Surgical Science Sweden AB (publ)

company Surgical Science have released its report for the third quarter in 2022. I therefore have its CEO Gisli Hennemark with me in the studio. Welcome, Gisli. Thank you, Mattias. So, you know, we like to start with the numbers, so I'll jump right into it. So for the third quarter in 2022, you reported net sales amounted to 205.1 million Swedish kronas compared to 95.3 in the corresponding quarter 2021. And the operating profit came in on 42.7 million compared to 7.6 last year. What is your comment to these numbers?

Well, there are great numbers. That's my first comment. And to go beyond 200 million Swedish crowns in a quarter is a record for us. So we're very happy with the Q3 quarter. Especially when you consider that the comparables are more challenging now, because we did have a great quarter last year. And actually, if you read the report a bit more detailed from last year, a significant contributor on the educational product side was Russia. So to start the quarter, with sort of not having that revenue and then still educational products coming in at 138 million Swedish crowns in a quarter is fantastic. I mean, educational products have really been, you know, powertrain for us. This is where we sell our own simulators, our own branded simulators to the university hospitals. And then industry OEM is doing good. Solid license revenue, 40 million Swedish crowns. This is when we license our technology to circle robotic companies. But also the other revenue streams there like simulator sales where we do both hardware and software combined to our med device customers grew. License revenue went down a bit from Q2. But there is some lumpiness, especially from the new circle robotic entrants that have a buying pattern where they buy a little bit more in bundles. And also when they come out with new products, they sometimes do series of their products to to get feedback and then adjust. So there is a little bit of variability. But overall, fantastic sales and the profit level is good. I mean, if we look at adjusted EBIT, which is what we like to measure, because then we add back amortizations on acquisitions, you know, almost one dollar out of four is profit. So very good quarter for us.

How is your sales distributed on your various markets?

United States is our most important market, both because that's where a lot of the large med device companies are located. But we also had particularly strong educational sales in the US and that's a direct sales market for us. So there we have a little bit higher gross margins, but also more costs because we have our direct sales force. But there we kept on delivering on this large leading US hospital deal that we announced in May. So sales in the US was very strong. Europe was good. And we kept on selling to various markets in Asia. It's a strong report.

You also mentioned in the report that cash flow was a bit weak. Can you elaborate a bit on this?

Absolutely. We said in the report that the cash flow was weak and it was. I mean, if you go from operating profit to how much money actually lands on the bank account, it was weak in the quarter. But then you have to also consider that our cash position is usually particularly vulnerable at the last day of the quarter because we have a lot of invoicing towards the end of the quarter. Now, what you do need to ask yourself is, is this an annoyance or is this a real problem? And in order to answer that question, you really have to look at all the data, which we have done. We have looked through all of our accounts receivables because it was primarily that that increased. And it's an annoyance. We delivered four million, almost four million dollars of this large US hospital deal. It's a complex deal where hospitals have multiple systems. So maybe you deliver, you know, four systems, but not the fifth one. payment gets delayed, but this is actually not something that worries us more than it's a short-term annoyance. And that's because we are growing, we're very profitable, no long-term debt, and a very strong cash position. We had 370 million Swedish crowns in the bank account end of the quarter. So that's the answer to that, but we pointed it out because it is weak and we're not happy with it.

All right. You recently held your yearly strategy meeting. What is the most important to communicate from that?

Well, first of all, we had it in Tel Aviv, in Israel. So the whole board came to what is today our largest office in the company in Tel Aviv. So we ate a lot of good hummus together and had a lot of interesting discussions. But also the output was a revised strategy for industry OEM. This is where we work with the med device companies. we really spoke to a lot of the customers and we also looked at a lot of the data we like to do things thoroughly when we do them and then you know we set the plan and we stick to it and basically we believe and have decided going forward we really focus more on the large med device companies where we can supply products to a lot of different specialities. So we want to focus more going forward on the larger customers and work very actively with key account management. And we have also beefed up our sales organization accordingly. So we have more specific key account managers that we have now hired. We feel that we spread ourselves a little bit too thin on too many areas because there are a lot of med device companies smaller or largest that want to do all sorts of things but we need to stay focused and work with the med device companies for their product specific training when we can grow our own ip and expand it and also make sure we get license revenue or have a high probability of license revenue after sort of the initial projects with those customers

So hiring more salespeople into the industry OEM, are you doing anything else in the whole for sales?

No, it's beefing up the sales organization and actually going setting in a global key account teams rather than having regional sales organization, which was the case, you know, it's surgical science as well as symbionics prior to merging together into larger companies, setting specific tactics and plans for these difference accounts and at the end of the day what we can bring to them in terms of simulation and the value of simulation. It's the same, it's two sides of the same coin because at the end of the day it's about the physicians and the surgeons feeling confident in knowing that they have the technical skills that have been objectively verified in a safe simulator environment, regardless if it's product training for a specific med device or if it's generic technical training that you get through our educational products. So we're hoping to see sort of same kind of appreciation that we felt within educational products, where this broad product portfolio has really shown its advantage. Educational products has been extremely strong after combining the best simulation technology in one company.

Thank you. I need to quote here, so I need to read. You state in the CEO note of the report that you are successful in keeping your price levels up and keep costs of goods sold under control despite inflation and component shortage. What is your strategy around pricing to your clients, customers?

Of course, we work actively with pricing especially in this environment where we have a you know significant inflation in most part of the world prices keep on going up and we are also continuously adding more value in our products we keep on developing them and adding new software. So in our educational products specifically, we have increased prices. So we've been able to both increase prices and sort of not provide as many discounts as perhaps we did. In combination, with being strong internally in our production and keeping the cost of goods sold down. And in this inflation environment where graphic cards and monitors and so on keeps on getting more expensive, I'm very proud of the team. We come in at a gross margin of 67% even though the product mix is very heavily tilted towards educational products. I think that's an achievement, especially if you look at the amount of output, how many more simulators we are now able to ship every week to customers around the world.

When it comes to components and the shortage, you have increased your inventory. Is this strictly due to the shortage or is it part of another plan?

No, we think that the cost of keeping a bit higher inventory is relatively low compared to the advantage of being able to deliver to your customers. So in this component shortage environment that we live in. When we have the right components to the right price, we'd rather buy and stock up a bit extra. We're also moving in now to Q4, which is traditionally the volume wise largest quarter of the year. So we need to be ready to deliver to our customers.

What else do you have for the market to look out for?

There are always so many things going on, Mattias, but one thing that excites me is after the end of Q3 in October, we saw a lot of regulatory notices, particularly from Medtronic and their UGO robot that was launched in Europe earlier this year. And now they actually got regulatory approval for general surgery in Canada. They expanded their indications in Europe into general surgery, which is by the way the fastest part of the surgical robotic market, the fastest growing part of the surgical robotic market. And maybe most importantly, they got regulatory approval for gynecology and urology in Japan. which is known to be a tough regulator or tough scrutiny. So for us, I mean, this goes well in hand with what we hear from the end customers about the excitement for surgical robotics that Medtronic can now sell to these markets as well. And of course, in order to introduce new surgical robotics, you also need... a patient-safe way to train, and part of that is simulation that comes from us.

So what is the timeline here for these new products, until we can see it in your numbers?

Well, there is some lag, of course, when surgical robotic companies that get regulatory approval is actually placing robots and shipping them out to hospitals and implementing them. But then our revenues are dependent on when our customers are purchasing the licenses from us. And for a circular robotic company that's very mature and it's in the market and selling every week, every day, etc., there we simply get a report and we invoice for the software. Whereas this new entrance is a little bit more lumpy, like we talked about in the beginning of our discussion. it depends and that's why you can see license revenue fluctuate a bit from quarter to quarter and the more data points you will get the clearer this will become because now we also report per revenue segment so you see different revenue streams in our reporting and As we grow and more customers are coming to market, we will keep on disclosing more granularity. For example, something that our investors are interested in is to see the split between reoccurring revenue, the subscription-based, and that is sort of at one time tied to the serial number of the robot for our licensed revenue. So that will come.

Great. That will sum it up for today. Thank you so much for your time, Gisli. Excellent. Thank you very much.