Surgical Science Sweden AB (publ)

Good day. My name is Gisle Hennemark. I'm the CEO of Circle Science and I also have our CFO Anna Aalberg with me. I will start off this presentation by some general comments of our first quarter 2024 and a bit of how we see the rest of the year and then Anna will provide some details. Afterwards we will have time to address any questions you may have. Educational products started the year really weak. Nosedive sounds perhaps a bit harsh, but that's what it feels like when your revenue decreases by 45% Q over Q last year compared to this year. We are experiencing customers that are a bit anxious after last year's experience. Or budgets that didn't work out. Criticism that they were running a deficit. Now they have fresh budgets. But they kept a tight grip on their wallet initially. We also see that among our markets. The United States performed rather well. Which is a direct sales market. But the big delta was in our distributor markets. Where we sell our product. our educational products through partners, through distributors. And looking at the delta, and with the delta, I mean the difference between 2023 and 2024, the first quarter, the largest part of the decrease, the delta, was the fact that we did not have any large tenders in Q1 this year. Usually every quarter we have some some multi-simulator large tenders, which is a really strong part for us, surgical science, as we have such a broad product portfolio. This year, the year didn't start with any. And last year, we had three. One in Europe, in Poland specifically, that was large. We had one in Asia, and we had one in Latin America. Another factor was the backlog. The comparable included 17 million Swedish crowns. That was sales that were made in the end of 2022 but delivered in the beginning of 2023. We did not have this effect this year and we previously disclosed that effect. Then China, the delta was 12 million. It doesn't mean that we didn't sell simulators to China this year in Q1, just as we did last year in Q1. But we sold for 12 million less than last year. And really, the market keeps on being a bit frozen in China. And it's related to the anti-corruption initiative by the government, specifically aiming healthcare and teaching institutions. And China is always a bit hard to predict, but we believe that this effect will ease up during the year. And finally, there was an 8 million Swedish crown difference in India. And that is completely frozen market right now because they're doing elections and then it's illegal for government purchases. But we do see the demand. We do see the needs. We have really good visibility on our pipeline. And we rather recently had our annual sales meeting where we meet all of our partners. We go through the pipeline. We know what's coming. And it does look good for the year. And if we summarize it, I can say that Q2 will be better than Q1 for educational products. And 2024 will have a growth. So we expect educational products to come back during the year and end up on a positive note. If we then move on and we look at the really positive part of our report was the industry OEM that grew very strongly. And actually our simulator sales when we sell both hardware and software with customized for a specific product training, those revenues grew by 300%. They actually ended up at the all-time high of 35 million Swedish crowns. So we're very pleased to see this. And I am personally very pleased to see how we're able to combine different products and different technologies in our broad portfolio and our broad competence to deliver solutions to these customers. And we have built up a healthy backlog there, and we see this trend continuing with strong growth throughout the year. And if we then move on to license revenues, where we are compensated from our surgical robotics customers for utilizing our software that's embedded on their robots, it started the year with 63 million. So it's a slight decrease, 7 million, actually back at sort of what was the all-time high in 2022, the fourth quarter. And this bumpiness is something that we are expecting. And it's specifically tied to new entrants who buy their licenses in bundles. So it's not exactly tied one-to-one when they were having their sales. We are noting that Intuitive has disclosed more about the DaVinci 5 rollout plan. And what they've said is that it will be a very controlled rollout with 2024 focus on existing customers that have been part of the clinical trials and doing more research after the FDA clearance. and next year increasing supply and also more of a broader rollout. We're extremely excited about this because it's a big step in surgical robotics when Intuitive comes out with a new platform that has added functionality such as haptics and it increases our chances of implementing more technology and more simulation that can bring customer value. We also note that there is what could be a start of a consolidation within the robotic assisted surgery segment. Recently, Storch announced that they've entered into a non-binding agreement to acquire Essensys Surgical. Essensys is a customer of ours, and we believe this trend will be positive for surgical science if it is a trend. early days, because as large med device companies are entering into surgical robotics, they will add significant financial muscle, but perhaps more importantly, they will add sales channels and sales organization and customer service and support. That means more customers will be exposed to the technology and can access it. And volumes go up and we receive more license revenue. I have traveled extensively during the spring. And one of the highlights was that I visited SAGES, which is a yearly conference in the United States for the association with the same name. And there was a magnificent 10-year anniversary celebration of the FES program. The FES programs is what's called fundamentals of endoscopic surgery. This is a long, long collaboration that we've had with the Sages where over 13,000 surgeons have been certified on our simulators for endoscopic maneuverability. And it's just a beautiful thing when you see what that adds to patient safety. For us as a company, it's also really important to remember that when we work with these end users, we work with the academia, and we're closely embedded with medical associations, we gain so much knowledge that we can combine together with our technology in order to deliver solutions for our med device customers. So that's sort of the core foundation of our strategy. And this is the reason why industry OEM can grow like it did this year. And for those of you who read our quarterly reports carefully and listen to what we communicate, we actually said last year that our sales strategy for industry OEM is working. the key account strategy and the people we've hired to work and meet our large med device customers globally is starting to generate and we're expecting to see sales in the coming quarters. That's what we said and that's what happened. And we see this trend continuing for 2024. So after a bit of a rough start for educational products, We're optimistic and we're confident for the full year. And we see a really strong trend in industry OEM. And with that, I will hand over to Anna for some further details.

Yes, thank you, Gisli. Continuing a bit on the revenue side, on the slide you see the split in percentage between the two business areas. And the summary for Q1 is, as you've heard, that educational products was week having a notch in the curve while industry OEM had really strong development and in total we had sales of 188 million that was down 18% both in Swedish crowns as well as in local currencies as you know we are heavily dependent on above all the US dollar where we have more than 80% of our sales and we've had some positive effects from the dollar strengthening for the past years. However, as you see now this quarter, it's even between Swedish crowns and local currencies. So we had record sales within industry OEM, the highest revenues we've ever had, both for the business area as a whole and for simulator sales within the area. And as Gisli said, we had a very focused strategy since one and a half years back, which is now starting to pay off. However, educational products declined more than industry OEM grew. We had very tough comps, but we also saw several distributor markets being weak, such as China. Then we talked about the anti-corruption campaign for quite a few quarters now. India now being frozen, awaiting a new administration. And several markets in Europe where we didn't see any tenders closing. One market that did exceed last year's numbers was then the US on the EDU side. If we look at our revenue streams, we see for the licensed revenues then that they are a bit lower absolute numbers for this quarter compared to Q1 2023, but at a good level. And being then a larger part of our total revenues, 34% compared to 31% in Q1 2023. Again, emphasizing what Gisli also said, that these revenues are a bit bumpy between the quarters since the new entrants purchased the licenses and batches. And we also have a certain seasonality effect also on the subscription side. Simulator sales being 48% of our total sales for the quarter down in total approximately 32%. Again, then Edu being down more and industry showing very good development and all time high. And as Gisela said, we do expect a degree of recovery for educational products in the second quarter. There are a number of major tenders on their way, even though it's always hard to know exactly when they will be completed. Regarding China, again, we've said that we expect normalization in the second half of the year at the earliest, and India will still have an effect in Q2 waiting for a new administration. Development revenues were higher and that is of course an effect since simulator sales within industry OEM were higher. They are often tied together being projects where we do adaptations and sell simulators. And these revenues are also of course tied to robotic projects. Service revenues continue to be stable and growing with the installed base. And new in this report is that we also now divide our regional sales per business area. You can find that in note 2 in the interim report. Costs and EBIT margin for the quarter. we continue to have good cost control. If we look below the gross margin in absolute numbers, all those OPEC cost lines were below both Q4 and Q1 of last year. On the sales and marketing side, we had two of our largest activities that we have during the year. They were in the first quarter. Our largest Congress within educational product is the IMSH. That was in January this year in San Diego. And we also hosted, as Gisela mentioned, our annual distributor meeting that was in February this year in Budapest, where we had over a hundred of our distributors, people from them in place from more than 40 countries. All in all, Sales and marketing costs were 21% of sales, admin 8. R&D costs were on par in absolute numbers if we compare to Q1 2023, 24% of sales. And we activated slightly less than 10 million SEC. The line other was in total a slight negative, minus 1%. That is costs for our option programs, And it's also effects on current receivables and liabilities that end up in this line. Going back up a bit then to our gross margin, that was 66% for the quarter compared to 69% last year. The increased share of license revenues has a positive effect on the gross margin. However, the product mix was unfavorable and The fact that we sold fewer simulators also meant that we had higher fixed costs per simulator, also affecting the gross margin in a negative way. EBIT was then 26 million or 14%. Organization-wise, we increased with five people during Q1 we were 260 going out of 2023 and then 265 people going out of Q1. Net we had an increase of three people in the US, one in Sweden and one in what we call other which is primarily Germany and China. The adjusted EBIT where we have our financial goal of 40% in 2026 was 17% for the quarter or 32 million SEK. And the finance net was 2 million SEK. We had a positive of 6 million for interest income and then a negative for revaluation of internal loans towards subsidiaries and also the IFRS effect, 16 effect. Net result for the quarter was then 24 million SEK. Looking at our cash flow, cash flow from our operating activities was plus 28 million SEK. We did have a negative effect in working capital since both inventory and accounts receivables increased somewhat. That was partly offset by the fact that current liabilities also increased somewhat. Cash flow from investing activities for this quarter was primarily investments in development costs and from financing primarily related to IFRS 16. The gray line you see there on the graph is our accounts receivables as a percentage of rolling 12-month sales. There's something we follow closely and have worked hard with and it remains at a good level. Also then helping the fact that We increased cash with approximately 25 million during the quarter, which we think was good in view of this quarter. And we ended with a cash position of 660 million crowns. With that, we conclude the presentation and can open up for questions.

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