Surgical Science Sweden AB (publ)

Good morning, everyone. My name is Gisli Hennemark. I'm the CEO of Surgical Science and I will take you through a few general comments about our Q3 report that we released this morning. Then Anna Ahlberg, our CFO, will dwell down a bit on the numbers and then we will open up for questions. Surgical Science has about half of its team in Tel Aviv, Israel. That's about 130 people out of our approximately 260 employees. And what happened on October 7th was a terrible tragedy on so many levels. We are okay physically, but we're not okay on a different level. This has been a trauma for many of our team members and everyone are affected deeply on an emotional level, even if physically okay. However, the business is very much usual in the unusual or abnormal times. And when I say that, I want to go back to, you know, I got the first message early Saturday morning about the terrorist attack. By Saturday late afternoon, we'd been in touch with all of our employees. Sunday, we opened up the office in the Middle East. The work week is Sunday to Thursday. And on Monday morning, we had full production in our Tel Aviv facilities. We ship simulators by air. The Bangurion airport has been open all the time. And we actually shipped even more simulator than we planned to in October. And I'm deeply touched on how this company really have come together and we've supported each other like one company in these difficult times. and people are traveling in and out of tel aviv so in terms of the business impact so far it's very marginal All of our customers pretty much are outside of Israel. So it's a development and assembly. There are big activities there. And the impact is more on some logistical costs are up. We've taken some precautions or hedging by moving finished simulators to our US and Swedish warehouses. And we also have some absence due to colleagues who are called up to serve in the Israeli Defense Forces. But those are primarily the junior, more younger men and women of our company. And it's so far a smaller number of employees. But this has been emotionally a tough month and going forward we actually don't judge who can see any major business impact as of now and I included some pictures there from the team during October in in our Tel Aviv office extremely proud of them now moving on and looking a little bit high level on how we performed as a business in Q3 we can start by looking at the overall growth, 3% in Q3 compared to Q3 in 2022. That sounds a bit anorectic actually, thinking about what surgical science shareholders have been used to for many, many quarters of higher growth than that. But it is actually a growth quarter, because if we look beneath the surface, of those 3% year-over-year growth, we can see that the big drop is in educational products and simulator sales in educational products. That decreased by 12% year-over-year, Q over Q. And actually, groundbreaking $6.7 million order that we received from a leading US hospital chain in May 2022. The bulk of deliveries was made in Q3. It was about 40 million Swedish crowns. And our important Chinese market that we've commented on before kept on being sluggish and slow in Q3 2022. So if you take those 40 million Swedish crowns and you add in an unknown sort of year-over-year drop in China, cool recording is on. Stimulator sales of 15 million Swedish crowns actually means that everything else combined had a very strong growth in Q3 in educational products. Our service revenue has a good, strong, healthy growth of 20%. And most importantly, our license revenues, when the surgical robotics companies are compensating us through royalties and subscriptions from using our IP, they grew by 38% in Q3 compared to 2022. And actually, if we look down at the market leader, Intuitive Surgical, They grew their installed base by 13%. And for us, perhaps the most importantly, the procedural growth, meaning utilizations, how many procedures, how many operations are being done with this installed base, that grew by 19%. And surgical science and our simulation licenses, that grew by 38%. So we keep on outgrowing the market. And if we look up to the right hand side there, we can see that the first three quarters of 2023, we're well ahead of the full year 2022 for licensed revenues. So I would characterize this still as a growth quarter, even if the combined top line growth was not that high. Moving down to more good news is that the gross margin improved not only year over year compared to 2022, but it also improved over the last quarter of Q2 by a percent and a half. And that doesn't sound maybe so much, but still, if we then take into account that license revenue in Q2 2023 was 35% of the overall revenue, And in Q3, it was 26%. That's 9% difference. That means everything else had a much stronger profitability. And here we see price increases starting to bite. We see a more favorable product mix. We see some more development revenues. And we also see that we're able to sell more software on our simulators, improving the average selling price and the gross margin. So I'm very pleased with that. And if we then sort of look at profit margins overall, I mean, they go up. It doesn't matter how you count. If you look at the EBIT of 24% or what we believe is the best measurement of profitability for our company, adjusted EBIT, where we add back. amortizations and potential write-downs to surplus values connected with acquisitions, that was 27%. EBITDA was 31%, so very good profit margins across the line. Actually, if we drill down all the way to profit per share for our shareholders, that grew by a whopping 65% in Q3. We do feel that we are on track for our 2026 goals, despite what is a strong headwind in macroeconomics. It is tougher out there. I think everyone who are involved with selling to healthcare industry can attribute to and tell you about the fact that it is tougher times. But we see some positive signs now in China, where again, our comments are related to educational products, where it has not really taken off after the pandemic. But we start seeing some positive signs there. But there is a higher level of uncertainty moving into Q4 here. Very much related to the overall economy. We typically have a Q4 positive effect. Basically, customers sort of spending their budget if they have any left. And that's sort of the big question here. How much money is left in Q4? But overall, we feel a very positive feeling. And also the accumulated revenue growth for 2023 is still very healthy and well in line with our trajectory towards our 2026 goals. And with that, I'm going to hand over to Anna, who will dig a bit deeper into the numbers, and then we will open up for questions.

Great, thank you, Gisli. So we go back to the top of the income statement and start with revenues. As we heard, net sales was 210 million Swedish, 423. And again, this is a weaker increase than we have seen before. but measured then against a very strong Q3 last year, with a majority of the US order of 6.7 million US, which we received in May 2022 was accounted for. We had 2.1 million US in Q2 last year, 3.9 then, the majority of the order in Q3, and then 0.7 in Q4 of last year. So the increase then for Q3 this year, the totally reported increase, 3%. And if we then exclude FX effects, it was 1%. We have the majority of our revenues in US dollar, approximately 80%. Looking at the different business areas, educational product sales then was down 9%. But again, if we exclude the US order to the main hospital chain that we received in 2022, sales was actually up 28%. And then also taking into account that China was weak, this means that the total of all other markets was strong. Industry OEM was up 26% and accounted for 40% of our total revenues in Q3 last year, it was 33%. Again, license revenues was up 38%. And both development revenues and simulator sales within industry OEM, they were higher than the previous quarters of this year in 2023. And I will get back to that on the next slide. um first just looking at also the full period january through september year to date we then showed the revenues of 656 million sec and that was an increase with 19 excluding fx 13 and for the respective business area educational products was up 12%, so within our range of 10 to 15% that we have in our financial goals. Industry OEM was up 31%. On this slide, we see the split and development of our four different revenue streams. In the interim report, you also have these revenue streams divided by business area. So a bit more detailed in the report. For the quarter, then we see an increase quarter over quarter for all revenue streams, except simulators. Again, license revenues was up 38%. We had sales of revenues of 56 million SEC. It was lower compared to Q2, but in this case, it is more relevant to compare against the same quarter last year. We have described the lumpiness of these revenues since we have more customers now where we receive the license revenues from, and they purchase the licenses more in batches. So not tied to exactly when the robot with the simulation on is being sold, which makes it a bit more lumpy between the quarters. Also, actually, there is a certain lumpiness also tied to the subscription part. We have different type of revenues within the license revenues, more perpetual tied to the specific robot and more recurring types of subscriptions. And these are also actually a bit bumpy because they are usually up for renewal once a year. And the number of licenses that are up for renewal varies a bit between the quarters. So for the quarter, license revenues was 26% versus 20% in Q3 of last year. Looking at simulator sales, they were on par for industry OEM, if we look at the different business areas, but down then within educational products, as we have discussed. And also for simulator sales within industry OEM, they were a lot stronger if we look at Q1 and Q2 of this year. they were significantly up. Development revenues also then higher again and also higher a bit higher than last year. This is connected to the higher sales of simulators within industry OEM. The development revenues are both tied to robotics projects but also then on software projects tied to sales of simulators to the OEMs. As Gisela mentioned, service revenues grew nicely and they are stable and growing with installed base. Moving then to the cost side, gross margin as mentioned was up 69% versus 67% in Q3 last year. And if we then compare to Q3 last year, we had a larger share of license revenues in this quarter, which has a positive effect. If we compare to Q2, again, as mentioned, then we had a higher share of license revenue. And that usually then affects it very positively. But still, we were able to increase the margin, which we are very, very happy about. The product mix was favorable. with a higher average sales price. And we had good development projects with good margins. On the cost side, it might be a bit more relevant to compare to the previous quarters this year instead of comparing to Q3 last year. So looking at both sales and admin costs, they were both in line with Q2. Looking at R&D, the costs were lower, but it also depends on what we work on during the quarter. When we have more development revenues, which we had in this quarter, we move the costs for doing that work up to COGS, because it's the same team. Also in this quarter, we capitalized some more costs than previous quarters. On the line other, I just want to mention that in this quarter, we had an effect from our options programs. There was a cost of 3.4 million SEK. Q3 bears the full effect for the Swedish part of our new options program, which was approved by the AGM in May. Then we also have an IFRS 2 effect. I won't go into all the details, but But we do have an effect that comes every quarter then related to the Israeli and US parts of the program. EBIT was almost 51 million Swedish crowns for the quarter, which meant then 24%, three percentage points stronger than Q3 last year. Looking at our organization, then we had approximately the same number of employees going out of Q3 as going out of Q2. We were then 259 and we are 260 people. And as talked about, half of them are in Israel. Approximately a quarter are in Sweden and the rest in the US as well as some other countries. Adjusted EBIT, where we have our financial goal of 40% in 2026. We showed an adjusted EBIT of 57 million SEK, which was then a margin of 27% for the quarter. Year-to-date, we have a margin of 26%. Finance, net and taxes. We have no financial loans in the group. So usually this is primarily revaluation items on this line, on the finance net line. However, for this quarter, the majority of this item was interest on our bank balances. The US dollar moved very little going, if we look at June 30th compared to September 30th. which means that the revaluation items were very small in the quarter. Our taxes are to a certain extent affected by the fact that we have no carry forwards, both in Sweden and in the US, which means that the tax rate overall then becomes a bit lower. And that result for the quarter was 47 million SEK. The last slide I want to show you is on cash flow. Cash flow from operating activities for the quarter was 53 million SEK. Changing working capital was negative 15 million. However, we see if we compare to the last quarter that inventory decreased a bit. It has been increasing over the last two quarters due to the fact that we are growing and gearing up for higher production, but it was reduced a bit during Q3. And also very nice to see that accounts receivables actually continues to decrease. The grey line there is accounts receivables as a percentage of of rolling 12-month sales and you see the decreasing trend which is very nice. The fact that changing working capital was negative is due to the fact that short-term liabilities also decreased and by a bit more than. Cash flow from investing activities and from financing activities not much to mention there, nothing out of the ordinary. And we then ended the quarter with a cash position of 606 million Swedish crowns. And with that, I think we can open up for questions.

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