Surgical Science Sweden AB (publ)

Welcome to this quarter one presentation for surgical science. My name is Tom Englund. I'm the CEO of surgical science. And with me today I have Anna Ahlberg, our company CFO. We will 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 first quarter for Surgical Science and a good start of 2025. This was an eventful quarter for us with strong growth and good underlying profitability. Sales increased to 251 million SEK up from 188 million last year with a growth of 30% in local currencies. During the quarter, we also reached an all-time high for our important license revenue, which grew more than 30% as the robotic surgery market continues to expand. I will now present the most important highlights and results of the business during the quarter. Starting with Intelligent Ultrasound, the company was welcomed into the surgical science family during the quarter. Intelligent ultrasound is a prominent player within ultrasound simulation, and the acquisition makes surgical science the world leader within this field, which is a market with big growth potential. The integration process has progressed well during the quarter, and it's gratifying to see that the synergies identified before the acquisitions are now actually becoming apparent in practice. We're working according to a plan to realize these synergies, which are primarily found in distribution channels, strengthened sales presence in direct markets, cross-selling of products, and in long-term product development. During the quarter, we also officially opened up our direct sales office in the UK. The acquisition and integration resulted in some one-off costs related to transaction and restructuring that negatively impacted profit in quarter one. These one-off costs were totally in line with our plan. We also see that the estimated and predicted cost reductions from ongoing operations will be realized in the coming quarters. Sales for Intelligent Altersound during the quarter was 23 million SEK, of which 18 million were included in our sales, which was lower than we expected. Although the Americas and APAC regions developed well for us, the UK market was weak to a challenging budget situation within the NHS, which distributes the funding for our type of equipment within the UK healthcare system. Moving over to educational products. The positive development of educational products continued and we saw a good increase in sales compared to the week quarter one of 2024 with 55% growth and 32% growth if excluding intelligent ultrasound. and this sales was at the same level as quarter four of 2024. We saw significant sales increases in the EMEA and Asia regions and good growth in the Americas region. At the same time, we have experienced continued pressure on purchasing budgets for customers in key markets, such as the US, where our quotes in a more challenging climate face tougher competition from other purchases that our customers must make. Our new sales organization was also established during the quarter, and we have already started to see positive results from this in terms of sales, customer satisfaction, and efficiency. During the beginning of the second quarter, we have experienced reduced demand from our customers in education products in the US, partly due to the above and partly due to the tariffs imposed between the US and other countries. Moving over to industry OEM. Industry OEM continued its strong development with a 17% increase in sales for the quarter. We expect continued positive development in the segment, driven by the important role and value of simulation for robotic surgery and med device companies. License revenues grew to an all-time high by 33% to 84 million SEC, and the market continued to develop at a very rapid pace. On January 15, It was announced that a letter of intent has been signed between the company's largest customer, Intuitive, and us. This means that Surgical Science moves to a fully subscription-based revenue model with Intuitive and that all DaVinci 5 systems will be equipped with simulation software from Surgical Science. And now all DaVinci 5 systems are equipped and shipped with simulation from Surgical Science. Simulator sales to med device companies, that is non-robotics, was 31 million sec, with customer demand remaining quite high. We estimate that this segment will continue to develop positively, driven by the fact that simulation is becoming a strategically important tool for our customers when they demonstrate their products for sales and training purposes, and that the rapid technical development within the segment benefits surgical science. Focusing a little bit more on robotics, just to give some more context. During the last nine months, nine robot companies have received sales approval for 13 different procedures. Intuitive received FDA approval for DaVinci 5 in the US and South Korea. J&J received IDE approval in November for clinical trials on human patients within its Ottawa. platform, and then a number of companies such as Medtronic, CMR, Surgical, Medicaroy, J&J, and Intuitive are also in the process of obtaining further regulatory approvals in the coming quarters. All of this is driving the manipulation and will positively impact Surgical Sciences' sales and license revenues. Another clear trend that we see is that medical device companies such as Medtronic and J&J are now being challenged by robot companies such as Intuitive in their highly profitable instrument business. It will therefore be strategically important for these major players to quickly grow their installed base of robots in order to not lose further market share in their instrument business. And the key factor in a successful rapid rollout will be simulation and training, which will have a positive impact on surgical science. Operating profit during the quarter was 24 million SEK or 10%. That was burdened by the above-mentioned one-off costs associated with the acquisition of Intelligent Ultrasound of 26 million. Adjusted for the one-off costs, the operating profit was 50 million or 20%. During the quarter, a strategic review was initiated, which will result in a further developed strategy by fall 2025. The main reason for the strategic review is due to that the company now sees many more growth opportunities than previously, and we want to have a solid strategy for how to capitalize on these growth opportunities in the best way. So that's a little bit about the quarter one highlights. I would like to now speak about our updated financial goals and first provide some background At the end of 2021, following the acquisition of Symbionics, Surgical Science built our strategic plan for the next five year period up to and including 2026. We set our target for Surgical Science to generate sales of 1.5 billion by 2026. And we also said that at the end of the period, adjusted EBIT should amount to 40%. And now we're almost halfway into 2025 and more than three years have passed since the formulation of the financial goals. And there have, of course, been some key developments that have had an impact on the financial performance versus the plan for the past three years. And that act as a rationale to why we now revise the targets. I will just go through them very quickly here. First, educational products. Educational products had a good average growth of 22% in 2021 to 2023. The end of 2023 and 2024 were negatively impacted by high inflation, which put pressure on the hospital market and the budgets used for the purchase of surgical sciences products. And this has led to a sales decrease by 15% in 2024, a lower average annual growth of 8%. We continue to have a positive view of educational products as a whole, although there is still inertia in certain market. And we believe that average growth target of 10% to 15% per year in the period after 2026 will be achieved. Regarding robotics, in industry OEM, the development has been positive in many ways during the period. The surgical science has secured several new customer customers and is today the dominant provider of medical simulation in this market. However, for some larger robotic companies, regulatory approvals have taken longer than expected, or initial development has progressed more slowly than estimated when the financial targets were developed. This affects Sotico Science's expected license revenues in the short term, but in the longer term, the company maintains a positive view of the development of the robotics market and the company's position within it. The effect of what is described above means that the license revenues are pushed forward in time. And thirdly, Sotico Science acquired Intelligent Ultrasound in the beginning of 2025, the addition of intelligent ultrasound which had revenues of just over 600 million sec in 2024 will contribute contribute positively to surgical sciences revenue but in the short term will affect the total margin negatively so if you look at these factors together surgical science remains very positive about the company's growth opportunities with good profitability going forward but at the same time feel it necessary to revise the financial target the sales target then as a result of the development primarily in the robotics segment together with the current global trade uncertainties where direct and indirect effects are very difficult to forecast we have together with the board of directors, revised our sales target from previously 1.5 billion SEC down to 1.4 billion SEC for end of 2026. And looking at the margins, The result of primarily lower license revenues in relation to total revenues and increased investments in areas that also include hardware means that the target for adjusted EBIT for 2026 has been revised to between 25 and 30% down from previously stated 40%. As I mentioned previously, surgical science is now conducting a strategic review to capture and realize all the growth opportunities that we now see in the market going forward. And we also plan to return in late autumn with the new strategy and with new financial targets for the period after 2026. That concludes my presentation and I would like to hand over to Anna.

Thank you, Tom. So the headline for the report is strong growth despite macroeconomic uncertainties. And for the quarter, we had sales of 251 million, up 33%, whereas Tom mentioned 18 million came from intelligent ultrasound after the acquisition date on February 18th. For the quarter as a whole, IU sales was 23 million. All sales are in educational products business area and the ultrasound product group. In local currencies, sales was up 30%. We have approximately 80% of our revenues in US dollars. And even though the SEC appreciated a lot during the quarter, it is still the case that the average rate was higher than in Q1 2024. It was 10.7 versus 10.4. However, as we will see in the cash flow and on the balance sheet, the US dollar at balance sheet date was a whole crown lower than on December 31st, 10 versus 11, which caused very large revaluation effects. Starting this quarter, we have a new table in the report, note two, showing sales also divided by product group, regardless of from which business area they originate. And there you can see, for example, that our ultrasound sales was up from 24 to 38 million for the quarter, making up 15% of our total revenues. And for 2024 as a whole, ultrasound more than doubled with the acquisition of IU to a bit over 200 million or 20% of sales. Again, IU was only in our revenues for part of the quarter, part of Q1, after February 18th. But it is still so, and as Tom also mentioned, that sales was slow for the first quarter, primarily attributable to the UK market and NHS. The split between the business areas was 49% for Edu and 51% for Indu. Edu was up then 55% or 32% excluding IU. Q1 last year was weak and so we saw growth in all regions but specifically in Europe where many countries did well. The outlook then for the US market going forward is a bit uncertain with a lot of leads and discussions taking place, but it remains to be seen at what pace these deals will be closed. Indu was up 17% and as Tom talked about, we saw all time high regarding license revenues. And if we then move over to our revenue streams, license revenues was 33% of total revenues. As mentioned many times before, this is slumpy for new entrants, where many of our customers are still in early phase. But also, as we heard Tom talk about, there are a lot of exciting things now happening on the market, new approvals, etc. Simulator sales as a whole was up 47% compared to Q1 last year. This is then all due to Edu. Indoor was down a bit, but we continue to view the segment very positively. And development revenues up a bit while service revenue at a stable level. For the quarter, there is no revenue from the order that we got in February to supply Trauma VR products and services to a Ministry of Defense in Southeast Asia. This project is for 18 months and 52 million. And we estimate approximately 0.7 million US to be recognized on this order in Q2. Moving from revenues to costs and EBIT margin for the quarter. Our gross margin was 69% versus 6% in Q1 2024. License revenues were slightly lower as a share of total sales. However, as we know, Salesforce in particular simulator was very weak in Q1 last year. And so it was still a good share for all of 2024. It was 31%. We also saw that we had good average sales prices in comparison to last year, this quarter, while the consolidation of IU had a negative effect on the gross margin by just below two percentage points. sales costs 21% of sales that included most of the restructuring costs for IU they were in total 3.9 million and 3.8 were in sales costs and that's then primarily attributable to redundancies of sales personnel Also, Q1 is always very busy. Our largest congress of the year, IMSH, is taking place in the US in January each year. And we also always host our distributor meeting in this quarter. When we acquired IU, we said that we estimated rationalizations and savings of between 1.5 and 2 million pounds. We have now on an annual basis reached approximately 1.5 million pounds. These savings did not have any effect on Q1, but we estimate that they will to a quite large extent come into effect in Q2. Administration costs, they were high due to the fact that we had all the acquisition costs in surgical science during this quarter. That was approximately 23 million, quite a lot. And a large part of it was for legal advice related to the process of acquiring a listed company in the UK through a court process, which was the procedure used. And this amount was also something we have already announced in the Q4 report. Excluding these costs, we were at 8% of sales. And R&D was at 22% of sales and we activated 10 million SEK. Other items, they include our options programs and FX effects. For this quarter, they also include income and costs in IU regarding a replacement program of older products. And so all in all, our EBIT margin was at 20% if we exclude acquisition and restructuring costs. For IU, less costs than revenues were consolidated if we take them as a portion of the respective item for the whole quarter. Excluding their acquisition costs which were approximately 16 million and the restructuring cost I talked about earlier, they had a quarterly loss of 12 million and we consolidated a loss of 3 million SEK in Q1. And before leaving the slide, I just want to comment on the impact of US tariffs as well. For 2024, our sales of simulators to the US, if we include IU sale of simulators, they were approximately 250 million SEK. And with a 10% tariff as it is today, we estimate the extra cost being around 10 million per year. The ambition is to reflect this in the price of the products as much as possible and we do consider the possibility of doing so to be good. For the remaining part of the business there are indirect effects that are currently difficult to predict. Organization number of employees at the end of the period was 336 people. And with the IU acquisition, we added 48 people in the UK and in the US. And then we have had redundancies of six people. We continue to employ. above all software developers. You can see the split between our sites down to the right. Adjusted EBIT, the key ratio that we think best shows how the business is doing. That was 23% for the quarter, then excluding acquisition and restructuring costs. We measured this as EBIT, exclusive of amortizations and surplus values related to acquisitions. And as you heard Tom talk about earlier, we now said that we estimate this to be 25 to 30% for 2026. FinanceNet in Texas. FinanceNet was 22 million for the quarter. We had, of course, interest income on our bank balances. We also had a positive effect from our GBP hedge. And for this quarter, we also had interest costs related to the short-term loan of 17 million pounds that we took out in conjunction with the IU acquisition. This loan has been repaid during Q1. Tax expense was 13 million and net result 33 million. Cashflow from operating activities was a minus 5 million for the quarter. We paid the majority of the acquisition costs during the quarter. And we also had large tax payments that were made in both Sweden and Israel. And then we had a negative of 34 million from changes in working capital where both inventories and accounts receivable have increased during the quarter while other current liabilities have decreased. These items are heavily influenced by changes in exchange rates and then above all the US dollar as discussed before. mainly due to the revaluation of internal receivables and liabilities. If we look at unchanged currencies, both accounts receivable and inventory have increased only very marginally. And when we look at accounts receivable as a percentage of rolling 12 month sales, which is the gray line in the graph, we see that this continues to be at a good level. Cash flow from investing activities, they will mainly have the effect of the IU acquisition during the quarter. And cash flow from financing activities, they will mainly have the effect from this repayment of the short-term loan that I mentioned before, 17 million pounds. And cash at the end of the quarter, March 31st was 613 million SEK. And with that, we conclude our presentation and open up for questions.

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