Surgical Science Sweden AB (publ)

profitability. That is the headline of the Q2 report from Surgical Science published this morning. To get some facts behind this I have with me the CEO Gisli Hennemark. Welcome.

Thank you Mattias.

So this headline is intriguing and reflects the numbers that came in higher than analysts' expectations. Net sales amounted to 188 million Swedish kronor and adjusted EBIT landed on 44.3 million Swedish kronor. Can you give us a brief of the quarter and how this was achieved?

Yes, it was a great quarter. I mean to keep on growing by 30% if you look in constant currencies. It's a combination of a strong industry OEM, which is where we license our technology to med device companies. that embed simulation in their products, where the license revenues that are very important for us, the royalty these companies pay, grew, and now I'm not talking year over year, but I'm talking Q1 to Q2, from about 36 million to about 45 million. So it's a strong growth. But even higher growth was in our educational products. This is our own simulators where we do both the hardware platform and the software and work with the end users. There's extremely strong growth in that area. And I think it also shows the strength of combining what used to be symbionics with surgical science. with the best products under one roof, best service and support organization, best distribution partners, one cloud solution. And the customers are really responding to that. So it was a very strong quarter.

Is this the balance between operating segments, educational products and industry OEM that we can expect forward?

It depends on what timeline you look at, but over time we expect our industry OEM revenue to grow faster. We've set financial goals, long-term financial goals, and we've been talking about educational products during this five-year period to have an average growth of 10 to 15 percent throughout the period, and industry OEM with an increase in growth. So it's of course really nice to feel that, you know, we are strong out of the starting blocks, especially when it comes to educational products. And that industry OEM is going well. You know, 10 to 15 customers. within the robotic surgery segment, which is the most important one. But also other areas of industry where we work with med device companies to help them with patient safety through simulation.

So it's been a year now since the acquisition on Symbionics. Would you say that they are fully merged with the surgical science?

I don't think it's a start point and an end point but rather a continuous process. But what I do say is that the one year anniversary was a day of joy. I mean we celebrated and a lot has to do with getting people on board in one organization and I really feel the motivation from the team. Of course not all things are perfect but overall we are delivering extremely strong results And perhaps more importantly, you have a team that's very motivated and inspired. And we're a simulation company and we love doing simulation. So I'm extremely happy with where we are one year after the ink dried on the contract.

What is your view on further acquisitions?

We have been successful in our acquisition agenda. I think it comes down a lot to actually doing the homework, doing the proper analysis, but then also really working prior to the acquisitions, getting to know the people, the main drivers behind these companies that we've been acquiring. And you can see everyone is still with our company after the acquisitions and are continuing contributing and going forward acquisitions will be an important part of our strategy we it has been successful to consolidate a growing niche business and we still have let's say white dots where we can do additional acquisitions

So are you looking for a specific kind of companies and I'm thinking of geographical, where they are located and so on?

No, this is more about industry logic. And when we make acquisitions, it's for a strategic reason. And that's why we also fully integrate all the companies that we merge in to surgical science. So it's basically customer base, particularly in industry OEM with med device companies. It's application areas. We do simulation in a lot of different clinical areas. It's complementary technologies. And it's a very specific competence of software development. These are the four factors that shape what we'd like to become part of surgical science and and also if you look in the reverse mirror you see sense graphics 2019 mimic technologies january 2021 symbionics in in august 2021 i mean they they all fit the bill of those things but most importantly are the people i mean You know, business is not done between two Excel sheets. It's done between people. And you have to really understand the motivations behind the key people.

You write that surgical science is on a good path. But there are causes for concern regarding the global economy, lockdowns in China, war in Ukraine. How is surgical science affected today?

Today, we haven't... I mean, you see the figures from Q2. To have an organic growth, constant currencies of more than 30%, adjusted EBIT, which we think is the most relevant way to measure profitability, meaning EBIT, and then excluding acquisition-related depreciations on surplus value, was 24%. So it's almost... one dollar out of four is profit. So far, we haven't been affected a lot. But of course, if we now move into recession, and I mean, we all read the papers, and that recession becomes really long and really deep, of course, it will affect us like everyone else. But I think, you know, healthcare and the healthcare sector, and the macro trends of increased focus on patient safety, digitalization in healthcare, those macro trends won't go away, even if we have a turn down in the economy. So I'm optimistic.

So with regards to the causes for concern just mentioned, two quarters now have passed since you communicated the target of net sales 1.5 billion Swedish kronor by the end of 2026. Are you more certain that you will achieve this today than in the beginning of the year when you communicated this?

We're used to setting high ambitions at Circle Science and then actually delivering on them. And we have a history of doing so. But what I said in the Q2 report is that we're on a good path towards our long-term goal. And I think in particular, I think maybe people have been surprised, maybe us ourselves has been a bit surprised of the strength in educational products. Maybe we underestimated that a little bit. Because the strong growth there is really nice to, if we talk about over these five years, to be on average between 10 and 15%. And we've been way higher now in the beginning of this journey towards the financial goals. That's, of course, very nice to be sort of, you know, on a good path there. And it also builds a customer base. And we do have some revenue, in particular service and support agreements, and also growing subscription revenue from our cloud services that are very important for us. And if you look at having a larger install base, that means those revenues can also, you have a higher chance of capitalizing basically on that install base once you got it.

In July, we could read some news from you regarding the American investment fund Invesco Global Opportunities became a large shareholder with about 1.5%. I think they are the 13th largest shareholder. What can you tell us about them? What's their strategy? Are they active or passive, for instance?

I think we have a really nice combination in surgical science of some long-term owners of flesh and blood. We have Mr. Jan Bengtsson, who's the largest shareholder, and then Mr. Roland Bengtsson, who's also the chairman. They've been with the company for more than 15 years. They didn't sell anything in the IPO. They've been really supporting our growth strategy. And okay, they've been diluted, but they've seen the value grow in their investment. And then we have a lot of mutual funds. And when it comes to the mutual funds, they're typically not very active in their ownership in terms of influence in the direction of the company. But they are very important for us because they have been there for us when we have needed capital for acquisitions. And we see a growing interest from foreign mutual funds. And also if you look at our cap table, I think one of our largest owners is Capital Group. It's an American company. And there are several large international mutual funds that are among our big owners on the top 10 list.

So I guess you receive more investor phone calls from overseas these days?

We get a lot of investor interest, yes, that's correct. And then you always have to balance it because I mean at the end of the day we focus on our customers and delivering the best simulation for the benefit of patient safety. So you need not to spend too much time on those things.

So what can shareholders look forward to in the second half of 2022?

Yeah, that's a very open question, Mattias, but we are at it every day, all parts of the organization. And in a quarter like Q2, when we were selling our educational simulators, 120 million Swedish crowns, that's several simulators per day. that we are assembling, quality assuring, delivering, installing, supporting. So we basically stick to our plan and that plan has really worked and I hope it will continue working and that we will have happy shareholders even in coming quarters.

Thank you for sharing this with us today. Excellent. Thank you for having me.