Surgical Science Sweden AB (publ)

Welcome to Surgical Science Q2 Report 2025 presentation. During the Q&A session, participants can ask questions by pressing pound key 5 on their telephone keypad. During the Q&A, we kindly ask participants to limit themselves to two questions at first. If you have additional questions, please queue up again by pressing pound key 5. Now, I will hand over to the speakers, CEO Tom Englund and CFO Anna Ahlberg. Please go ahead.

Hi everyone and welcome to this Q2 presentation for Surgical Science. My name is Tom Englund, 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. Despite a strong Q1 and start of the year, we saw more negative financial development during the second quarter. primarily driven by a weaker macroeconomic climate in some of our key markets. Sales was 209 million SEC, or 2% decrease versus the same quarter last year. Sales grew by 4%, however, in local currencies. The quarter also saw a significant impact from currency effects, affecting the result negatively by around 24 million SEC. Despite the financial headwinds during the quarter, our company maintained a high execution pace and achieved several important milestones, many of which will have positive impact already in the next few quarters. I want to present the most important highlights and results of the business during the quarter. After a good start of the year for educational products with a 32% increase in sales in the first quarter, our second quarter was significantly weaker with a 12% contraction in sales, both for comparable units excluding intelligent ultrasound. A large part of the contraction came from the US due to continued pressure on procurement budgets. there is still an uncertainty around the funding levels for certain funding bodies which affect our sales. And this is something that we've also communicated in previous reports. The situation doesn't really cause us to lose opportunities in that the customers say they don't consider buying anymore or buy from competition, but rather the opportunities sit in the pipeline for longer periods of time before closing. This also has as effect that close rates of proposals are more lumpy in nature. And for quarter two, that had as effect that many orders came late in the quarter. Some of them were too late for us to be able to ship out to customers within time. And then they ended up in the backlog. Backlog therefore increased with 30 million sec in both education of products and industry versus previous quarter. These orders will be shipped during quarter three instead. One priority for us is to increase production readiness and efficiency to be able to ship out products faster to eliminate big backlog swings. And the impact from this work will be seen already in the coming quarters. China revenue developed negatively during the quarter, primarily driven by late orders ending up in backlog and by continued hesitation by many Chinese customers due to effect from the already mentioned anti-corruption campaign. Europe saw good development of 22% growth, and we see now continued positive sales development from Europe during the last quarters. The intelligent ultrasound integration proceeded according to plan, and we are realizing the expected cost synergies, but we are behind on the plan on the revenue synergies. Our first ultrasound products with content from both intelligent ultrasound and surgical science will be launched during the third quarter. several important initiatives were launched and or executed during the quarter to support our education of products business and to improve our performance we launched partner path our new sales concept for distributors who account for approximately 50 percent of sales in education of products the aim of this initiative is to provide even better support to our distributors cover the market more effectively and raise awareness of surgical science The program will also have increased sales efficiency and improved profitability as effect for us. Prices were adjusted during the quarter to offset the stronger Swedish krona, as well as tariffs on products to the US. Moving over to Industry OEM. Industry OEM had a much weaker quarter than expected, with sales being down 3% after many quarters of sales growth at around 20%. We consider this result an outlier and not a trend shift, and the result is attributable to a set of specific factors. In general, we see a favorable market demand for industry OEM across the world from both existing and new customers. Simulator sales in industry declined by 36%. We do consider this business to be more lumpy in nature as well, due to that order sizes are quite big and order timing can affect a certain quarter considerably up or down. We did build up a large order book during the quarter and had some large simulator orders late in the quarter that ended up as backlog. License revenues during the quarter was weaker than expected, and there were two specific reasons for this. One reason was that robotic surgery customers who have just started selling products from which surgical science earns a license revenue buy these licenses in packages. There may be, therefore, the timing effects between quarters depending on when these package orders are placed and the licenses are used. In this quarter, revenue from these new customers was unusually low, and this is due to that In many cases, the development times and regulatory approvals for our robotics customers have taken longer time than previously estimated. The other reason for the lower license revenue was attributed to a lower renewal rate in the simulation subscriptions from Intuitive on the older generation of robotic systems. Despite this generational shift, Our revenue from Intuitive increased in Q2 2025 compared to the same period in the previous year in US dollars. Market activity within the robotics surgery space was quite high with important announcement from both Medtronic with their Jugo system and J&J with the Ottawa robot. During the quarter, we also launched our latest product for educational and industry customers, the Robotics Express, which you can see on the picture to the right. This is an entry level platform that makes advanced surgical simulation available to users outside of the operating room. The development philosophy for the product is accessibility to more surgeons, flexibility in configuration and training scenarios, portability, and all at this at an attractive price point. Initial customer response has been very positive, and the system has been launched for sales during August. Development revenues were very high during the quarter and grew by 172%. This significant uptick was primarily driven by the delivery of products to a Ministry of Defense in a Southeast Asian country, an order which was signed at the beginning of the year. During the quarter, we also signed several other important development projects, which will start generating revenue in late 25 or 26. Development projects are of strategic importance since they are the first step from where we later can generate either license or simulated revenues. Looking at the gross margins during the quarter, we saw a decline to 65% versus 68% in quarter two, 24. The decline was due to weak sense of simulators and negative revenue mix with a lower share of license revenue and the inclusion of intelligent ultrasound into the PNL, which has a lower gross margin than surgical science. We're working on a number of initiatives aimed at increasing the gross margin, and we expect to see gradual improvements from this work in the quarters ahead. To conclude, The second quarter was a quarter that we are not happy with. We feel, however, that this result doesn't reflect our everyday reality where we see a very positive development in dialogues with our customers and the work we do for them, as well as the improvements made internally by our team. I'm very happy with the work that the team has been doing in the pace of execution to serve our customers better and improve and develop our company. We have taken important steps forward in our strategic review, and we will be able to finalize the work in the coming months. We also have a high tempo internally on several strategic projects. First, we execute on a long list of customer projects to provide solutions for our industry customers. We also have a roadmap for new and exciting products for educational products. And there then we also focus on the intelligent ultrasound integration, our partner path program aimed at disability efficiency, our robotics express launch and many, many more initiatives. All these initiatives aim at serving our customers better and will also impact our financial result in the short and long term positively. And with that, I would like to hand over to Anna.

Thank you, Tom. So starting with sales, as mentioned for the quarter, we had sales of 209 million SEC down 2%, where 22 million came from intelligent ultrasound or former intelligent ultrasound. I should say it has now been renamed Surgical Science UK, but I will use the abbreviation IU in this presentation. And all IU sales are attributable to the Edu products business area and to the ultrasound product group. As Tom mentioned, in local currencies, sales was up 4%. We have approximately 80% of our revenues in US dollars. And this is the first quarter in a very long time that we have had a negative effect from currencies on our overall sales. So going out of Q2, we then had an unusually high backlog or order stock. The difference between ingoing and outgoing order stock was approximately 30 million SEK. And this is relatively evenly distributed between the business areas and will, as mentioned before, be shipped now during Q3. Looking at the business areas, the split was 53% for EDU and 47% for INDU. EDU sales was flat or minus 20% excluding IU. Asia and then here specifically as we heard China was weaker compared to the same quarter last year. Sales in Europe continued to show strength. And the North and South America region also increased. However, this is also IU's largest market. And if we look at comparable numbers, sales decreased, and especially then in the US. As we said already in the Q1 report, then the outlook for the US market going forward is a bit uncertain. A lot of leads and discussions, but it remains to be seen at what pace the deals will be closed. And we now also have a higher and more permanent tariff rate. We are intending to put the effect for this on the customers, but the full effect still remains to be seen. Indu then down 3%, which is of course very disappointing. This is an area which has shown and should continue to show strong growth and i will come back to this a bit more on the next slide looking at the numbers for the first six months then this means that sales was 460 million sec this is an increase of 15 or 18 in local currencies And IU is included with just above 40 million, meaning that sales increased by 5% for comparable units. EDU for the first half year was up 23% or 2% excluding IU. And again, the EMEA region is the one that has shown the strongest development. INDU up 7% for the first six months and licensed revenues are up 10 percent and looking then at our revenue streams license revenues was 28 percent of total revenues for q2 compared to 32 last year as tom talked about and i will mention it again it's it's uh lumpy for new entrance where many of our customers are still in early phase and then they purchase their licenses and when it's used and for the quarter this part of the license sales was unusually low also for the quarter we then saw a decline when it comes to renewals of subscriptions for sim now with the older generations of intuitive surgical systems however despite this our revenue from intuitive increased in q2 compared to the same period last year in us dollars Simulator sales as a whole was down 8% compared to the same quarter last year, and this is then primarily due to Indu. Also here, we have said several times before that this is more lumpy than for sales within Edu since it's usually tied to larger projects where development is also involved. However, we do continue to view the segment very positively and have many exciting discussions ongoing within the area. Development revenues up a lot and this mentioned primarily due to the project we have for a Ministry of Defense in a Southeast Asian country, but not only. We still had good development revenues. The project that I mentioned is for 18 months and in total 52 million SEK. Approximately 1 million just below 1 million US was recognized for this quarter and we estimate that approximately 1 million US will also be recognized in Q3 on this project. Service revenues continue to be stable and growing with the installed base. Moving on to costs and EBIT margin for the quarter. Tom already talked about the gross margin being lower at 65% versus 68% last year. And several factors then influencing this. Licensed revenues have the highest margin. And these were as we saw them lower as a share of total sales, which affects the margin negatively. Then we also with the lower simulator sales have fixed costs that are spread over fewer simulators. US sales as we talked about was weaker and that is a direct market which means it has a higher gross margin for us. And then also the effect from the IU having a lower gross margin on those products. Regarding OPEX, as we reported in the first quarter, a smaller portion of the costs for that quarter were included in the consolidated numbers for IU. which was consolidated from February 18 and that means of course that for this quarter the full costs are included for the UK. Sales costs were 28% of sales. There has been a very high level of activity related to trade fairs and conferences in the quarter. Starting in the second quarter, then we also saw the effects from tariffs on our simulators that are distributed from production units outside of the US. And this was approximately 1 million SEC in the quarter. As I mentioned, we aim to pass on this cost to the price of the products as far as possible. But for this quarter, that did not occur because there is always a delay between quotations and then delivery and invoicing. Then this quarter's expenses also included an item of a more occasional nature amounting to approximately 2 million. which was attributable to commissions, to distributors. And these then vary depending on the country in which the sale takes place. Admin costs 11% of sales and R&D 25% of sales where we activated 10 million SEK for the quarter. And the costs on this line also vary depending on how much development revenue there is for the quarter since salaries for the portion of development department staff who have worked on projects that generate development revenue are transferred to cost of goods sold. And that means that more was transferred in this quarter since development revenues were high. When we acquired intelligent ultrasound, we said that we estimated rationalizations and cost savings to between one and a half and two million pounds on an annual basis. As of Q2 and on an annual basis, these cost savings have been implemented of approximately 1.8 million pounds in relation then to the cost structure that existed in IU at the time of the takeover. And this is mainly in the form of reduced costs related to the company's previous stock market listing and staff reductions mainly in respect of sales personnel. For this quarter Q2, cost savings of approximately 4 million SEK are included. And then other operating income and operating costs for this quarter that is then primarily attributable to the revaluation of operating assets and operating liabilities in foreign currencies. We had a negative impact on this of approximately 25 million, where the major factor was the weakening of the US dollar against the shekel. As you know, we have large values and a big part of our balance sheet is in foreign currencies. And the largest factor here is then the revaluation of intragroup items. We are taking measures to reduce these items to the largest extent possible. Following this, our operating result for the second quarter then amounted to a negative 22 million, corresponding to a negative EBIT margin of 11%. And included in this is IU with an operating result of a negative of 5 million sec. We were 327 people in the organization at the end of Q2. This is a decrease if we compare to Q1 when we had 336 people. With the IU acquisition, we added 48 people and then we have had a number of redundancies. We do continue to employ people above all software developers. However, we are also working intensely with the efficiency improving projects and of course employ with caution and big cost consciousness. And you can see the split between the sites there down to the right. Adjusted EBIT, we measured that as EBIT exclusive of amortizations on surplus values that are related to acquisitions. For the quarter, adjusted EBIT was a negative 8% compared to 15% last year. And for the first half year, then it was 3% compared to 18% last year. We did in Q1 have acquisition and restructuring costs. And adjusted for this, our adjusted EBIT was 40 million or a margin of 9%. Finance, net and taxes. We have no loan financing and the net financial items for this quarter then mainly consisted of interest income on bank deposits and also a revaluation of an intragroup loan, both positive items and then a small negative from the IFRS 16 effect. Tax expense minus one and the net result then minus 20 million SEK. Cash flow from operating activities was 16 million for the quarter compared to 30 million last year. We had some larger tax payments that we made in Sweden, but we then had good cash flow from working capital was a positive 20 million compared to a negative of 17 last year. Inventory increased, but accounts receivable decreased during the quarter. And this can also be seen from the gray line there in the chart, where we continue to be at a very good level with our accounts receivable as a percentage of rolling 12 months sales. Cashflow from investing and financing activities, nothing really to mention. there and cash at june 30th then ended at 610 million sec tom thank you anna to conclude then