Surgical Science Sweden AB (publ)

Good day. My name is Gisli Hannemark. I'm the CEO of CircoScience 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. So educational products start to the year really weak. Nose dive 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 of 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 market. But the big Delta was in our distributor markets where we sell our products, our educational products through partners, through distributors. 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 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 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. 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. China is always a bit hard to predict but we believe that this effect will ease up during the year. Finally there was 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. 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 customized stimulators for a specific product training those revenues grew by 300 percent. They actually ended up at the all-time high of 35 million Swedish kronor. So we're very pleased to see this and I'm personally very pleased to see how we're able to combine different products and 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 circular 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 seven million actually back at sort of the 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're 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 and also more of a broader rollout. We're extremely excited about this because it's 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 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 a census surgical. The census is a customer of ours and we believe this trend will be positive for surgical science if it is a trend. It's 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 program is what's called Fundamentals of Endoscopic Surgery. This is a long long collaboration that we've had with 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 and 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 accounts 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 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 education of products was weak 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 percent 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 percent 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've 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 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 license revenues then they are a bit lower in 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 percent 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 purchase the licenses and batches and we also have a certain seasonality effect also on the subscription side. Simulator sales being 48 percent of our total sales for the quarter down in total approximately 32 percent again then EDU being down more and industry showing very good development and all-time high and as Gisli 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 and you can find that in note two 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 projects is the IMSH that was in January this year in San Diego and we also hosted as Gisli 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 percent of sales admin eight R&D costs were on par in absolute numbers if we compare to Q1 2023 24 percent of sales and we activated slightly less than 10 million SEC. The line other was in total a slight negative minus one percent that is costs for our option programs and it's also effects on current receivables and liabilities that end up on this line. Going back up a bit then to our gross margin that was 66 percent 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 percent. 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 percent in 2026 was 17 percent for the quarter or 32 million SEC. And the finance net was two million SEC we had a positive of six 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 SEC. Looking at our cash flow cash flow from our operating activities was plus 28 million SEC. We did have a negative effect in working capital since both inventory and accounts receivables increased somewhat. That was partly upset by the fact that current liabilities also increased somewhat. Cash flow from investing activities for this quarter was also a negative. 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. That'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.

If you wish to ask a question please dial pound key 5 on your telephone keypad to enter the queue. If you wish to withdraw your question please dial pound key 6 on your telephone keypad. The next question comes from Simon Johnson from Berenberg. Please go ahead.

Morning Gisley, morning Anna. A couple of questions from me. The first one is on education and really how can you be so confident that we will see growth in 2024? Do you have a stability on larger tenders over the next quarters? It just goes against your comments that customers are holding a tight grip on its wallet and also related to that what are you hearing about your budget for 2024 if you compare that to 2023?

All right so Simon the confidence comes from years and years of reviewing pipeline numbers and knowing all of these simil- all of these distributors. It has been a tough start of the year and customers are a bit shell-shocked from 2023 when the budgets didn't work out so they've been very cautious but we see the actual deals in the pipeline and we also note that macroeconomics are again favorable for us. Inflation is coming down and we are really confident that many of these deals will take place in 2024 and when we add all that up to a big picture we are confident that educational products will grow in 2024.

All right and to follow up on that could you maybe help us understand the sequential development a little bit better? How much of this will rely on Q4? I mean it's the seasonally strongest quarter and I'm just thinking that maybe the budgets are better but they will still likely wait an order until then or how should we think about that?

Well it's not like we're not selling anything even if you know a decrease to from 140 plus down to 79 is a big decrease but also if you look at how we broke down and disclosed a lot of detailed information for everyone to understand that bridge you also see that there aren't that many factors. I mean the comparable is tough there's nothing to do about that but a lot of it is attributable to large tenders and we have really good visibility on large tenders. We know there will be new government in India even if that is perhaps not the biggest delta it was eight million and we do feel confident that at some point China will bounce back. We've seen that many times historically but it's a bit more tricky with China to know exactly when but all these things combined makes us see a strong solid 2024.

All right perfect. Our second topic is robotics and license remuneration. Could you also help us sort of get more color on the 11% decline here year over year? You're mentioning that it's because of customers are buying licenses in bundles. Is that the main reason or could you sort of comment on the underlying development if we exclude this effect?

There is some inherent bumpiness related to one customers especially new entrants are buying licenses in bundles. Two there is also some bumpiness in when the recurring revenue in terms of subscriptions are renewed. So these two things contributes to some bumpiness. What we see in the market is a brand new robot from intuitive. We see advances among many of the other robotics companies and we are embedded on 15 of these companies with our software. Of course there are some varying degree of success as they're starting to enter the market and they get regulatory approval and so on. There was actually a Chinese customer a Chinese company got regulatory approval in Europe just recently. All these factors mean that there is some bumpiness but we don't see any difference in the outlook of the strong trend of surgical robotics moving forward and our role in supporting those customers within that niche. So we feel confident about the surgical robotics portion of our revenue streams.

Okay and in terms of the DaVinci 5 you're commenting in the report it's clear that that will be a more of a 2025 story. Do you have any more visibility on how this might affect your license revenues in 2024?

Nothing that I can comment on. Of course we have a very close working relationship with all of our customers but I note that intuitive themselves and that's why I'm quoting it has talked about a phased controlled rollout and limited supply throughout the year and supply increasing in 2025. I also comment on the fact that for us as a simulation company it's really exciting to see all that added functionality that means that we are in a position to add more meaningful technology to such platform without making any sort of further comments or drawing any conclusions or disclosing anything about intuitive plans going forward.

All right those all from me thank you so much.

The next question comes from Christian Lee from Pareto Securities. Please go ahead.

Yes good morning and thank you for taking my questions. The first one is a follow-up on the DaVinci 5 adding more features. Does this mean a more project development opportunities for you in the short term?

I really can't comment that specifically on my customer Christian but on a more broader level the more complex features being added in the technology from surgical robotics companies means that physicians can do more things with the robots and then for the sake of patient safety they also need more training and we outgrew the market in an amazing way last year where our license revenue grew by 50 percent whereas the market certainly didn't grow by 50 percent and we have no reason to believe that this trend over time is going to change because customers are also increasingly moving towards simulation because simulation is advancing and we're able to do things that we did that we couldn't do before because also we are investing in our technology and also from an ESG perspective it really doesn't make sense to use a lot of living animals or cadavers meaning deceased humans to practice so all this combined makes us really excited about the future.

Okay great second question is also regarding DaVinci 5. It seems like the robotic systems will include simulation by default that the customers previously had to purchase separately. Is this the reason for why you expect the license revenues to pick up significantly next year?

I can't again I cannot comment specifically on one customer. I simply can't I'm not in a position to do that but if you look at how the robotic assisted surgery industry is developing and new players are coming to market and really simulation is becoming a de facto standard. Everyone expects it in a way to be included on the console. I mean that's what surgeons, physicians and other hospital staff are coming to expect and the supplier of that world leading simulation is surgical science so that's a positive for us.

Yeah sure my final question would it be possible to disclose how much of the license revenues that are subscription based?

We know that that is something that would be interesting to to see and as you know we try every year to add more information to our reports and this year it was the geographic split that we have more in a more granular way. We have not disclosed the split and we cannot do so yet. That is our judgment from a sensitivity point of view. You know the only thing we said is when we acquired Symbionics that the larger part of their revenues from intuitive were subscription based.

Okay that's clear thank you very much.

As a reminder if you wish to ask a question please dial pound key five on your telephone keypad. The next question comes from Ulrich Trattner from Carnegie. Please go ahead.

Great thank you very much and good day, Ghislaine and Anna. A few follow-ups. You're referring to a rather tough situation in China. Previously you've sounded more upbeat. I know it's a tricky one but if you can help us decipher how transparent can it be that the market will improve despite sort of historical pattern and as well as you're referring to India in educational products and the lack of opportunity to capture orders there but for transparency reason as well. Can you help us provide some more granularity on what sales was derived out of India for Q2 and portfolio in 2024? That would be my first question.

Sure, India is pretty simple. I mean after they've elected a new government they will start business as usual again and we have a great distributor there, a great partner, great visibility on you know business and tenders and so on. We haven't disclosed absolute numbers for the markets but the fact that the deviation was eight million you know we really tried to add some transparent data points in order to understand the dip in educational products at least it tells you something. When it comes to China Ulrik, you know I travel extensively to China. It's a very important market for us not at least in the industry OEM where we really see big opportunities and we're strengthening our organization there. We have our own office, we have our own people but it's really tricky to know and we commented in one of the Q reports last year that we saw the Chinese market potentially opening up in the beginning of this year and it didn't happen so I will just bite my tongue in terms of exact timing but we do really know the end users there and the medical community so we are confident that it will come back but the exact timing is difficult. We anticipated to be on the second half of this year but it is difficult to know with China.

And again just emphasizing that that is on the educational product side. On the industry OEM side we see a lot of activities in China and a lot of positive development.

Fair enough. And you also talked about that you're seeing tenders out of the edu segments but didn't I correct me if I'm wrong but I interpreted that you haven't these have not been finalized in Q2. So you have one and a half months left for Q2 or these tenders to be finalized and for you to deliver products on these. What's your confidence in that as well as if we're talking here at potentially at best last organic growth for the educational segment for the full year 24. Do you think that you will need to revise your financial targets on sales and margins as well for 2026? That would be our final question. Thank you.

Yeah but what we said Ulrik is that Q2 will be better than Q1 for educational products and 2024 will have growth over 2023. When it comes to the tenders and there was one specifically mentioned here we said that it was a large deal in Poland last year. I mean this comes from years of work and you know EU financing etc etc. So I really do feel that we have a good grip on major tenders. The exact timing we have not said anything about but we always typically always have large tenders in any quarter and we haven't said anything specifically on Q2 or if our large tenders are not in Q2 but we said that we know that Q2 will be better than Q1 and 2024 as a whole. And when it comes to the 2026 financial goals there is no change in that. We are as confident as we were before Q1 of 2024 that we will accomplish our goals by 2026 of 1.5 billion Swedish crowns in revenue and 40 percent adjusted EBIT margin.

Okay great thanks for taking the question Ulrik. I'll get back into the queue.

The next question comes from Christian Binder from Redeye. Please go ahead.

Hi and thanks so much for taking my question. I just have one quick follow-up. You mentioned vascular surgery as a particular area of strength. Can you elaborate a little bit on when you're taking market share there and how you see the competitive environment developing? Is kind of your position improving relative to competitors there?

Thank you Christian. Yeah we noted that our strong start of the year and what we anticipate to be strong continuation of the year for simulators hardware and software to med device customers had a good portion of revenues within vascular surgery. And that's the competitive market. I know you follow our competitor Mentes and we have been winning a lot of business but even if we are competitors sure we are in direct competition in some tenders. But it's also a little bit of a customer mix. You know we have some different customers, different strengths and we're deeply embedded in different customers. Of course we want to gain market share and win over them and I can't remember exactly but I think their start of the year was a bit weaker in that segment. But it's more that I feel that we are coming out with our technology and we're able to combine our technology within our different products to deliver really meaningful solutions to the customers.

All right perfect that was all from my side. Thank you so much.

There are no more questions at this time so I hand the conference back to the speakers for any written questions and closing comments. So let us look at the written

questions. There is a question around capital allocation and the strategy going forward regarding this and our cash position yes continues to increase. And what we've said all along is that I mean we have the same strategy as we have had over the past years. We do not need a lot of capital for our running -to-day business that generating cash meaning that that would be for other projects and as you know acquisitions have been a successful part of our strategy in the past and it continues to be something that is an important part of our strategy going forward. And so that is still the same the same answer to that question. Then I see a question if there were any surprises or mis-planning happenings during the quarters.

Let me see if I can interpret this question. Of course I mean it is a big mishap to that the revenues decreased in educational products which has such a significant amount and like I said it felt it was a nosedive it felt like a nosedive and what you do after that is you get up and you look ahead. Now did we see that happening? You know a lot of our deals come late in the quarter and visibility of the exact timing if a deal is going to be in March or in April or something like that it usually happens rather late so I wouldn't say we expected it but it was in line with what we communicated also in the Q4 report that we do see a healthcare system and this is the same for all over the world that is having a tough time. The inflation that hit them last year and budgets not being met meant that a lot of them had a really tough time so holding on that they were holding on to their wallets initially maybe we could have sort of figured that out but we did not know knew that until it happened so to speak.

There is a question around DV5 that I hope we we answered we talked a lot about DV5 and then the last written question there is one around the Gaza conflict if we have lost orders or market share due to the conflict since we do have half of our staff in Tel Aviv.

The short answer to that question is no. The bit longer answer on the war in Israel is that it continues to be tough emotionally for our team for our colleagues for our friends in Tel Aviv but we also see that being a Swedish Israeli US company really global company it's an amazing team spirit that just got stronger after the conflict how people are backing each other up how we as a very diverse company with all sorts of religions or political opinions are really pulling together as one team. I also note that if anything with a bit of a downturn in the Israeli economy it's been easier to attract and retain talent there so as you can see in our staffing statistics we've kept on investing in Israel and we will keep on investing in Israel it's a great competence in that country and even if we all think that the war is terrible we all keep our fingers crossed that there will be an end to so nothing has changed in that aspect. With that I think we are all done we don't see any new questions coming into the chat and everyone has had a chance to ask their questions so with that I thank you all for listening and hope to interact and see many of you in the in the coming months and perhaps even some at our AGM which takes place tomorrow in Sonne Gothenburg. Thank you. Thank you.