Surgical Science Sweden AB (publ)

Welcome to this year-end and quarter four presentation of Surgical Science. My name is Tom Englund, CEO of Surgical Science, and with me today I have Anna Ahlberg, our company CFO. We'll use our time together today to first present the report and then we will take questions from the audience. We can look back at an eventful and positive fourth quarter for Surgical Science and a good end to 2024. The year started weekly with a tough business environment in educational products. Our turnaround came in quarter two of last year, and sales and market conditions have since steadily improved during the year to end with record sales for the group of 252 million SEK. Starting with educational products, the quarter saw growth for the business area of 2% to 125 million SEK. Some geographies had considerable growth, like Asia with 29%, and Europe with 20% growth, whereas our important market Americas decreased by 20%. We're cautiously optimistic about developments in educational products, even though the growth is not in line with our growth expectations of 10 to 15% right now, which we have for this business area. On the one hand, we're seeing a clear increase in customer activity and requests for quotes in all markets. On the other hand, the global budgetary climate for hospitals and training centers remains strained, which prolongs the time it takes to convert quotes into orders. Our team has a very high activity level and we have taken several very specific actions to increase the growth pace and convert more quotes to orders. And our outlook for our different regions, Americas, EMEA and APAC is positive. A key priority for us right now is also to develop and optimize our sales channels to ensure our now very broad product portfolio has the best global reach. After the end of the quarter, we announced that we had one procurement amounting to 52 million SEC in a Southeast Asian country. This order is for a virtual or mixed reality solution to train military medical personnel in emergency situations and in emergency procedures. This order is expected to be delivered over 18 months with work starting in quarter one 2025. We consider this to be a breakthrough order, which is very exciting and holds great potential as it relates to a new innovative product for a new and potentially very large customer segment for us. There are many similar types of customers around the world, and the need for training in these type of procedures and environment is very, very high. Looking a little bit at industry OEM, which has performed strongly throughout 2024, we continued to perform well also in the fourth quarter. Sales amounted to 127 million sec with an increase of 21%. Our sales of simulators towards non-robotic customers in the medical device space grew by 124% to 43 million sec, which was an all-time high. This result is due to a combination of existing customers making repeat purchases from us, as well as an increasing number of new customers who are buying simulators from us for the first time. It's clear that simulation is becoming an important tool for med device companies to train their customers and sales teams, as well as use in R&D and development efforts. We also received orders for several large development projects during quarter four from robotic manufacturers and medical device companies around the world. These orders did not materialize into revenue in quarter four, but will do so during the coming quarters. Licenses. License revenue grew by 1% during the quarter to 76 million SEK. Certical Science gets licensed revenues from several robotics companies, and customers can either be invoiced for the licenses they consume during the quarter, or they can buy licenses in packs for several quarters ahead. This means that revenue development can be lumpy in nature depending on when our customers purchase their licenses. As has been mentioned previously, there are several robotics manufacturers right now that are coming into the market and who are in various stages of the regulatory approval process prior to start of sales and marketing. These new companies all now have a steady growth of new procedures, which means that the systems are being used by more surgeons and each system is being used for more types of procedures. This in turn will drive the need for training and simulations on these new systems, and since many of the companies are customers to surgical science, eventually it will also turn into license revenues for us. We can do little to affect the later part of the commercialization efforts of the robotics companies, and we are dependent on their success, of course, in their robotics sales. One major milestone for our company during the past two quarters has been our new agreement with one of our main customers and the world's largest robotics manufacturer, Intuitive. This agreement, where prices are set for the next four years, means that Intuitive will equip and ship all new DaVinci 5 systems with simulation from Surgical Science. DaVinci 5 is the latest and most highest performance robot of Intuitive. We have in our existing contract had a significant portion of subscription revenue and starting now in January 2025, the revenue model will become entirely subscription based. And this new agreement is fully in line with the 2026 financial targets that we have regarding intuitive. Another very important event for us during the last quarter was the announcement of our intention to acquire UK based Intelligent Ultrasound. Intelligent Ultrasound is a Cardiff based company within ultrasound simulation, and which has a broad product portfolio. The acquisition makes surgical science the market leader in ultrasound simulation, which is an exciting area with strong potential for us. As was announced by a press release yesterday, the scheme of arrangement has successfully been completed, and yesterday we were happy to welcome the Intelligent Ultrasound team into the Surgical Science family, and we look forward to the continued journey together. We see a lot of users who need training and simulation in order to use ultrasound to ensure efficiency and quality of diagnostics. In industry OEM, we can also see several major application areas combining ultrasound with other technologies. A few of these, or many others, are needle training, anesthesia training, and drug delivery. This acquisition also means that we will open up a sales office and establish ourselves directly in the UK market, where we see good growth opportunity, both within educational products and industry OEM. Profitability for the quarter was 39 million sec or 16%. The quarter saw higher costs related for sales incentives and a higher share of sales from distributors, which affects our margins negatively. Furthermore, similar as previous quarters, we made investments into our sales and R&D teams to increase our geographical coverage in sales and our capacity to handle R&D projects and response quicker to customer requests. An important focus area is and will be our ability to scale the company efficiently to make it possible for us to handle more customers and revenue with an increase in our internal efficiency. We also see many opportunities in the market right now outside of our traditional segments where we invest for growth. We approach these investments with a careful and financially very prudent approach. Cash flow for the quarter was strong and net cash increased by 66 million SEK for the quarter. On the topic of our operations after the end of the quarter, the decision was made to expand the production capacity of our existing premises in Tel Aviv in order to continue to grow and handle the increased volumes. As I mentioned in the quarter three report, the focus has been on strengthening delivery capacity in R&D and developing our sales and distribution channels to cover the market better. We are during quarter four and also in quarter one reorganizing R&D to increase our capacity to handle development projects and our ability to respond to customer requests faster. We've also reorganized the sales function into regional division to get closer to our customers and distributors and to more effectively leverage our shared resources. And finally, the management team has been reshaped and reduced from eight to five members to create clear ownership and ensure quicker decision making. Niklas Olsson has been appointed to the new role of Chief Revenue Officer with responsibility for all sales for all our business areas and Ariel Ben-Moshe to Chief R&D Officer. And with that, I would like to hand over to Anna.

Thank you, Tom. So as Tom mentioned, we saw a strong end to the year with all time high sales coming in at 251.5 million SEK, up 11%. And that was the same then in local currencies. Educational product sales was up 2%. We saw a market increase in Asia, and that was all due to China. We also said that we have a positive outlook on China for this year, for 2025. Europe was also strong, both if we compare it to Q3 and Q4 of last year, we had a large order in Romania if we compare to Q3. We also had that in Q4 of last year, so we also had other markets being strong. But then, as Tom also mentioned, the North and South American region was weaker. Brazil was strong, but US was weaker. And we are cautiously optimistic looking forward for the business area. Industry OEM up 21%. And although not with much, we still saw time high sales for license revenues, 76 million. And our simulated sales continued. It's very strong development up 124% for the quarter and at all time high level at 42, coming in at 42.5 million sec. While development revenues for the quarter was somewhat weaker. That meant that for the full year 2024, our net sales came in on par with 2023, 883 compared to 884 for 2024, which in light of our very weak Q1, we see as positive. And for the first time in a long time, the currency effect is working against us. As you know, we have more than 80% of our sales in US dollars. And if we look at sales in local currencies, it was slightly higher, plus 1%. Educational products then weaker, minus 15% for the year, although finishing better than it started for sure. And industry OEM continuing its very strong growth journey and being up 21%. And that meant for the full year, you see the graph is then the split between our two different business areas. And for the full year, sales between the two business areas was 50-50. And if we compare to 2023 was 59 for educational products and 41 for industry OEM. Looking at our revenue streams, as mentioned, license revenues were at all time high, but a bit lower than Q4 last year as a percentage of total revenues, 30 versus 33. And for the year, license revenues decreased by 2% and came in at 272 versus 278. That meant 31% of total revenues. That was both for 2024 as well as for 2023. As you know, and as Tom also talked about, they are more bumpy for new entrants since they purchased the licenses in batches. And if we compare to 2023, that is what we see that has affected these revenues during 2024. Simulator sales was the strongest it has been since Q4 2022 and a lot then of course due to the strong growth within industry we have. Simulator sales within industry grew by 160% for the full year 2024. development revenues consist of both robotics projects and projects tied to sales of simulators within industry this was as i mentioned weaker in q4 but it is not a sign of new projects being fewer we have commented before that this can be also bumpy if we are in between SOWs or statement of works for example for long projects and as you know we also announced the Singapore deal which entails development revenues and we also said that we closed some robotic orders where we have development revenues that will come during 2025. Costs and EBIT margin, we had a gross margin of 68% versus Q4 last year when we had a very strong gross margin of 71. 68 was also the number for the full year compared to 69 for 2023. and compared them to q4 in 2023 we saw a lower share of license revenues as i mentioned 30 versus 33 and that had then a negative effect on the gross margin and since the u.s market was weaker that meant a lower share of direct sales and we also had some more service cases affecting the gross margin for the quarter if we look at our sales costs Approximately five milliseconds of those were costs of a more rare nature related to things such as demo equipment provisions we had for a few accounts receivables and higher commissions. And that depends on to what country we sell how these commissions fall. We also had five more people joining this team in Q4 in four different countries. So we also invest for the future and for the prospects we see. Admin was 9% of sales and we still have some higher double management costs both for current and previous CEO. R&D costs were higher. And if we compare to Q3 of last year, we again invest in this organization and we continue to employ more people. So we were more employees. However, it is also important to remember that our R&D costs end up on three different lines. They end up in cost of goods sold on the actual R&D line and also in the balance sheet as capitalized. And if we compare Q4 to Q3 of last year, since development revenues were lower, that meant that less of the R&D costs for Q4 were moved to cost of goods sold. When we adjust for these effects and look at the total R&D costs for Q4 compared to Q3, they were in line with each other on the same level. For the full year then for these different functions, we see that we increased sales costs with 5%, admin costs 6%, and R&D costs 8%. Again, all investing in the future to meet all the possibilities that we see ahead. On the line other, primarily two items, option programs, that was 1.5 for the quarter, and then FXFX, and they were quite large during Q4. We had a volatile US dollar during the quarter, especially towards the shekel. EBIT then came in at 39 million SEK for the quarter, 16%. And for the full year, 144 or 16%. Organization wise, we were 14 more people in the organization going out of 2024 compared to going out of 2023. And you can see the splits between our different countries down to the right. Adjusted EBIT for the quarter came in at 45 million SEK, a margin of 18%. and for the year at 169 or 19%. FinanceNet for the quarter, slight positive. We have, of course, interest on our bank balances for this quarter. We also have the interest cost for the GBP loan that we took in conjunction with the IU acquisition. And on the negative side, we also had revaluation of internal loans for subsidiaries and IFRS 16 effect. There is a large number in the comparative figure. Last year, we had the last part of the contingent consideration for the Mimic acquisition. A smaller part was paid out in the beginning of last year, 1.1 million, but the rest was then reversed in the finance net. So that is why that number is so high. That was 70 million. And net result for the quarter was 36 million and for the full year, then 132. Cash flow, as Tom said, we had a very strong quarter in terms of cash flow, making up also for the weekly Q3 we had. From operating activities, we had a positive of 57 million, and we had a slight negative from changing working capital. And looking at the balance sheet in absolute numbers, we can see that inventory and accounts receivable they increased somewhat. However, this is all due to FX. In local currencies, they were actually both a bit lower going out of Q4 than going out of Q3. And then cash flow from investing activities, that's mainly investments in development costs. cash flow from financing activities then of course affected by the fact that we took this loan this short-term loan 17 million pounds sterling for the iu acquisition that was then a positive in the cash flow for with 235 million sec that meant that we had closing cash of 968 million however looking instead of on net cash excluding the loan, we were at 733, which was then a positive in the quarter of 66 million SEK. And we can see that accounts receivables as a percentage of sales last 12 months was on the same level as last quarter. So this is usually my last slide, but since we had a number of news events after the year end, I just wanted to summarize them here. In January 15, we announced the LOI with intuitive that Tom talked about. Then on February 3, the election committee gave their proposal for the AGM in May. And the proposal is for all board members to be re-elected. And for Gisli, our previous CEO, to be the chairman. Roland Bengtsson, who's been the chairman for many years, has declined re-election. On February 4th, then announcing the contract in Southeast Asia, 52 million SEK over a period of 18 months and then both development revenues and products. And then we had three different releases actually on the intelligent ultrasound acquisition, but the most important, of course, being the one yesterday, which announced that it has now come into force. and IU will be consolidated as of the state. We are now starting our post completion review that we also talked about when we announced the acquisition. Payments will be executed within 14 days from the state. And as you might have seen in the report, we had no costs in the P&L for this acquisition in 2024, that will be in Q1. And the costs are estimated at 25 million SEK.

Thank you, Anna. I would like to conclude this presentation by saying that we can look back at the positive and very eventful quarter during quarter four of last year. And the team and myself, we are excited and energized for the continued journey for surgical science. We are world-leading products, we have a highly engaged and global team, we have the stability and brand of a market leader, and we operate in a growing and rapidly developing market with prominent customers. We have great momentum in industry OEM. We also strengthened our relations with the key robotic companies during the quarter. In educational, business climate is improving, although at a slower pace than expected. And intelligent ultrasound is an exciting addition to the company and an opportunity to grow further within ultrasound simulation. And with that, I would like to open the floor for questions. Thank you.