Surgical Science Sweden AB (publ)

and welcome to the surgical science q4 2023 call my name is gisli hennemark i'm the ceo of the company and i will start this call off with a few general comments and then anna oldberg cfo will go through some of the details and then we will open up for questions so 2023 Q4 we had a decrease in our total revenue compared to the same period last year compared to the same period in 2022. What we saw in the fourth quarter was that the typical what we call end of year deals when hospitals are using their budgets that they've been waiting or saving during the year did not do so in 2023. It was a tough year for many hospitals and more so in the United States which is an important market for us and when our customers were planning to do their end of year purchases the budget was simply not there because it had already been spent. And this is not so strange looking at it in the reverse mirror. Most of these budgets were set in fall of 2022. And then inflation and cost increases ate away a lot of those budgets, making the environment difficult for the hospitals. We also noted that The Chinese market which we commented on in our Q3 report where we saw some bright signs and I actually travel quite a lot to China. I was there two times last year. We have an office there so we have our own people on the ground. But we noted that it was a change during the fourth quarter where the government, to our surprise, announced that they will continue the anti-corruption campaign specifically targeted towards hospitals and teaching institutions within hospitals. This puts a dampering effect on the market because no one wants to be subject for those kinds of investigations. The need is still very strong there. We expect the market to come back and our best guess currently is that that market will start bouncing back mid-2024. And I must add also that this comment is not attributable to industry OEM where we see a strong growth and lots of opportunities also in the Chinese market. Moving on, looking at more of the bright side of our Q4 report is the continued strong growth in license revenue. We ended the year with a total of 278 million Swedish crowns in license revenue. So these are the royalties that the surgical robotics companies are paying us to utilize our technology. and that's up more than 50% so it's a very strong tailwind and strong development also the fourth quarter had a growth of about 20% and you can see it there on the slide on your screen if you're in front of your computers where you see it quarter by quarter looking a bit at the market we follow very closely the utilization of surgical robots and we saw market leader Intuitive post their quarterly report about a month ago and they had all-time high utilization rates so procedural growth how much you use the surgical robots continues to grow very strongly This is extremely important to us because it means more surgeons are needed, which in turn means that you need to do more training and more use of our simulation technology. We also note that The new entrants that are competing with the market leader in this business typically have lower utilization rates and one important part of bridging and getting utilization rates up is to work with education and training and with simulation. another interesting observation is that and this is true particularly for europe where we have a regulatory environment where there are many robotic platforms robotic surgery platforms that are approved we note that the hospitals are really embracing simulation because these robots they are not like driving a car meaning that in between them they work differently of how you control them so you need to train on each one of these robots in order to perform surgery in a patient safe manner and we're really seeing hospitals embracing simulation and appreciating the fact that the simulation is the same from one vendor to another. So we feel that we are moving our positions forward in us being the de facto gold standard for simulation for robotic surgery. And we keep on investing in technology. So we have advanced our core technology meaning that we can do applications for our customers that we weren't able to do before. And we're also helping our customers utilize the simulation in different contexts. We call this product extensions, meaning that the core console simulation can be used also ahead of the surgeon even coming and sitting at the surgical robot for the first time. For example through head mounted display. These are VR headsets that we can utilize off the shelf hardware with our software. About a month ago the market leader Intuitive announced that they have now made a submission to the FDA in the United States for a next generation DaVinci called the DaVinci 5 and without making any comments whatsoever about the actual capability of DaVinci 5 I can note that generally speaking this is very good news for surgical science because when a new robot comes to market it typically has some features that are different and that requires more training and simulation is part of that training. It also typically has capabilities that over time means that the surgical robotic company can expand into new indications and when doing so it again puts a demand for more simulation. so generally speaking this is good news for surgical science of course in the very short term it can have some market dynamics that some customers may want to hold off a bit and get more information about what the new davinci 5 will actually have in terms of capabilities But this is again speaking historically what we've seen when Intuitive launched their latest Davinci called the Davinci XI. And what is different today is also that there are many more customers that are leasing the robots. So it means increased flexibility for them to upgrade at a future point of time. our profit margin in Q4 was disappointing and not where we are used to having our profit margin but actually looking a bit more closely at that profit margin the big effect was the currency effect on our receivables like accounts receivables because they need to be revalued at 31st of December, which happened to be a low point for the US dollar versus the Swedish crown. Actually, that effect was about 15 million Swedish crowns representing then six percentage points. So that's the difference between the actual 17% profit margin on an EBIT level to a more normal mid 20s profit margin, 23% in this example. And I will provide details on this matter. We have our largest office in Tel Aviv in Israel and throughout the fourth quarter we all know that Israel was at war. I was there the last time in December working with the team and even if war means a lot of emotions and a war is a tragedy for everyone involved on all sides, I can comment that Circus Science has not missed one single delivery or one single deadline out of the Tel Aviv office. So I'm extremely proud of how our team is pulling together there and how the whole company is working together in order to move the company forward. So business-wise the war has had a very marginal effect on our business. Now finalizing my introduction here I like to firmly restate that we have a strong belief in our 2026 goals. If we're looking at for example educational products that had a weak quarter in Q4 since we introduced our long-term financial goals Educational products have been well above the 10 to 15 percent on average revenue growth that's needed in order to reach the goal. That means sort of just mathematically if you take our total revenues that for 2024 ended at 883 million we need a total growth of just below 20 percent for 2024 up until 2026. We firmly believe in this goal and we also firmly believe in our strong position within the surgical robotic customer group that will drive license revenue and will make us reach our adjusted EBIT goal of 40%. of course looking in here into 2024 we know that there is a headwind in educational products there is a very strong demand we know the need from the customers but there are question marks about financing And actually last year, for educational products as a whole, it still grew, even if it was a very modest growth, I think like 10 million Swedish crowns. But if you look at what we had sort of against us in that year, there was the Q4 effect that sort of just didn't happen in 2023. In 2022 we had a sale to a leading US hospital chain of about 70 million Swedish crowns and then a sluggish China. In this environment we still grew educational products, meaning there are many other markets that had very nice growth in order to adjust for this. And we feel a strong tailwind in industry OEM. The strategy is working, the resources that we put in place are generating, and we're seeing not only surgical robotics, also outside of surgical robotics, we're seeing good progress. So with those words, I say thank you, and I hand over to our CFO, Anna Ahlberg.

Yes, hi everyone. So Q4 was a quarter where we had strong license revenues and weaker simulator sales because of the lack of what we call the year-end Q4 effect on the hospital side. Meaning sales was more on par with Q2 and Q3. In absolute numbers, we had sales of 227 million SEK, down 9% and the same than in local currencies. As you know, we are heavily dependent on the US dollar where we have 82% of our revenues. We have had a positive effect for quite some time from the strengthening US dollar. It was on par for the quarter then on the sales side, but we saw a negative effect further down in the income statement and I will get back to that in a while. Educational products was 54% of our sales for the quarter down 20% and more in line with Q2 and Q3 then because of the lack of the Q4 effect. We have had some great quarters for educational products with great growth up until and including Q1. We have repeatedly said that the rising inflation and downturn in the economy would affect us unless it was very short. And we do see there being a greater inertia in the market, not because the demand is not there, but we do see things taking a longer time and especially then in the US. And then we have the very important China market being weak due to the anti-corruption campaign affecting the healthcare sector. For educational products, Europe was slightly above Q2 and Q3. And the same goes for South America. Industry OEM was up 9%, 46% of our sales. And again, license revenues at an all-time high level and up 20% for the quarter. That meant we showed sales of 883 million for 2023, plus 10%, and in local currencies, plus 7%. Educational products then plus two and industry OEM plus 24. And as Kisly also said, after the merger with Symbionics, we had a very, very strong period for educational products. And that means that we at the CAGR level, we are above our target of 10 to 15% average growth per year since our financial goals were communicated. and license revenues for the year were up 50%. Looking at our four different revenue streams and also in the report you have them divided per business area as well. We see that license revenues for the quarter was 33% of our total sales And that meant that for 2023, our license revenues were 31% of our total sales, which was considerably higher than in 2022 when we had 23%. And this is, of course, very important for us, for our financial goals, both when it comes to our sales goal and our profitability goal. As we always emphasize this number, the license revenues is more lumpy between the quarters since new entrants buy their licenses more in batches. We do have today revenues from several customers within the segment. We also said that we gained new customers during 2023 within the robotics segment, even though they haven't started to generate license revenues yet. Simulator sales was 55% of our sales in Q4. If we look at full year 2023 and exclude the large U.S. order we had of approximately 68 million SEC, the increase was 18%. Development revenues were somewhat lower for the quarter, but we do have, as Kissele also said, several exciting projects within the area. And we are starting to see that our investments that we have made in the sales organization within industry OEM, that that is starting to pay off. This item consists of both robotics projects as well as sales of simulators where we do software adaptations to the OEMs. And our service revenues continue to be stable and grow with our installed base. Cost and EBIT margin for the fourth quarter, our gross margin was at the highest level that we had in Q4 for 2023. It was just above 71% due to both the fact that we had an increased share of license revenues, 33% versus 25% in Q4 2022. And we also had a good product mix and a favorable average sales price. Sales costs increased a bit compared to Q2 and Q3. They are usually a bit higher in Q4. One factor being that sales commissions often reach a higher level. And the costs were only, there was only a slight increase if we compare quarter over quarter for Q4. Sales costs were 19% of sales and admin then 9% of sales. Looking at R&D, the costs were on par with last year and they were at 20% of sales. We activated approximately 8 million SEC, the same as last year, but lower than in Q3 than when we had 12 million. We got some questions then if that level should be considered to be sort of the new level going forward. But it does depend a lot on what we work on during the quarter. And again, we are working on many good projects within the industry OEM area and here revenue recognition can be a bit more lumpy. The item other is usually not significant. For this quarter, however, we had a large currency effect from the weakening US dollar. The dollar went from 10.8 on September 30th to 10.0 on December 31st. And when we then revalue our operating assets and liabilities in above all US dollar, This was the effect of that. So it is not a realized loss, but more of a translation loss. This item also includes an IFRS 2 effect from our options programs. EBIT was then 38 million, corresponding to a margin of 17%. If we exclude the 15 million that we just discussed, we are at a more normal 23% EBIT margin. Organization. We were the same number of employees at the end of the year as after Q3, 260 people. We are continuing to grow the organization, especially within R&D, but also other areas. We have a good plan for this year and are growing with cost control. Down to the right you can see the split between the countries where we have approximately half of our staff in Israel and then one quarter each in Sweden and the US respectively. Adjusted EBIT, where we have our financial goal of 40% in 2026, which corresponds to EBIT adjusted for amortizations on acquisition related items, such as customer contracts and technology. For Q4, this number was 44 million, a margin of 19%. And for the full year, we had adjusted EBIT of 240 million. That was a margin of 24%, approximately one percentage point above 2022. Finance net and taxes. Finance net for the quarter was 80 million SEK, and 70 of these came from the effect of the Mimic earn out. Going into the quarter, we had 7.8 million US dollars in our balance sheet, which was attributable to 2023, which was the last year of this continuing consideration that was in the deal when we acquired Mimic in 2021. 6.7 of these will not be paid out and they are in the finance net and then 1.1 million US dollar will be paid out to the former shareholders of Mimic. This item is then still in the balance sheet as a short-term liability and after it has been paid out during the spring there is nothing left referring to the Mimic acquisition or the contingent consideration of the earnouts. Other items in the finance net, interest on bank balances, approximately 4 million, revaluation of internal loans, 7 million, and then a smaller amount attributable to IFRS 16. Taxes for the quarter were 20 million and for the full year 34 million. Our taxes paid are affected by the fact that we have no carry forwards in Sweden and the US. That means then that not all of the tax expense in the income statement will be paid. Some is booked towards deferred tax assets because of these nulls. And going into 2024, we have nulls left in the US in MIMIC. Net result for the quarter was 98 million SEK and for the full year 234 million SEK, approximately 26%. Cash flow from operating activities, it was 40 million SEK for the quarter. A negative change in working capital, minus 15. Inventory and accounts receivables decreased. However, other current receivables increased. For the full year, we see that inventory has increased due to the fact that we have more production. while accounts receivables have decreased. This is the most important item that we work with in our cash management. Accounts receivables are more important than the inventory level, especially in the US, since that is a direct market. I'm very happy with the development we've had. You see the grey line there with a decreasing trend. Accounts receivables as a percentage of rolling 12-month sales. We see decreasing also for Q4, but I think we are pretty much where we want to be with that now. It's more a question of continuing to do this good work on the AR side. Cash flow from investing activities was minus 12. That is mainly investments in development costs from financing activities. It was a plus nine and IFRS 16 effects. And that meant that we ended the year with 634 million in our bank accounts. That was plus 28 million for the quarter and just above 200 million SEC plus for 2023.

all right thank you anna um ending the address here with after numbers to the left and right with a picture a couple of photos from reality a couple of weeks ago we had our annual sales and partner meeting we had it in budapest this year and we're about 120 people from all over the world literally all over the world meeting up and they were surgical science people you know we our internal staff but the majority are our distributors our sales partners within educational products and this community is strong And I'm really proud of the sales network we have and our sales organization helping them get customers their needs met with simulation, but also the service and support organization that can help customers with this broad portfolio of simulators for medical specialties. We also had the technical training and it's such a vibrant amazing community that keeps on growing and that is ready to sell new products. We really feel after the various acquisitions we made that our strategy of being a simulation company with a broad product portfolio is really working. So with that, I would like to hand over for any questions. Thank you.