Surgical Science Sweden AB (publ)

Good morning everyone. My name is Gisli Hennemark. I'm the CEO of Circoscience and I also have together with me Anna Ahlberg, the CFO. We will run through a few slides and provide some general comments and then we will open up for questions and finish by no later than 12 o'clock. Educational products had a turnaround in the second quarter of this year. Minus 13 percent may not sound like a turnaround but it is big time. After the slow start of the quarter there was a clear shift in momentum and this trend has really continued in the third quarter. Big tenders are back and for those of you who were with us on our last call you remember how important it is that we have this base of revenue from big tenders and they're back, definitely back. Especially in Eastern Europe, a lot of EU money being channeled into large projects there and we also see a bright spot in China where we had a strong solid quarter after a number of quarters with difficulties. It's looking better but it's a little bit too early to tell because China is hard to predict. The big picture here and it's always easier to understand it in the reverse mirror is that 2023, the infection really took off. All the hospital budgets went bust basically and our customers stopped buying and there was no Q4 effect. Get into 2024, new budgets, people are naturally very hesitant and cautious but now inflation is down, governments are spending money and daring to put their foot on the gas pedal again. We're definitely seeing it in our sales and we're seeing it in our pipeline. We have good visibility of the coming quarters in our pipeline. And the full 2024, if we look at that, let's start by looking at what was the full 2023. It was 518 million Swedish crowns in educational products and so far in 2024 after six months we have 189 million Swedish crowns. So basically we need to do 165 times two to reach 518 and then go above. This is doable given the pipeline and also one specific large tender that we've been working on for quite some time but it is uncertain. And it also depends a lot on deliveries and when the orders close and when we're able to ship and so on. So this is a change from what we said in the last quarter but it's still doable but there is uncertainty. Moving on, industry OEM at plus 15 percent. Here it's extremely gratifying to see that our strategy is working and we have said that a number of times. But now it shows in the numbers. We actually triple the sales of simulators compared to the same period as last year. And simulators in this business area consists of specific product, specific simulators to medical device companies. And we see no change going forward in this strong demand. So our strategy of having global key account teams and the recruitments we made into that team and working with the largest med device customers to really serve them is working. And it's very gratifying to see. And this is despite the fact industry OEM is growing despite the fact that license revenue was down. Nine million Swedish kronor, quarter over quarter. And in this area we see new entrants coming to market that are doing their regulatory approvals. They're perhaps doing adjustments to their robots. But also most importantly, they have been facing the same hospital market and same hospital budgets as we have. So the consumption of licenses has been slower than expected in the early 2024. And remember these new entrants, they buy licenses from us in bundles, in packages, and then they use them and then they buy new packages. So this is a bit bumpy. When it comes to the market leader, Intuitive, they've had a fantastic launch of DaVinci 5. And they also said publicly that this is a controlled rollout of the DaVinci 5. So it's close customers who are selected partners, many of them who have been working with Intuitive to do the regulatory approvals that are now the customers. And they are preparing for the larger general rollout in 2025. So in this controlled rollout, there is no simulation on the DaVinci 5. And this is natural because these are customers that are very familiar and have worked very closely with Intuitive on DaVinci 5. And when they are then moving into next year, they will do a number of hardware and software upgrades and simulation is one of them. And then DaVinci 5 robots from this year, as well as going forward, will be equipped with simulation. So overall, our picture is 67 million license revenue is down a bit, a bit of headwind from the new entrance and no revenue from DaVinci 5. But it's not lost revenue because that will be an opportunity when DaVinci 5 is launched in 2025. And if we're looking at the robotic surgery more broadly, the SRS conference, the Society of Robotic Surgery just took place now in June, end of June. And it's never been bigger. More players, more participants, great technology advancements that are being presented. Massive success for DaVinci 5. A lot of new entrants. They keep on coming new companies to markets, in particularly Asian ones. And we will also see a continued consolidation, which has just started in this market. We had a fantastic SRS. We also had our new ultra portable head mounted display extension. That's a long word, but basically we use the same simulation software that our partners have on their robotic console in a head mounted display so they can get more value out of the simulation and we can generate more license revenue. We have now the first order, first test order for this product and it will be delivered in Q3. We've also signed one new robotic customer, a European one, that will generate license revenue as well as development revenue. And with this 28th quarterly report for me as the CEO, it's now time to hand over the company in really good hands. Tom Englund. I'm looking at him right now. He's here in the studio video with us, even though he's not mic'd up. We will have now a time to work side by side. I will leave the company up until October 1st and then Tom takes over. So that feels really good. We are confident that we are in the very early phases of simulation. Because if you look at the digitalization, how we can utilize our software on med device companies own platforms, robotic surgery is sort of just the first step there. And we are doing amazing work with our educational customers and in our educational products. And we have the really strong synergy between the two areas. So I feel very good and I'm very proud of what the team and I have accomplished in the last nine years. And I feel very happy to hand it over to Tom. And after our 2026 goals that we have a couple of years still to get to, Tom will shape and form and lead us into the future. And with that, I hand over to Anna.

Thank you very much, Gisli. Hi everyone. So I will dig into the numbers a bit more, starting then with revenues. As Gisli talked about, we saw a rebound for educational products, especially towards the end of the quarter. Industry OEM continued to show very strong development with many interesting orders and prospects outside of robotics. And within robotics, we also signed a new customer, as Gisli mentioned, even though, of course, it does not show in this quarter's numbers. In total, for the quarter, we had sales of 212 million SEK. In SEK, that was down 2% and in local currencies down 1%. Educational products then down 13% versus Q2 last year, but up 39% versus Q1. And as mentioned then, Asia and especially China had a strong quarter and China is a very important market for us within educational products. So that's, of course, important, even if it is a bit early to say that this will continue and that there are no more effects from the anti-corruption campaign that has affected us for quite some time. Large tenders are back and we see several that should be closed during this year. And did the quarter strong with a good order book, a larger order book going out of the quarter then coming into it. And Q3 has continued on that same note. Industry OEM was up 15%. License revenues then down, Gisli explained the reasons for this. Simulator sales continue to be very strong and so did development revenues. I will talk a bit more about them on the next slide. But in total then, industry OEM was 40% of our total sales and educational products 52%. Looking then at our four different revenue streams that we report on and in the report you also have them divided by business area. License revenues as mentioned down 9 million SEK and constituting 32% of our total revenues. Emphasizing again that they are lumpy for new entrants since they purchased the licenses in packages or batches. And some that have bought these packages have used less than expected during the first half of the year and that is then impacting of course new orders. But we see revenues from several customers now within this revenue stream. Simulator sales, we saw a rebound from the first quarter. Educational products increased 62%. And industry OEM continued even though it was down a bit from Q1 continued the very strong development. We also said for that part that it is a bit more bumpy since these are projects that include both products and also development revenues. And development revenues higher and consisting then of both robotics projects as well as what I just mentioned sales of simulators within the Indu OEM area. Service revenues continue to be stable and growing over time with a larger installed base. Cost and margins for the quarter. We continue to have good cost control. Q2 was a quarter with high activity and so OPEC's costs were higher than in Q1. And also compared to Q2 last year they were higher reflecting both on the fact that we are a growing company. We have more employees. We see inflation on for example wages. And for this quarter we also had some costs that were more of a one off or rare nature such as CEO recruitment costs. Sales costs were then 20% of our sales for the quarter. Admin 10%. R&D on par and 23% of sales. Where we activated costs on our balance sheets of just below 10 million that was approximately the same as last quarter. Our gross margin was the same as last year and it was better than Q1. The decreased share of license revenues had a negative effect on the gross margin while we had a good product mix and also the average sales price affected the margin positively. The operating result then ended at 33 million SEC or a margin of 16%. Looking at our organization we were the same number of employees going out of Q2 as going out of Q1. And that was six more than Q2 of last year. And down to the right you can see the split between our different sites. Adjusted EBIT where we have our financial goal of 40% in 2026 and where we add back amortizations on acquisition related items to our EBIT. Our net net was 19% for the quarter up from 17% in Q1. And for the first six months it was 18% or 72 million SEC. Our finance net for the quarter was a positive of 4.4. That is primarily interest on our bank balances. That was 4.7. And then we have some revaluation items on internal loans and also IFRS 16 effect. And then we have the net net for the quarter that we had last year. So in the comparison numbers we also had a revaluation effect on the contingency consideration for the MIMIC acquisition. I will talk a bit more about that under cash flow. The net result for the quarter was 29 million. Looking at the cash flow then we had really tough numbers to compare against. Q2 of last year was all time high. From operating activities we gained 30 million SEC and included in that number is a negative for working capital minus 17 million SEC. We increased our inventory. A large part of that was due to higher inventory of finished goods and work in process. Our accounts receivables however decreased and as you can see from the grey line it continued to decrease as a percentage of last 12 months sales. Cash flow from investing activities is primarily investments in development costs. And then from financing activities there we had this payout of the last part of the contingency consideration for the MIMIC acquisition. That was 1.1 million US or approximately 12 million SEC. It didn't affect the income statement. It was booked in Q4 last year but it was paid out during Q2. And then Q2 last year we instead had a positive item of 19 million SEC attributable to redemption of an options program. We ended Q2 with cash and bank balances amounting to 667 million SEC. And with that we will open up for questions.

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 Ulrik Trattner from Carnegie. Please go ahead.

Thank you very much and a hi Gisleina.

Ulrik before you get going with your question because I see I got a number of questions on the same theme here in the chat asking how much revenue will we get from DV5? Why wasn't simulation included from the start? I just want to make a general comment to those questions because perhaps many of the ones who are calling in have similar questions. There has been no change of the plan. We can only comment on what our customers are publicly saying. And now we're very happy that Intuitive made a comment during their Q2 call. So this is part of their plan not to have simulation included on the controlled rollout when select close customers of Intuitive are getting access to the DV5. And simulation will be included early 2025 and those units will then be equipped with simulation. And I cannot comment specifically how much revenue will this give us and etc. I can only conclude that our license revenue of 67 million in this quarter given the fact that we did not get license revenue on DV5. And that some of the new entrants have had the slower start to 2024 makes us very comfortable of what we're seeing going forward. So this has nothing to do with surgical science. It's not sort of we were not late with the simulation or anything like that. We are working very closely. Our teams are working very, very closely with Intuitive. We have one big team going out there to California in a couple of weeks time and everything is progressing exactly according to plan. Sorry Ulrik, but I just want to get this one out of the way and then I hand over to you.

Sure, thank you. I had a few other questions in mind to start off with. But since you mentioned it on the DV5, my interpretation of listening into Intuitive Q2, what's the day going forward will be integrating more simulation into their system versus historically. So first of all, is that a fair assumption? And secondly, I know that you don't want to talk specifics about Intuitive. But do you see more of an inclusion going forward in general of basic training into the robots or also to include advanced simulation? And do you believe that in turn if volumes were to increase and basic simulation were to be integrated that that would impact your average selling price or will it be neutral for the margins?

Yeah, thank you Ulrik. Many questions there at the same time. So let me see where to start with this. First of all, David Rosa, president of Intuitive said that simulation will be integrated. So he didn't speak on any quantity more or less, etc, etc. Then when it comes to sort of a general robotic surgery view from us and what we see at SRS and elsewhere is that more and more of the players in this market are integrating simulation more and more with the complete ecosystem. And this was exactly also what Intuitive commented on, how it will integrate into case insights and other part of their ecosystem. And then lastly to your question, the more value you provide as a partner, the more money you get. And we keep on as a company to develop newer, better technologies and innovations because we have the second to none R&D organization. And we also have the scale to do this because we work with so many robotic companies. So you get sort of a network economy effect because we keep on improving our IP and bring new solutions ultimately to help the surgeons increase the patient safety so they can train in a safe, controlled environment where they get objective feedback. So I can't comment specifically of course on Intuitive, but generally the more value you add, the more money you earn. And this is what we see going forward.

Great. Thank you, Gisli. And if we were to stay on the OEM side of the business and you mentioned and it looks like demand in OEM outside of robotics is accelerating. And you mentioned new strategy on your end. But is there more to that? Our customers wanting more simulation to showcase their devices or has it been large projects now materializing? And if you can help us with the margin profile of OEM revenues outside of robotics, as well as since you're selling hardware, although it's more part to robotic surgery companies, could you help us with the growth on your end towards robotic surgery companies? Or should we look more towards licensed revenues and potentially look at it from a rolling 12-month perspective? And if you can just help us how to view this?

Yeah, let me see if I take the first part of the question with industry OEM.

Or maybe just start with the second part. This is then outside of robotics. For robotics, there is no hardware. It continues to be pure software delivery, development revenues and licensed revenues. So this is to customers outside of the robotics space. And then it's both hardware and software and more product specific tailor-made solutions either based on the simulators we have. And then we do development work to do it product specific. Or it can be, as we also mentioned in the report, that we can combine with our broad product range. We can combine and do completely new solutions. So this is a lot about a market that we are, we are also finding new solutions, new ways.

And the customers are also increasingly using simulation for a wide range of purposes. Of course, the natural one is to train the end users to increase patient safety. But they use it a lot in sales and marketing situations. They use it in the R&D in order to test concepts early on. So we see a continued embracement of the usage of the simulation technology, broadly speaking. And our strategy is really working after our consolidation that we have done of specific technology niches to become the simulation company in healthcare for these kinds of applications where we are currently having offerings.

And just a clarification, would you say that there's been a shift in terms of customers now wanting more simulation for their specific devices than you have seen before? Because it looks like, and your comments in the last few quarters, sounds like there is an acceleration for this customer group. And secondly, the question initially asked there, how the margin profile looks like versus your licensed business?

Margins, of course, not the same as licensed revenues, but since it contains hardware as well. But it's a good margin business. And with growth also and volumes, etc. I mean, we see that. But it's not the same as licenses, of course.

No, and I also made a comment in my CEO commentary that it's challenging in these particular deals to estimate production time and development because these are more custom made solutions. But I think we have been very successful now to bring to attention of the customers that these technologies exist and how we can help them. And that is paying off. And we have been talking about us seeing the strategy working. If you go back a couple of quarterly reports, but now you see it in the numbers, and we believe there is a lot more potential in this area. We really do. We do not see any decrease in demand in this area.

Great. The last question on my end on the educational side, obviously a sequential improvement. But I guess that was kind of expected based on your comments from Q1. But you now say that procurement are back. And you talk about Eastern Europe being one of these drivers and you also talk about large tenders that could push this towards a flat year on year, full year, end result. And if you could provide some more color on this and in terms of the tenders that you're currently are seeing, are we talking about tenders on 2023 years levels or are these larger tenders?

We conclude that it's definitely a turnaround. I mean, educational products has rebounded for sure. It's very evident both in what happened in Q2 towards the end of Q2. Also how Q3 has started very strong. July is usually, you know, very quiet month. This year it hasn't been. And also what we see in our pipeline. Then we haven't made any specific comments to you know how many tenders are there, etc. But we conclude that educational products is looking really strong going forward. It's doable to achieve growth in 2024, but it's a race against the clock. So that's what we can say Ulrik.

Okay, great. That was all questions on my end. Thank you very much.

Thank you.

The next question comes from Victor Hogberg from Danske Bank. Please go ahead.

On that one on educational, the unusually large tender that you talked about, and that could be a hit or miss for potential growth or not in the segment for this full year. Could you quantify how large that tender is?

No, I don't want to quantify it. I just want to add that, you know, it is a race against the clock. We see how pipeline and we say, okay, we can make it. But you know, it depends on deliveries, when we get the PO, etc, etc. So it's tight. It's uncertain. And on the margin there, it's one specific large tender that we've been working on for a long time that we hope will come through. And as we've said it, now we will for sure comment on it in the future.

And it's fair to assume that if you wouldn't be able to put it in this year, it would be in the next year, or would it be a new one? Thinking about winning it or the timing for it?

No, I mean, nothing is a sure thing until it's signed. But of course we have high hopes of winning it.

Okay, another question on educational. So if you could just help us understand the growth turnaround here during the quarter, you said that the starter Q3 has been strong as well. Now just 13% year over year in the full quarter versus 45 in Q1. So it looks like they actually grew in June and definitely in July. Is that the correct assumptions that you're back to growth?

We don't look at really, you know, specific months in that way for us. And as you know, a lot of usually a lot of orders come towards the end of the quarter, etc. So it doesn't really make sense. We know what, as Kirsten said before, we know what the we have good visibility of the pipeline. And yes, we have a good closure also in the end of Q2 and beginning of Q3. But I that's not something. No, we can't give you those numbers.

Okay, fair enough. Just a final one on the non-robotic simulator sales that's been growing strongly. Does this, the traction you're getting with your clients here, does this affect your cost or investment plan going forward? Do you want to or do you need to put additional resources into this to be able to manufacture and also develop these products?

We have we have done the investment in the Salesforce and we have talked about that and you have seen that in the numbers and I think our EVP of that area, Niklas Olsson has done a great job in forming this truly global team. And we're now beginning to see the fruits of that work. When it comes to the other parts of the business, it's, let's say, part of the overall growth plan in order to produce, I mean, to program, to do development work, to then assemble simulators, ship them, install them, service them. So it's business as usual and part of the overall growth plan.

Okay, thank you very much.

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

Hi, and thank you so much for taking my questions. Just to follow up on the increased simulator sales in industry OAM. Did you kind of expect that increase over time when you set your margin target for 2026 or might that affect your margin outlook in case that trend continues?

You know, we set the strategy almost two years ago and so this is of course something that has been in the plan. We said it for quite some time that we've with this new strategy, we also expect growth within the non-robotic area. How much or how that is not something that we that we comment on. But again, we've said it for quite some time and we're very happy that we that it's now also starting to show in the numbers.

And it also shows this very strategic importance of having the two legs of educational products where we get the close key opinion leadership contacts. We sell simulators to academia, to university hospitals, primarily. We learn a lot. We then develop product specific simulators for the med device companies. And we are often able to enhance our IP that flows back to educational products. And to a large extent, it's the same resources in development in final assembly, QAQC, logistics. So it's really great to have these two legs to stand on. And now industry OEM has been really strong and in the beginning of the year, educational products has been slow. Now educational products has turned around and we see no sort of slowing down of industry OEM. Perfect.

Just in general, when it comes to the robotic surgery industry, you mentioned that several potential new players have seen delays and this also is ongoing consolidation. When you look back a couple of years, would you say that now it looks like the market may support fewer players and how's that going to affect your competitive situation?

Yeah, for us, the really, really sort of KPI is number of robotic procedures. That really drives our business because that drives the underlying need for training. Also, if you go one step down, it also depends a bit what kind of procedures because if you're venturing into new areas that we're seeing now, you're using the robots for different kinds of indications that you weren't before, it continuously drives the need for training in order to secure patient safety. Also, new instruments and new technologies, new features being added to the robots that again requires a controlled, simulated training combined also with the ESG aspect where more and more companies do not want to do training with live animals or cadavers. So this is the overall picture, Christian.

All right, perfect. Got it. Thank you so much. That was all from my side.

As a reminder, if you wish to ask a question, please dial pound key five on your telephone keypad. The next question comes from Christian Lee from Pareto Securities. Please go ahead.

Thank you and good morning. I had two questions based on your current order book. Do you expect educational products to return to growth in Q3 or do you need to win a larger procurement?

We haven't commented specifically on that, Christian. What we have said is that we see the very clear comeback and rebound and large tenders and really strong finish of Q2. We have also commented that Q3 started very strong and that we have a really healthy, solid pipeline and a clear view of our deal flow going forward. You also noted that our inventory went up and we commented that it was also primarily finished goods. So these things should indicate that we see a strong comeback during the year for educational products. But we are also very clear on the fact that last year it was 518 million. So far, six months, it's 189. Basically, in order to achieve growth, we need to do around 165 per quarter and we're uncertain if we will reach there, but it's

doable. Very clear. Thank you.

I was also wondering if you could give us some more color on the simulation that will be included in DB5. Will there only be training of basic skills or will more advanced procedures be included in this package?

I wish I could do it, Christian, but we are very mindful of our customer confidentiality. As our customer in this case has not made any comments around it, other than that specific comment they did during their own Q2 call, I cannot comment on that.

Okay, fair enough. Thank you very much.

Okay, so no more questions there. I think we answered the written questions as well during the question session.

Thank you very much, everyone who called in and thank you everyone who contributed with great questions. With this, we then give you guys 15 minutes of your time back and conclude today's call. Thank you very much. Thank you.