by actually seeing that the prosthesis is stable as it should be. Medical education, there we have a little backlash this quarter because people are buying less of the hardware, which is the large tables. That's part of the general trend. But also the recurring revenue in that area is increasing rapidly. So that part, which is the most important part, is growing steadily. Genomics IT is the new area that we have been live with since in May. in the University of Pennsylvania in the U.S. We have a large interest in the market, but for those who have ever read Jeffrey Bohr's book Crossing Casper, we are exactly in that casper phase now. People are very interested. We saw that in an exhibition last week. But, of course, they want to see how it goes for the first customer first. That is, however, progressing very well. So we believe in that era going forward as a very interesting era to come. But things take time in medicine, that is as it should be. In research, that's not a business area, but it's a cost unit. We have lots of focus on various aspects of AI in medicine and clinical decision making, which is important. Malister for Genomics IT. As I said, we are in collaboration with the University of Pennsylvania handling genomic data. Genomic sequences is increasing a lot all over the world, but it has been done on research systems and Excel. Now, this doesn't work when you have an increase in production, then you need production systems and the world has been not had such production systems in genomics because it's been so seldomly done. Now this is increasing and we are experts of workflow optimization in medicine, etc. It fits perfectly well into what we do. large synergies with existing portfolio medical diagnostics not only in oncology it also actually is increasingly interesting for other parts because a mutation might be not cancerogenic but it might be something that affects probability of disease for instance in cardiology and then genomics has an impact also in that area. Live since May at Penn University of Pennsylvania. As I said before, our customers are happy with it. They're giving us good references. And a large initial interest from other institutions, but of course, medicine is slow, so this will take years before it really begins to grow. But we're well-processioned for the future there. Image and IT solutions are the biggest area. We have this ongoing transformation to software as a service that really affects our financing, especially short-term financing right now. We have cloud recurring revenue going up at 36%. And now at the level we are, it really begins to make an impact where we continue that growth. And we have very large order intake and high interest from the market. And as an example, we can give the Quebec order in Canada where they have had many systems over the province before more than 150 sites in Quebec they do about 12 million exams per year and that's about the same amount as Sweden does as a whole country and they will now go into one single consolary system for the entire Quebec public healthcare system it will replace a multitude of old IT systems And they can facilitate actually cross-reading, helping each other out, and having centralized service instead. This is a very large order. It contains radiology, breast imaging, orthopedics, not today pathology and other things we also could do. And that's, of course, up to the customer if they want to give that to us in the future as well. There will probably be another order for that. But who gets that is, of course, not yet decided. We just came back last week from our largest trade show of the year, that's Radiology Society of North America. That's every year in Chicago, the week after Thanksgiving. We had a large booth and we had a record interest in our offerings. We had more visitors, substantially more than any previous year, despite that we had a full much extended booth we had it was more or less full the entire show and we had a lot of people coming and seeing what we're doing and we can note that a lot of proof and appreciation of their separate position as a thought leader in medical imaging diagnostics now people come to us even customers who are have acquired other systems and they want to see what we do because we do all of these different things in one single systems Then I will lead over to Jessica who will continue the financial report.

Thank you. Good morning and welcome to our presentation. Our six month report shows record high order intake, solid recurring revenue growth and strong cash flow. Whereas the overall sales growth is more moderate and the operating profit is lower than in the comparable period. I will walk you through some key financial metrics, starting off with order intake. With the Quebec order signed during the period, our order intake, contracted order intake levels reached new all-time high levels, amounting to 4.8 billion in the period, of which close to 4.6 billion was guaranteed order intake. And we point out the fact that orders of this size create variations in the quarterly order bookings, as can be seen in this graph. In addition to the Quebec order, we also received sector one cloud orders during the second quarter, both in the US and the UK. And we received orders for digital pathology in, for example, France and Belgium. Order bookings in secure communications remain stable during the period with various orders for Tiger S and network encryptors. And sorry for my voice today, which is not functioning 100%. I will do my best. Sales in the six month period amounted to 1,477,000,000, an increase of 8% year on year. And we had some currency impact on sales figures. Adjusting for that sales would have grown by 9%. And recurring revenue keeps growing, up 17% year on year. And the part that is cloud-based increased by 36%. So this shows, again, the progress we're making in the transition to cloud-based SaaS. We have non-recurring revenues that are lower than in the comparable quarter. Non-recurring revenues are typically revenues from license sales and migration. And as we have an increasing share of new business generated, or an increasing share of new business from cloud contracts, this is the result of that. We continue our growth journey with loyal customers, noting that the recurring revenue churn remained very limited at 0.5%, rolling 12. Imaging IT reported sales growth of 5% year on year. This growth rate is more moderate than what we have seen in recent periods, and growth is dampened both by currency and by the transition to the new business model with revenues spread over time. Growth in cloud recurring revenue remained high, 36%, and this is the KPI that we focus on during the transition. Secure communications grew sales by 42% year on year to 198 million. This is volume driven and also includes more product deliveries than we had in the comparable period. In business innovation, as Torbjörn said, we have seen a slowdown in the sales. hardware in medical education but we have rapid growth in recurring rate revenue this could however not compensate fully year on year sales increased year on year in our geographic markets except in the u.s and rest of world the u.s decline is currency driven and we also note that This is the market where we have the fastest transition to cloud, with all new customer sales being service sales. In the rest of world markets, the decline is partly currency driven. It also reflects lower non-recurring revenues outside our main markets. We know the highest growth in absolute figures in Sweden fueled by the positive development in secure communications. Our operating profit declined 15% year on year to 209 million, and the operating profit margin was weakened. The transition to the new business model again is impacting as we spread revenues and earnings over time. We also have initial costs relating to the new extensive customer contracts that we have signed. That is a factor that impacted profit negatively in the period. And quarterly variations are expected to gradually decrease long term, but we are not there yet. Imaging IT reported 22% lower operating profit at a margin of 15%. And here we have the strategic investment in becoming a service provider that continues to impact profitability as we report revenues and earnings over time. And we also have the ongoing preparations for deliveries of our large customer orders secured in the past year. And none of the larger customer contracts are yet in full production. Secure communications. increased the operating profit by almost 200%. This is a major significant uplift and I repeat it's volume. And also we have more product deliveries than the comparable period. Operations generated a cash flow of 119 million in the period. And versus the comparable period, we have less tied up capital in current receivables as a result of timing effects in customer projects. And we closed the reporting period with 626 million in cash balance after settlement of the share redemption program during the second quarter. That was all for me.