Sectra AB (publ)

Good morning and welcome to Sectra's year-end report presentation with CEO Torbjörn Cronander and CFO Jessica Franzén. My name is Helena Pettersson. I will be moderating the Q&A session after management presentation. The chat function is open from start, and you are most welcome to write your questions during the presentation. Management will address them afterwards. And with that, I hand over to you, Torbjörn.

All right, thank you very much. So we'll go through intro and highlights as a start. We'll do the financial development, and Jessica will do that. Jessica Holmqvist. And then briefly, I will go through a little bit of a way forward at the end. And then we have the Q&A sessions. You can do questions both via chat and email. And we'll reply to that and also some previously sent in questions that we got by email before the meeting. So our business operations, that's a short brief. Our largest business area, led by my excellent trigger, is imaging IT. That is management of images in hospital healthcare. Main part of that is radiology, but we have increasing other areas as well, such as pathology. We have ophthalmology. We have other operations as well in that area. We're becoming an enterprise imaging company there. By far the largest area where. Then we have secure communications, which is highly high security encryption systems for communications mainly. And that is managed by Magnus Skogberg. And we have good growth in that area as well. And then we have business innovation, which is our greenhouse, including research. We have an extensive research industrial doctorate student program. We keep at the very forefront and we have some business areas there that are not big enough to become a business unit itself, but are still interesting areas for the future. Those are in orthopedics, medical education, which is growing well, and we have genomics, a relatively new area with a high future potential. Highlights from the year. We have long-term recurring revenues going up. The contract order bookings went a little down, but we're still a ways above our turnover at more than double the turnover of revenue in order bookings. So we're not all panicked about that. Then we have, and I should point out that in order bookings, the orders are very large relative to our size. And that means that individual quarters and even years are heavily influenced by individual orders. When one order might be 25% of the annual revenue, it is not like selling a lot of small units. It's individual orders that come in. Net sales rose by 9%. And profit by share grew by almost 20%. And the cloud recurring revenue, which is our big growth area when we transform into as a service, software as a service model, grew by 55%, which is now increasingly a very large portion of what we do. And recurring revenue as a whole, which also includes the cloud recurring revenue. But in addition to cloud recurring revenue, it includes the whole service contracts and more type of that, which is not related to the SaaS model that grew by 19%. And the main part of that growth is, of course, the first one, the cloud recurring revenue. And then we have churn. If you're on a service model, you don't want to lose customers as they pay per procedure. and we have a very low recurring revenue churn at 0.5%, which is a very important figure to look upon if you compare to the first ones. The financial targets for the group are equity, assets ratio, a measure of stability. We sell into areas and customers who do not want us to cease to exist. The medical informatics solutions we sell are named to be the most important IT systems of hospitals. If the management of radiology stops, most of the modern hospitals come to a grinding halt. You don't buy that from three guys in a garage, you buy it from someone you trust. And that trust comes both in other references and other happy customers, but it also comes from financial stability. And our target there is 30% of equity assets ratio, and we are well above that, 48%. Despite that, we also increased the dividends for last year. Profitability, which is a second prioritized target, is margin. We have a margin target of 15% and we're well above that at about 20. These two first are hygiene measures. Increasing margin can only do once, but growing profits it can do forever. So stability, profitability, when these are fulfilled as hygiene measures, and they are, then the main goal of the company is growth of profit per share. We measure that by EBIT per share growth over a five-year period. That should be above 50%, and we are well above 100%. Once again, we're ranked number one in customer satisfaction. When you have such a high-trust business as we are in, what other people say is very important. And we have now had the 13th year in a row in the United States and large hospitals. We have been named the system in our business, which customers are most satisfied. Seventh year in a row in Canada and in global packs, which are other areas in Northern Europe. We have the happiest customer in Southern Europe. We have the happiest customer in DACH, which is a very large portion of Middle Europe, Middle East, Africa, and Oceania, which is Australia, New Zealand. We also have the highest customer satisfaction of all vendors in our business. And these are important things when you're in such type of business as we are. We also towards the end of the year acquired an AI company. We have said before that we do not normally do AI in-house, but this one is a little bit different. This is not AI just assisting a doctor. It's a system that is approved in Europe for autonomous AI. And if an AI can do at least high confidence normals, when the suspicion or the probability of disease is very, very low, but you have to go through a very large amount of images, you can actually, in some cases, replace a doctor all over. And that means real savings for the hospital. Just to have another measurement for the doctor who needs to review an image anyways, that is not really saving. But if you can take the doctor away for some exams, That's really savings and that was the main reason why we acquired this. Lithuanian company located in Vilnius. Very competent people and we are very happy to have them in the group. There is no material impact on the group products 2526. This is a small company with small revenue, but it's strategically it is important for the future. In business innovation, we want a national wide agreement in Norway for education portal. And that was not for universities. We've mainly been selling in universities earlier, but now medical doctors are becoming like us engineers. What I studied when I was in engineering school is by far obsolete. The only thing that's still valid is probably the math. But in a So the half-life of knowledge of an engineer is short. You have to be a continuous learner for life. Medical has become such. Also medical professionals in hospitals and working all over the world needs to keep up to speed of what's happening in the field. So they need continuous education. And the nationwide agreement in Norway is for pathology, And radiology, all over Norway, so all Norwegian doctors will be trained, continuously trained on our solution that is nationwide. That is, we hope, a good example and reference going forward because we think this will be more and more important to have continuous education of medical professionals because there is a new article every week for something that is important for them. And you need to have a organized training for that. In sector communication, we had a very high revenue for Singly Porter. We are growing in a way because of a sad reason. There is a war going on in Europe and that has driven security concern and defense concerns all over the world. And we are doing encryption, which is very important to keep secret secrets. And with the inclusion of NATO, we hope to have a larger market going forward as well. But we have a lot of growth in that area. We also do civilian defense encryption systems. In financial development, I will leave the word to Jessica.

Thank you. Good morning and welcome to our call. We are happy to report solid financial performance for the full year and the fourth quarter. And as usual during our presentations, I will guide you through the key financial metrics, starting with order intake. We see sustained demand for our offerings. Full-year contracted order bookings amounted to 7.6 billion, surpassed only by last year's record high order intake, which was driven by the 3 billion Quebec contract. Our rolling 12 book to bill ratio is 2.2, and we have seen strong order inflow across our geographic markets. with North America leading and solid contributions in Sweden and in the UK. Our fourth quarter order intake amounted to 1.6 billion. Not a bit down versus the comparable quarter when we signed several larger US contracts. And this again confirms quarterly volatility in our order bookings. Net sales for the full year amounted to 3.5 billion, corresponding to a growth rate of 9.3%. The SaaS transition drives recurring revenue, which increased by 19%, whereas our non-recurring revenue declined by 7%. And I point out again that the cloud recurring revenue grew by 55% to 960 million. Currency movements impacted sales negatively, with the US dollar, the euro and the British pound all weaker against the Swedish krona than in the comparable period. And adjusting for currency effect, sales increased by 16.5%. And high customer satisfaction is reflected in our figures. with a low recurring revenue churn of 0.5, rolling 12. Fourth quarter sales increased by 13%, and for the first time, quarterly sales exceeded one billion. All operating areas increased sales year over year. In imaging IT, The drivers are increased usage of our services and continued deployment at additional sites. In this area, we report close to 76% recurring revenue for the full year. In secure communications, we increased sales by 11% to 453 million. The fourth quarter was strong despite product delivery delays. with sales reaching the highest level ever for a single quarter. And in business innovation, where we include orthopedics, medical education and genomics, the performance is driven by growth in our medical operations business. All geographic markets report sales growth year over year in local currencies. We reported the highest growth in absolute numbers in the US, and Canada is the main market driving growth in rest of world. Please note that our year over year comparisons on operating profit exclude the non-recurring patent settlement recognized in 2425, which had an EBIT impact of 110 million. Excluding that, our operating profit rose by 16% to 711 million, of which 209 million was generated in the fourth quarter. Profit growth is seen across all three operating areas. And the margin was improved to just above 20% up from 18.9 the year before. And this is driven by higher volume, cost control, and more capitalized work for own use. Imaging IT delivered a strong finish to the full year. Operating profit increased by 25%. And the margin is just about 23%. And the drivers are the same as mentioned previously, increased use of increased usage, new, more deployments, deployments of new customers and add-on sales. And combined with cost control, this resulted in profit growth and improved profitability. Secure communications operating profit increased by 24%, and the margin was 17.6%. Throughout the year, we have seen the impact of delayed product deliveries, but nevertheless, the fourth quarter was strong through both growth and efficiency improvements in underlying operations. Other operations, we report a larger operating loss than in the comparable period. And this is mainly due to employee profit sharing recorded during the fourth quarter. Cash flow from operating activities amounted to 1 billion 78 million. for the full year, of which roughly 500 was generated in the fourth quarter. And the strong cash flow generation comes from profit growth and also from increased short-term liabilities related to advance payments from customers. And given the cash flow generation and the overall financial position, Our board and CEO propose an increased ordinary dividend of 130 per share, and an extraordinary dividend of one krona per share for approval at the annual general meeting in September.

Thank you, Jessica. Our way forward. There is a wave of AI coming through our entire society. And we have said several times that this wave is not something that can be stopped or hindered. It's a normal wave coming in. You have two choices. You can either try to surf on the front of that wave and benefit from it. You would fall a couple of times, but you can at least try to surf. and use that energy to your own benefit, or you can fight like crazy man on the back end of it, trying to paddle to keep up, and you will probably not succeed anyways. We prefer to try to serve from the front side, and we're using AI to both help our customers, both in making healthcare more efficient. Actually, we can see a trend that healthcare, as we know it, would not survive without this new trend in AI. It makes survival or increase of production in healthcare possible. So we are helping our customers with that. We're also helping out on the cybersecurity side to defend and also use this to increase cyber resilience. Problem in there is that also the crooks have access to these tools. So it's kind of an increasing speed of change in cybersecurity. But our job is to help our customers as good as we can in both areas. We also use AI to increase internal efficiencies. We have very large increases in efficiencies, as probably most of you also have seen in your own environments. If you use AI carefully and cleverly, you can become way more efficient than you was without it. In medical IT, we have the growth areas that were presented many times based on the demographics of the world and the relative numbers of older people to younger people growing. The main focus has to be related to the age-related diseases. And these are neurodegenerative, cardiovascular disease, cancer disease, musculoskeletal disease, and vision and here, vision and here. And we do image-related diagnostics. We don't do therapy, but image-related diagnostics and now also genomics in these areas. And these are areas that will have to grow if we want healthcare to survive in the future. And that's our main focus. We need to be good in all imaging and all diagnosis, but these are the ones that really require the highest investment from society in the future. And we do that increasingly, but we call sector one. Sector one, our customers now on the cloud, they can sign one contract with us. And within that one contract, they can get all of these different services. That is radiology, which is the biggest one, but we also have pathology, cardiology, genomics, education, as we discussed before, breast imaging, orthopedic planning, all in one contract. And that means the customers can, when they use one of these functions, there is a tick and they need to pay for that. But they don't have to have multiple vendors. That simplifies the environment of the world of our customers tremendously. But it also provides a possibility to have these interacting in the future diagnosis, many different ologies, so to say, and many source information needs to to be unified and participate in what the customer uses. So we can say that Sacra is in a way a Microsoft Office in medical imaging. You would not today buy Excel or Word separate. You have a Microsoft Office that contains that, and we have that possibility for our customers. And as with Microsoft today, you don't normally buy Microsoft as a package in the bookstore anymore. You get the subscription and you get all the service going forward. And that is exactly what we are doing. But we charge per usage. We don't charge per seat. And we are also adding now reporting into that. We've done reporting as kind of the output of the diagnostic process. And we have done that in Europe for many, many years. But we also add that in now in the U.S., And that is an important part because reporting can take the result of the different diagnostics and make comprehensive report and then go to the referring physician, which is a very important part of diagnostics. What we hear from customers all over the world, we lack medical staff and our workload is increasing. People are getting older and older and old people in general get sicker. And we are also seeing cancer, especially that cancer is transforming from being an acute deadly disease to a chronic disease. If you have cancer, you can live on, but then you need medical diagnosis all the time while you continue living because you need to monitor that thing. Burnout risk is really not so today. It's especially in the US, but also in Europe. Serious issue. People can not work all the time. You have to see your kids and have a life outside as well, even if you make a lot of money. Workflow efficiency, therefore, is paramountly important, and that is our core, the crosshairs of what we do in products. We increase production in hostels by improving workflows. Workflow efficiency is what they need in order to survive. Another thing we hear from customers, we have too many IT systems. There are hostels with 1,000 IT systems. That's a huge cost base of maintenance. They have to have staff on the hostels that look at all the different systems, know all these different systems. That's expensive and comes up. But it's also a high cybersecurity risk. All of these 1,000 systems is a possible risk. place of attack for cybersecurity. You would like to decrease them so you can have various cybersecurity control over your hospital environment. And these two both motivate having one vendor for many systems. And lately we see personalized medicine, which is applying therapies that is different from two different patients. They look, they have the same disease, they look the same, but they are perhaps different in genomics or something. And then you want to target personalized treatment for that person. And that requires integrated diagnostics. You need input from radiology, pathology to take those decisions, and not the least genomics, our newest area. And we are, this is what we're building. As you saw that big circle before with sector one, this is what is needed. It's one system doing all of these, but you can also have one report in the future having input from all these different areas. We are the only vendor in the world with all of these in one single system, radiology, cardiology, pathology, genomics, IT, and ophthalmology. And that is a strength. Fewer systems for the hospital, less concern, and one integrated report going forward. In cybersecurity, We normally say we, we're not secular, but we as humanity have built a very fragile society in IT. It can be compared to building a skyscraper one floor at a time. We built a very primitive, very early versions of TCP IP with protocols underlying most of the communication in internet, et cetera. That was very primitive in the beginning. I still remember when the first possibility to send data over the Atlantic was done in the mid-'80s. But it worked fine. So we built another floor in this building, a third floor. There was no plan. There was no foundations made to support it. But today, that's a big skyscraper built on a foundation that was never intended for this. There was no foundation, no plan. This is scary. But that building now runs all society. And that building needs protection. And we need to patch it as good as we can. We can't rebuild it. It's already there. But we need to patch it. And that is cybersecurity in a nutshell. And we are good at that. We help out in protecting that building. In both of these markets, sector is very well positioned. Healthcare and cybersecurity are markets that even if you have a low-tide economy, even if inflation goes up, due to external pressures, we need to have healthcare, especially for elderly, but also for ourselves. And we need that huge skyscraper to be protected. These markets have to grow. So we will grow despite, or our markets will grow, despite if there is high tides or low tides in economy as a whole. Which is an important nice place to be, but that was intentionally built so. The priorities take key takeaways going forward. We have significant goal lives in progress now. The large contracts we've taken over the years with all sector one, so they're spread out over many years. are now in progress to be taken into real life, and then they begin to pay. They don't pay now at order, they pay when they go live, and they pay with per procedure they do in medical. The quarterly variations in revenue and profit will decrease slowly. The quarterly variations in order intake will still be very large. And we are also exposed to currencies, so we want you to be aware of that. The Swedish krona affects our results quite a lot. The upcoming financial events. We have a three-month report on September 4th. September 8th, we have an annual general meeting. We are old-fashioned. We do that, as the kids say, in real life. So that will not be digital, it will be fiscal in Linköping. And November 25th, we have our six-month report for the year that we are now working. I would like to remind you, these meetings are not for the sake of us, it's for the sake of you. So we have the same thinking about you as we have about our customers. You need to tell us what you think works, otherwise we cannot improve them. So send an email to info.investor.sector.com if you want us to improve this, if you have suggestions how they can become more efficient. We're changing quite a lot over the last years based on that feedback. And then we open up for questions.

Thank you, Torbjörn and Jessica. We have received a lot of questions during your presentations, but I will start with one that we have seen from several investors, and it's connected to the Sector 1 cloud. Could you please update us on the implementation status and timeline on some of the largest Sector 1 cloud deployments and how they are proceeding, especially contracts, nationwide enterprise imaging in Scotland, The Quebec contract in Canada and the major U.S. contract.

The major U.S. contract, we are now in the early phase. We have the first host of regions or markets, depending on which chain it is going live. In Quebec, the first host is alive, but there is still a huge chunk to be done. And in Scotland, it's a little delayed, but that's proceeding well. But the early start of it is a bit delayed.

And a follow-up question on that from Kristoffer Liljeberg at EMB Carnegie. Are sequential growth for cloud recurring sales likely to accelerate in the new fiscal year?

Well, long-term it cannot grow faster than revenue. The proportion of the revenue will increase will increase I mean long term we we think will be by far majority be a recurring revenue company but it cannot grow faster than top line growth long term because what that doesn't work and also in relation to the sector one cloud contracts a question from Nicola Kalanowski at

ABG, do you expect to be able to deploy with new customers faster, given that you've now opened a new office in Denver, Colorado? Or do you expect this will mostly improve your customer service for local customers in the region?

Denver is open for mainly two reasons. It's a nice area to recruit in. A lot of people would like to go. Young people would like skiing. So that's one of the reasons we have that office. But it's also close to the West Coast without being all the nine hours away from Europe. So it's only one hour away from our customers on the West Coast and it's a fast trip to the customer on the West Coast, but it's still not nine hours away from Sweden, which makes Denver a very good choice. It's also a very dynamic area and nice area to live in.

And then I think we will move on to a question from a private investor. It's regarding the installed or how much is in the cloud today. How many percent of the installed based in terms of exam volume is in the cloud today?

That's not something that we... We have actually disclosed that in the report. Oh, then I shouldn't say we haven't disclosed it. I don't know, but you can fill me in.

Yeah, it's 25% of the 180 million.

Okay, so about 25%. Yeah. I mean, all the new deals we do in the US are cloud-based. Europe is delayed as for cloud because of the political situation. It's more insecure right now or uncertain right now what's going to happen in Europe than it was a year ago. in U.S., more or less all U.S., Canada and the U.K., all your businesses, public and cloud.

Thank you. And then we will move on to questions from Jakob Lenke at SCB. Can you elaborate on the strong order rate intake in K4? Which type of orders, which regions?

It's not as big as the biggest one. And some of them we're not allowed to disclose because customers do not want us to do it. But it's dominant in the US.

And then we have a question from Nicola Kalanowski at AVG also regarding the order bookings. When we look at your contracted order bookings in the last 12 months, would you say that a significant share of the order bookings includes modules other than radiology and mammography?

Well, mammography is part of radiology in many aspects. They come together. The absolute majority is still radiology and mammography. But increasingly, shares of cardiology, pathology and the other ologies as well. But they are small compared to regular.

Yes, and then. Another question from Nikola Kalinowski at AGB. Are customer using sector amplifier marketplace more this year so far compared to last year? And are you generally seeing more adoption of AI applications among customers?

Yes. The growth in amplifier is large. And it's over two years is doubled. So it's a heavy growth and customers are using AI more and more for every year that goes.

And we also have a question from Daniel Albin at Creades regarding AI. Historically, PACS has been a central hub of the imaging workflow. However, if AI increasingly performs triage and primarily interpretation directly at the modality or edge level, one could argue that the center of gravity in imaging IT may shift away from PACS over time. Do you believe SECTRA is structurally protected from that risk and what evidence are you seeing today that support that view?

It is correct that might happen for a few cases, but it's mainly if you take the modality thing, if you put an AI into the X-ray machine, it will be different for different vendors and few hospitals want that. But acute settings like appendicitis or stroke can be detected in the modality theoretically. No one does it today, but it can happen. Will that change that you need a final report signed by a doctor? No, it will not. That requirement, the legal requirement for actually signing the report is still there. And in order to do that, you need to see the images. For some acute settings, it might increase. But for the final handling, creating a medical report, a diagnostic report will not change. But reporting that we do, it will be increasingly important.

OK, and then I think a question for you, Jessica. Could you please clarify the increase in other operations? Is most of the increase related to performance based profit sharing or central cost distribution in the group?

Well, as I said during the presentation, it's employee profit sharing that is the driver of the increased loss in operating in other in that area.

And then I will move on to some more questions from the chat function. And we have one question here from Christopher Liljeberg at GMB Carnegie. Would it be possible to say the number of US annual imaging exams you have in the backlog as an update to the figure given the latest capital market stay?

We have not disclosed that, so I cannot reveal that. But we will normally report back on the capital market stay. And there will be more of those coming.

And the next question is regarding the US market. Is the sales you are reporting now purely recurring, or are you still incurring some license revenues in the US?

It is still a mix, the recurring revenue is growing, but we have revenue, for example, from migration or implementation that is not classified as recurring revenue and some license upgrades.

And another question related to that. Do you anticipate that non-recurring revenue in imaging IT will continue to decline this fiscal year we are in now?

We are not giving predictions on that level. Long term, it will be declining because we're also transferring the old customers over to the new model. So that licensees we did before will decline.

And then we have a question from Jakob Lemket SCB regarding our acquisition. When do you expect that Oxifit could contribute meaningfully to your growth?

That would take years. It's not, it's a strategic investment of the type that Secrub and Verafin do with a long-term. It will contribute strongly, but not in the short-term future.

And a reflection regarding the order bookings. It seems like you are booking less non-guaranteed orders recently. Has there been any change in contract structure or type deals you are winning?

I would say it's just, you know, temporary fluctuations. As the contracts are very large, one single contract can make a change there.

And then we have a question regarding UK and rest of Europe. What are the causes of UK and rest of Europe weakness when there is so much untapped market, especially in rest of Europe?

I would say that the geopolitical situation and in general also, I mean, Germany is a large company, they have financial problems. But mainly the geopolitical situation where people are waiting to see if they should go cloud or stay in what they have. And uncertainty always creates delays. That's part of human nature.

And then we have another question from Christopher Liljeberg. In what type of deals are you getting advanced payments from customers, both imaging IT and secure communication, US, Canada, Europe? Yes, yes, yes.

That can be both business areas, both in imaging IT and secure communication. It's also across the geographies.

And another question. Question from Kristoffer. Your peers say they take orders from competitors. Do you see any change in win rate trend between the two of you?

I wouldn't comment on that, but we have a good order intake. Now, previously we took almost everything. Now we have not been able to take everything, but we've taken a very large chunk.

We have another question from a private investor also regarding our key competitor, which claims they are the only cloud-native vendor. How far is Sectra to become cloud-native?

We are cloud-native. I will not comment on other companies' statements, but we sell a lot of cloud, and we wouldn't do that if we're not cloud-native.

And then we have a question regarding the profit sharing. Can you explain the employee profit sharing? Is that a one-off or going forward? Should we be, should be a recurring expense in other operations?

Marcus, I can explain the principle we have used over the last years. That is to have a stock options program, a very long-term anti-vesting program that we have been granted by the annual meeting. And that we have run that every two years. We intend to propose that for this general assembly as well. And when in between years, when we do not issue that stock options program, we've used profit sharing. Profit sharing is that we set a target and everything above that target for profits is shared between the shareholders and the employees. And that is what

you see this year we had a good year so that became a quite significant sum but that is good it's the it's all the people out there that contribute this profit and then we have another question regarding implementation times have you been able to improve implementation times this year if yes what percentage Should we expect the new Denver office to clear the implementation bottlenecks you have been having?

Two questions. Yes, we are improving quickly. We are learning fast. And it's also important that you can use AI for implementations as well, which means we're onboard new recruits faster than we used to do because we have AI to help them out. And the Denver office is more being closer to the West Coast, so that's a quality issue a lot, but also recruitment issue. It will not make any big difference in deployment time as such. Most of the deployment work today is done remote.

I'm looking through the chat function and if you have any final questions, please write it and I will just check the email if we have had some there. I think that's where all the questions for today. Thank you, Torbjörn and Jessica.

All right. Then we thank you for viewing and listening. We look forward to see you in September again. Thank you very much and best wishes for a good summer.