Elekta AB (publ)

STO:EKTA B

Earnings Call Analysis

Earnings Call Transcript 2025-Q1

[Peter Nyquist, executive]

Hi, and good morning, everyone. My name is Peter Nyquist, Head of Investor Relations here at Elekta. With me here in Stockholm, I have Gustaf Salford, Elekta's President and CEO; and our CFO, Tobias Hagglov, who is presenting the results. Today's agenda starts off with Gustaf, who will present the highlights from the development during the first quarter of the fiscal year '24/'25 as well as strategic achievements during the quarter. Then Tobias will, in more detail, go through the details of the financials in the presentation. And then we will end with Gustaf giving us the outlook. And after the presentation, there will, as always, be time for questions.

Before I start, I want to remind you that some of the information discussed on this call contains forward-looking statements. This can include projections regarding revenue, operating results, cash flow as well as products and product development. These statements involve risks and uncertainties that may cause actual results to differ materially from those set forth in the statements. With that said, I would like to hand over to our CEO, Gustaf.

[Gustaf Salford, executive]

Thank you, Peter, and thank you all for attending our call. I will now focus on the key takeaways for the first quarter of fiscal year '24/'25. So you can see here that net sales increased by 1% in constant currencies. A main driver was strong installations in the U.S. Gross margins came in at 37.8%, a decline year-over-year related to inflation and reduced impact from inventory valuation. However, the gross margin improved sequentially, supported by an improved service margin in the quarter. The adjusted EBIT margin declined year-over-year, mainly impacted by the gross margin development and we have initiated cost reduction activities to manage the OpEx levels. Tobias will go through this later in his presentation.

The book-to-bill ratio improved to 1.10 from last year's 1.0, and the 12-month rolling figure for a book-to-bill ratio is well above 1, a solid foundation for future sales growth. At the end of the quarter, we announced a major customer win from the largest private health care provider in Mexico, Hospital Angeles Health System, amounting to $64 million. And if we move to the next slide, I'll give you some more details on the sales and market development during the quarter. So you can see that group sales amounted to SEK 3.8 billion in Q1, almost equally distributed between our 3 regions. And based again on constant exchange rates, we delivered a strong 16% growth in Americas, driven by both North and South America. It's really encouraging to see that installations in the U.S. are showing strong development and also that Canada and Mexico were also showing growth sales in Q1.

The APAC region increased sales by 3% despite continued negative impact from anticorruption campaign in China. But if you exclude China, the region grew by 29% with India and Korea as the main drivers. In the region of Europe, Middle East and Africa, sales declined by 12% compared to last year when the region grew by 15%, driven by large installations in Spain and Italy. Most markets in the Middle East and Africa showed growth. And if we then look at the key components of our ACCESS 2025 strategy, I want to highlight some strategic achievements during the quarter. An important strategic win for us that I mentioned before was, of course, the major order from the largest private health care provider in Mexico, Hospital Angeles Health System, including radiotherapy solutions, software and Elekta Esprit, the Leksell Gamma Knife. The total value of the order was $64 million with installations expected to start in December 2024.

In the area of driving partner integration across the cancer care ecosystem, we today announced that we have entered into a joint venture with AnSheng, our Chinese software partner. This strategic investment aims to ensure Elekta's market-leading positions in China and accelerating the adoption of radiation therapy in the country. This is truly sign of our commitment to deliver state-of-the-art radiotherapy solutions in China, and we continue to take actions even further to strengthen our market position. In the area of drive adoption across the globe, we received a Unity with a university hospital in Lund, in Sweden. And the expansion of the MR-Linac technology is important as the system will be dedicating to pushing the boundaries of treating cancer. And of course, for me, personally, I'm really proud to deliver the most advanced radiation therapy solution to the town where I grew up.

Since we launched ACCESS 2025, we have been accelerating innovation. And recently, we launched our new CT linac Elekta Evo and treatment planning software, Elekta ONE Planning. And today, we have the leading and most comprehensive portfolio in the industry with our MR-Linac Unity, Brachy Studio. And in the middle, you see Elekta Evo and then, of course, we also have Elekta Harmony. And then you have the Elekta ONE software suite and of course, the Leksell Gamma Knife Esprit. And looking across this portfolio, we can now proudly say that we enable online adaptive treatments in all of our product lines: Neuro, Brachy, Linac and Software Solutions, where our Unity has unique MR imaging and comprehensive motion management technology the Elekta Evo now complements our Linac portfolio with a high versatility in terms of personalization and productivity. We will leverage our leading product portfolio to drive profitable growth going forward.

And then if we take a closer look at Elekta Evo, it comes fully ready for online adaptive treatments or can easily be upgraded over time if that is the customer's preference. It has best-in-class image quality due to the AI-enhanced Iris technology, and it also leverages our new treatment planning system, Elekta ONE Planning powered by MIM. This new software offers AI-driven auto contouring, faster dose calculation and planning, and it's also vendor agnostic to ensure it supports not only Elekta devices but also other products in the market. Elekta Evo has been well received among customers relating to the clinical needs and elevating personalized care as well as increased productivity. We are expecting CE and FDA submissions in the second quarter, and we look forward to delivering the new solutions to our customers in the coming quarters. And with that, over to financials and Tobias.

[Tobias Hagglov, executive]

Thank you, Gustaf, and good morning, everyone. So let's then start by looking into the Q1 results in more detail. During the first quarter, we delivered net sales growth of 1% in constant exchange rates. We continue to increase our service business with a 5% growth year-over-year. Solutions sales declined by 3%, driven by Europe and China. Adjusted gross margin amounted to 37.8%. The decline versus last year is coming from inflationary pressure from material and salaries, changes in foreign exchange rates and reduced impact from inventory valuation. Sequentially, the adjusted gross margin increased by 120 basis points, supported by an improved service margin. The adjusted EBIT margin declined to 7.4%, mainly driven by the lower gross margin. Increased operating expenses was mainly driven by higher administrative costs and higher amortization following the recent product launches. Net income amounted to SEK 71 million and earnings per share to SEK 0.18. In the quarter, we continued to drive cost reduction initiatives with the aim to lower structural costs and enhance productivity across the organization. The target is to generate annual savings by around SEK 250 million at the end of the fiscal year '24/'25 at an estimated implantation cost of SEK 250 million.

In Q1, annual run rate savings of SEK 70 million were achieved with a limited financial impact on Q1. The implementation costs amounted to SEK 109 million and are reporting as items affecting comparability. In the seasonally weak first quarter, cash flow after continuous investments amounted to SEK 891 million negative, similar to last year. Working capital as a percentage of sales improved to minus 5% compared to minus 4% last year. Taxes paid was lower than last year due to an R&D expenditure credit in the U.K. In the first quarter, we have continued to make R&D investments in new product solutions and software amounting to SEK 336 million and intangible assets of SEK 61 million. The rolling 12 months cash flow from operating activities amounted to SEK 2.5 billion, which is an increase of SEK 900 million year-over-year. Cash conversion amounted to 83%, well above our target of 70%.

Now over to our book-to-bill reporting. I will start with explaining the development during the quarter, and then I will give you the background of why we are changing our order reporting going forward. Looking at Q1, you previously heard Gustaf, the book-to-bill ratio improved to 1.10. As Gustaf previously mentioned, we received a large order for a value of approximately USD 64 million. Installations will begin during the third quarter of '24/'25 with the last system expected to be installed during the first quarter of '27/'28. Approximately USD 38 million has been booked in Q1, and the first deliveries are expected in December 2024. Let me then explain the background of why we are changing our order reporting.

The regional order reporting is challenging to use for forecasting future sales as many larger deals leading to volatility in quarterly order growth are not tied to the sales growth in a specific quarter. They are rather distributed over a longer time horizon. The time line from orders to revenue depends on various factors such as the size of the customer, region and whether it's hardware, service or software. The book-to-bill ratio is the most relevant indicator for sales growth. A consistent strong book-to-bill ratio over an extended period serves a solid foundation for future growth, where Elekta has been able to deliver a book-to-bill ratio of more than 1 for a long period of time.

The book-to-bill ratio is also in line with industry practice. When we have looked at industry peers as well as other listed companies, if reporting orders, book-to-bill ratio is clearly the most used metrics. When we then look ahead, we will move focus more towards the actual market sales and profitability development in the quarter supporting our ambition to reach our targets. When reporting the group total book-to-bill ratio, we will include both solutions and service. And lastly, we will continue to report total gross order intake as it's an important part of explaining the book-to-bill development. With that, I hand over to you, Gustaf.

[Gustaf Salford, executive]

Thank you, Tobias. And I would now like to focus on our outlook for the first half as well as for the full year of '24/'25. And as previously communicated, we expect the first half of '24/'25 to be weaker compared to last year. And then during the second half of the year, we expect sales and profitability to pick up from new product launches as well as productivity measures. Net sales for Elekta are expected to grow by mid-single digits for the full year of '24/'25 with an improved EBIT margin. Elekta is experiencing a strong customer interest in our industry-leading offering and a long-term underlying demand for world-leading cancer care solutions. And beyond '24/'25, we will drive for an EBIT margin expansion to 14% and higher. So if we then summarize the first quarter '24/'25 for Elekta. We grew net sales by 1% in constant exchange rates. We delivered a sequential improvement in adjusted gross margin of 120 basis points. We won a major customer win in Mexico, and we have initiated further actions to improve profitability, price increases, product launches and efficiency measures. Thank you.

[Peter Nyquist, executive]

Thank you, Gustaf, and thank you, Tobias. Before going back to the Q&A, or hand over to Gustaf and Tobias, I just want to highlight the financial calendar. And there is no major change here. Maybe just to highlight the event next week, which is the AGM on Thursday, September 5. So that's the next event we have at Elekta. So with that, operator, we are now open for the questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Kristofer Liljeberg with Carnegie.

[Kristofer Liljeberg-Svensson, analyst]

Two questions. First on the service margin. Was that back now to a more normal level after the weakness in Q4? And how much of the sequential improvement does that explain? Second question related to China. If you could comment on the order situation, specifically in China now. And based on that and orders last year, how you foresee sales in China coming quarters? More specifically, should we expect another big decline in the second quarter before the year-over-year comparison becomes easier from the third quarter?

[Gustaf Salford, executive]

Thank you, Kristofer. I think Tobias will take the first question, and I will put the flavor on China.

[Tobias Hagglov, executive]

Yes, Kristofer, good to hear your voice again. So to your point here, yes, it's more back to a normalized level, and it's actually a quite significant part of the sequential improvement that we see sequentially.

[Kristofer Liljeberg-Svensson, analyst]

And on that, before China, what's your confidence that the weak service margin was -- in Q4 was a temporary thing that we shouldn't see again in the near future at least?

[Tobias Hagglov, executive]

I think that the work that we do and of course, there is, as you know, between the quarters, you have how much solution and service we're selling in different quarters. But what we see was an improvement result of the good work and where we see that it should go back to normalized levels. And as you know, we strive here for drive the profitable growth, and that is across the P&L. And this is one of the part which is important for us to run this with a high level of efficiency.

[Gustaf Salford, executive]

Yes. And I can just reiterate that how important the service business is for Elekta, and we will continue to focus on that going forward, both for growth to our installed base, the upgrade business, we now will get with the new product launches we do, and also efficiency and productivity measures around the world. So service will continue and grow in importance for Elekta going forward. If we then take the very important China topic, China is select as second biggest market. It's a market we have a strong position, where we have localized a lot. We know the production, the software development and now the joint venture with AnSheng, and we also have a joint venture with Sinopharm. So we have a very strong position in China. And what's -- what we see right now and what's happening is that it still impacts from the anticorruption campaign that we have seen now for, yes, 1 year, almost exactly, I would say.

And if you then look ahead, we have lots of customers dialogues and discussions about orders, but also installation going forward. So we have seen a gradual or less impact in this quarter compared to the 2 previous quarters from the anticorruption campaigns, et cetera. And we see the market is starting to come back. We don't foresee it to come back fully in the next quarter. But going forward, in the third and fourth quarter, we expect that, that all that pent-up demand together with the big stimulus packages to drive growth. But the truth comes really from the big demand that we see in China for continued investments in radiation oncology and linear accelerators and Gamma knives and brachytherapy. So we are optimistic for the full year on China, but we foresee the next quarter will continue to be impacted, but less so than this quarter.

[Kristofer Liljeberg-Svensson, analyst]

And when you say next quarter impacted, is that orders or sales?

[Gustaf Salford, executive]

I would say both for next quarter. We are not fully back to kind of pre the campaign levels, but we foresee that to happen in the third and fourth quarter. But what I see in the market and in my dialogues with customers and our team there is that the wheels are turning, and we start to get back to normal activity, so to say. And that should then be translated into orders and of course, revenue in the coming quarters here, some in Q2, but mainly in Q3 and Q4.

[Kristofer Liljeberg-Svensson, analyst]

But if you look at orders year-over-year, I think second quarter last year was the first quarter when you saw that large drop. Would you expect orders in China to be higher organically this second quarter versus second quarter last year?

[Gustaf Salford, executive]

I don't know. We don't guide kind of specifically on Q2 orders in China. But I expect much more activity that can be translated into orders, but we need to go through the quarter to see. But what I can say is that activity has significantly increased, and we will translate that to orders going forward as well. But exactly what the number will be, we'll see that after next quarter.

[Kristofer Liljeberg-Svensson, analyst]

And just the last one on China. Do you think it's possible for you to grow sales organically in China this year, year-over-year?

[Gustaf Salford, executive]

We'll see what the next quarters will show us. But I mean we have a backlog. We have a strong operations. We have good opportunity for growth in China. So I think that's what we see. But don't expect it so much in Q2 rather in Q3 and Q4. And then we'll need to come back after year-end on exactly what number that translates to.

[Peter Nyquist, executive]

Thank you, Kristofer. We'll move to the next one, please, operator?

[Operator]

The next question comes from the line of Mattias Vadsten, SEB.

[Mattias Vadsten, analyst]

Maybe first, if you could talk a little bit more about orders for Q2 based on sort of tender passed. And also we're interested to see what you've seen so far, maybe outside China, I think you covered that. Are we looking for growth year-over-year? Or is that a bit tough given the India order that you had has help last year? That's the first one.

[Gustaf Salford, executive]

Yes. So I think orders last year, we had a large India order, as you mentioned. We had growth in the second quarter on orders. So we'll see exactly where we come in. We have a good activity, but where we expect most of the orders is to come from the new product launches. So some of that will be later in the quarter and primarily into Q3 and Q4, if you think about Evo and Elekta ONE, et cetera and so on. So that is a bit further out. So we don't guide specifically on order growth in a specific quarter. But we have -- there's lots of larger deals going on around all the regions, so we just need to translate that into won orders as well. But we'll drive for growth for the full year, especially, but I don't comment on a specific quarter.

[Mattias Vadsten, analyst]

And then I think you had a quite abrupt increase in solutions sales in Americas, as you mentioned, much higher than any I can see for Q1 historically. Could you maybe talk a little bit about where you installed more this quarter? And if this is a timing effect? Or should we expect this good momentum to sort of continue also going forward? That's my second question.

[Gustaf Salford, executive]

Great question. So we got some installations in U.S. that came in -- we worked hard, but they came in a bit earlier. We expected some of them to come in, in Q2. They came in into Q1. So that's great, both on the MR linac side and the CT linac side. So that grew the U.S. net sales, as we can see here. So it's a strong development. That will then have a bit of a negative effect on the next quarter because that's when we expected them. But we will continue to drive for strong installations of all our product portfolio in the U.S. in the coming quarters here as well. And what we -- the feedback we've got is the new product launches is well suited for the U.S. market, and we have the very important ASTRO conference in the end of September, early October, in Washington this year, where we also look forward to bring new product launches to discuss with customers to drive both order and revenue growth in the second half of the year.

[Peter Nyquist, executive]

Yes. Thanks, Mattias. And thanks, Gustaf. We'll move to the next question, please?

[Operator]

The next question comes from the line of Richard Felton, Goldman Sachs.

[Richard Felton, analyst]

I'll just do 2, please. So the first one is on pricing. You alluded to pricing having a positive impact in Q1 with more to come. So my question is, how should we think about the magnitude of that impact through the course of the year? That's the first question. The second question is maybe a slightly more kind of medium-term question. But in opening your press release today, the headline is further actions to improve profitability. So my question is as you take those actions, as inflationary pressures come down a bit, pricing is coming through. As all of that happens and you get better visibility on the margin trajectory, would you be willing to give us a slightly more specific timeline for the 14% margin target?

[Gustaf Salford, executive]

Thank you, Richard. I will kick off with price and Tobias will continue with the profitability and outlook question. So price, we've been working hard with price for the last quarters. As you know, inflation kicked in. We have been working a lot with price increases, both on existing and new products. We first see that in the increase on the order side. And now in Q4, we start to see price increases coming to the P&L as well as now in Q1. It's low single digits. But the key thing is that the momentum is there and we start to see the order backlog increases coming into the P&L. We expect that to continue in Q2 and Q3 and Q4 as well. And it is a very, very important part of our margin improvement both, in gross and EBIT levels. But in addition to that, we work a lot on productivity measures on the gross margin, but also between gross margin and EBIT because it's absolutely vital for Elekta to come back to pre-COVID profitability levels. And that's why we also set the 14% and above level going forward. And maybe you want to share some perspectives on that as well, Tobias?

[Tobias Hagglov, executive]

Yes, absolutely, Richard, and thanks for the question. No, but I can just echo the comments. I mean, when you look at this and combine the great support that we see from the recent product launches, the price increases starts to be visible in the P&L and also the productivity actions that we are taking on. That just confirms to us to -- on the path to actually reach the targets, and that is to reach an EBIT margin of 14% or higher. So -- and I think all these metrics just confirm that path to the target. We have not provided a specific timeline, but we are confident to reach those levels.

[Peter Nyquist, executive]

Thanks, Richard. We'll move to the next question.

[Operator]

The next question comes from the line of Veronika Dubajova with Citi.

[Veronika Dubajova, analyst]

I have 3, please, if that's okay. The first one is just, I appreciate you've changed the order reporting structure, and I'm going to ask you a question that you don't want to answer, but I'm going to ask it anyhow. If I kind of look at the order growth struck out Mexico, I think you would have been about 0% order growth year-on-year. Can you just give us a little bit of flavor within that which regions were growing and which regions were not? And I guess, specifically, I think last quarter, you were talking about a subdued U.S. environment, whether that is something that has still continued on the order front specifically? Or have you seen some easing there? So that would be my first question. My second question is just on the R&D capitalization rate in the quarter and if there are any one-offs in there that explain the sort of increase? And just a reminder, maybe for all of us on the line for how we should be thinking about the capitalization and the amortization for the full year. And then my big picture question, which is sort of a final question. Obviously, it's a little bit of a follow-on to Richard's. Lots of moving parts on the profitability. You've taken a lot of cost out of the business. Once you are done with the restructuring that you've completed this year, do you still see more room for cost to come out? Or do you think that by the time we exit this year, the sort of path from here to the 14% will be dependent a lot more on the top line than on cost activity? If you can just talk through how you think about that.

[Gustaf Salford, executive]

Thank you, Veronika. I think we have order growth. We have R&D capitalization and we have costs kind of development going forward, if I got your 3 questions. So I will start with the market situation on the order side. And R&D, I think Tobias will take, and we'll come back both of us maybe on the cost side and productivity side that's so important for us. If you take the order and the book-to-bill ratio, we came in at 1.1, as we mentioned. We believe that's a strong indicator for future sales growth. So -- and then if you look at the market dynamics, and we're happy to talk about the market dynamics, of course. And you mentioned Americas and if you take out, let me say, Mexico, you mentioned we would have been flat. But I think, overall, for that market, we saw a good development in the U.S. as well, and especially, we'll highlight maybe Europe, that we saw good dynamics and deals coming in on the European market as well. And then, of course, we look forward to China kicking in when they are out from the anticorruption campaign. That's another dynamic. And then we have a strong market situation in India, if I highlight one market with a lot of activities and a lot of investments in health care on the private side, maybe specialty and oncology and radiotherapy. And then you had a question on the U.S. subdued market situation. I think now the ASTRO conference is very important for us. We believe there is a need for investments in newer linacs, both on the MR-linac side, but also with the latest Gamma Knife Esprit, where we're very successful in the U.S. market, brachytherapy, where we have the #1 situation. So I think for Elekta, it's more about creating those opportunities, those deals that would drive our book-to-bill ratio going forward. So we continue to focus on the U.S. market to drive that growth across all the different product categories we have. So that's a bit what we see in the market side as of now in terms of deals and activities. And if we take the R&D question, Tobias, R&D cap.

[Tobias Hagglov, executive]

Yes, the R&D question. It's -- so what you will see throughout this year is that, I mean, if we talk about the total R&D spend, that will actually go down gradually, it will be quite stable, but a slight decline over the quarters. In terms of the capitalization rate, it will stay fairly stable. It will be slightly higher here in the second quarter. But otherwise, it follows pretty much the gross R&D development here. So that is what I can say about the -- and that really follows the project phases of the innovation pipeline that we're on here. So yes, that follows that pattern, clearly.

[Gustaf Salford, executive]

Yes. And on the cost side, where we'll see the leverage going forward after this year? I think as you mentioned, we now drive productivity initiatives, cost savings initiatives across the company to get back to better margin levels. We'll focus a lot on that during this year. But I think you're right in your comment, Veronika, that going forward, most of the leverage on the EBIT margin and gross margin side will come from improved gross margins from new product launches and price increases. We'll always work on cost. We'll always work on productivity. But from H2 and onwards, the leverage will primarily come on the gross margin side. That's the plan.

[Veronika Dubajova, analyst]

And Gustaf, would you also say sort of as you think about the past from whatever margin we end up this year to the 14%, that's going to be mostly gross margin-driven or OpEx driven?

[Gustaf Salford, executive]

Gross margin driven.

[Peter Nyquist, executive]

Thanks, Veronika. We'll move to the next question please, operator.

[Operator]

So the next question comes from the line of Julien Dormois, Jefferies.

[Julien Dormois, analyst]

So I have 2 really. One is very much focused on the short-term trend, and I know you guys don't want to comment on a specific quarter, but given the developments we saw in the first quarter with slight sales growth, but margin is still under pretty heavy pressure. Should we expect pretty much the same dynamics to stand in the second quarter before getting much better in the second half? So that would help us obviously model a little bit more precisely what we should expect on a sequential basis. And the second question is coming back on China. You have mentioned that you would probably expect the stimulus program to help at some point. I suspect you probably do not have more information at this stage unless I'm wrong, but when could we expect or when do you guys expect to hear more from the ground on what we could expect on this side?

[Gustaf Salford, executive]

Yes, I -- let's break it. So Tobias, if you take the short-term Q2 question, and I'll take the China question.

[Tobias Hagglov, executive]

Absolutely. Thanks for the question, Julien. To your question, the answer is yes. We expect the first half year to be weak with both in terms of sales and also profitability. And then rightly, what you just mentioned here that we then see the pickup as also previously stated and communicated throughout the second half, supported by the action and initiatives that we just were talking about.

[Gustaf Salford, executive]

Yes. So we've had a good start of the first quarter, but we don't change the outlook for the first half or not the second half, either. And then coming back to China, it's -- the stimulus program have not had major impacts yet because of the anticorruption campaign that is ongoing. But we expect it to have impact going forward. And lessons learned from the history. When this happened once before, what is it 1.5 years ago, I think that had a big impact also on orders in China and then installations, when you get these kind of stimulus packages and low interest loans to do replacements of the installed base of linear accelerators. So expected to have an impact going forward. But we will drive our activities. I think that's the key thing. It's in our hands to drive the orders. It's in our hands to drive the installations and new product launches, et cetera, in China. And then I think we more see the stimulus program, that's something that could support and further fuel that. But we see it is in our own hands to create the order and revenue growth in China in the coming quarters here.

[Peter Nyquist, executive]

Thanks to Julien. And then we'll move to the next question, please, operator.

[Operator]

The next question comes from the line of Lisa Clive, Bernstein.

[Lisa Clive, analyst]

I just wanted to ask about some of the market dynamics in the U.S. specifically around ViewRay's bankruptcy a while back, what sort of interest you're having in Unity. Also, just are you seeing any commercial activity from ViewRay? Or are they completely out of the market at this point?

[Gustaf Salford, executive]

Thank you, Lisa. So on the MR linac segment and Unity, I think over the last year, it's been kind of dramatic events for ViewRay, our former competitor. I think they still have some operations. Part of it was acquired, and they continue to maintain a bit of the installed base. Some of the installed bases is not up and running. I mean then for Elekta, we are driving the Unity consortia, all activities, sales activities on ASTRO. So we see a very good funnel in the U.S. and globally for Unity because of all the clinical outcome that has been coming at and we've also seen great results. We've seen hyper-fractionations down to 2 fractions for prostate, for example. So the trend is continuing that MR and RT and MR adaptive linacs is the way to go going forward as well. So we don't see much of ViewRay at the moment, if that's a specific question. And we are driving Unity growth going forward and installations.

[Lisa Clive, analyst]

And I suppose, in the question they are servicing, it sounds like some of their installed base, but not all of it in the areas where they are no longer servicing machines. Are you able to or have you sold any Unity linacs into those facilities? Or do you expect to in the coming quarters?

[Gustaf Salford, executive]

Yes, as mentioned before, in the last year, we sold into those situations. I agree to that. And we continue to do so. And because many of the users are devoted MR Linac users and really believe in the technology, and want to continue with that technology going forward as well. And then Elekta Unity is the best option going forward. So we have those. We have won those deals. We communicated a couple of them last year, and we'll continue to drive for that growth for Elekta Unity.

[Peter Nyquist, executive]

So we'll move to the next question, please, operator?

[Operator]

[Operator Instructions] And the next question comes from the line of Sten Gustafsson, ABG Sundal Collier.

[Sten Gustafsson, analyst]

The first one is a bit of a clarification in the CEO Letter and also during the call, you have talked about price increases. Have you increased your prices again recently? Or are we talking about the one you implemented about 1 year ago?

[Gustaf Salford, executive]

Yes. Okay, I'll start with that question. So how we work with it, we increased the prices in all our systems, our quoting systems and so on. And that we often do during quarter, during a month, et cetera. And then throughout, when you quote, you win the deal, that deal will be won at a higher price level compared to, say, previous years. Then we install that deal maybe 12 months after, but we continue all the time to evaluate, I mean, the impact from inflation on our inputs and material costs. And then we reflect that in a yearly or quarterly process in our quoting tools, and then that goes out to quotes, to higher prices, to installations, to better margins. So that's how we do it. So it's not a one-off exercise. It's something we work with all the time.

[Sten Gustafsson, analyst]

Okay. And you have continued to raise prices recently then, I guess. And how much of the current backlog reflects sort of the new price level as of end of last year or 1 year ago, would you say? Is it half the backlog or 1/3 of it or...?

[Gustaf Salford, executive]

I don't have a specific number, but something in between those numbers would be my assessment right now. So you will see that coming out. Those deals will come out during next year and the year after, the majority of those deals, I would say. And that's why we're so pleased to see, Sten, both in Q4 and in Q1 that, that is kicking in also in the P&L, both on the solution and service side because that's absolutely crucial for gross margin improvement because inflation has impacted our materials, our salary levels, et cetera. And now we see a path to offset that effect by higher prices also coming into the P&L.

[Sten Gustafsson, analyst]

So it will be a gradual impact over the coming years, you could say?

[Gustaf Salford, executive]

Yes. Because as I mentioned before, you update it in the system, and then you deliver it quarter-over-quarter. So it's not -- you will not see a spike in a specific quarter. That's not what you should expect. It would come gradually as we see now.

[Sten Gustafsson, analyst]

Fair enough. And then secondly, on the Evo and new software. Did you say that you expect the CE Mark to come this quarter, in your second quarter and also the 510(k). Or do you file the 510(k) this quarter? I may have...

[Gustaf Salford, executive]

Yes. So we said submission, that's what I said a bit earlier in the presentation. So we'll submit both for CE and FDA in the quarter. So then we can market and sell the products in those markets as well. And then for FDA clearance, that often takes 3 months, some 90 days, something like that, can take a bit longer and then you can install the machines. But that's often the time it takes for the orders to go from signed order to start of installation.

[Sten Gustafsson, analyst]

So the FDA approval is then perhaps not likely to come during the calendar year '24, but maybe early '25. Is that correct?

[Gustaf Salford, executive]

I mean, I cannot say exactly how long that process will take. For CE Mark it's more submission that we do. But for FDA approval, often what you refer to is these 90 days. But it depends a bit on how much questions you get. So it's very difficult for me to say a specific date for it. But the positive thing that we then can do after submission is to go and market the products in conferences and so on in Americas as well.

[Sten Gustafsson, analyst]

Understood. And is this also for the new software, the -- or has that already been cleared?

[Gustaf Salford, executive]

Some of it has been cleared. If it's not a medical device, you can sell it, and some of it needs to be approved as well. And that will also happen during the coming quarter.

[Peter Nyquist, executive]

Thank you, Sten. Then we'll move back to Kristofer, I think, operator.

[Operator]

Exactly. We have a follow-up first from Mr. Liljeberg.

[Kristofer Liljeberg-Svensson, analyst]

Yes. Perfect. It was actually a follow-up on Sten's question by coincidence. So did you have Evo orders here in Europe in the second quarter? And based on the interest you see, what's your confidence in the amount of Evo deliveries in the second half of the fiscal year? And how important will this be for the gross margin improvements?

[Gustaf Salford, executive]

Thank you, Kristofer. Evo is very important for Elekta. I think those of you that participated in ASTRO, you really felt the fantastic interest of the customer in the product, both if you want to do a full installation of a new linac, but also if you want to upgrade with some of the imaging capabilities and adaptive capabilities into your installed base. What we've seen the development of that customer interest throughout the quarter is, I would say, it has increased. When we look with our regions out in the year, it's even more interest than we experienced 3 months ago. So that's a positive driver. We start to take orders where we can, when you can take an order that is kind of contingent on CE approval, et cetera. So we start to also translate that into orders. And then, of course, the key thing is to get to see submission and FDA submission and an FDA approval. But I think the wheels are turning faster and faster on the Evo side, and we are very positive on the customer interest we have seen. It's a technology that they really want to install. It's a new way of treating with adaptive treatments that's absolutely crucial. Image quality, image capabilities has always been kind of at the heart of Elekta's been doing over the last decades, and this is a perfect fit into that strategy into our purpose. So I think big interest. Now it's about translating that into orders and then installations. And the orders will start to come during the second quarter and onwards and installations will start to come during the third and fourth quarter, I would say. It is -- it has a positive impact on the full year number that we have in our outlook, but it will have an even more impact, of course, into the next year, where we'll have 4 full Evo quarters, so to say, and Elekta ONE quarters.

[Kristofer Liljeberg-Svensson, analyst]

And what has been the customer feedback on what I expect is a pretty large premium price versus the previous high end product you have?

[Gustaf Salford, executive]

Yes. We often, of course, discuss value rather than price. But what we've seen is that they really believe in the value that this product will bring them into -- they will be able to do different types of treatments as well. And that will and is translating into a higher price level as well. We haven't communicated any specific prices, et cetera, and we're still in the early days. But the first indications we have is a good development.

[Kristofer Liljeberg-Svensson, analyst]

Do you think it will be possible to shift the majority of high linac sales from Versa HD to Evo?

[Gustaf Salford, executive]

That's the plan, yes. So I think it's great for Elekta to now have a fantastic product in this high-end CT adaptive segment. So I think there will be a big transfer from Versa HDs into Evos going forward, yes.

[Peter Nyquist, executive]

Thank you, Kristofer. We'll move to the next question, please, operator.

[Operator]

The next question comes from the line of Robert Davies, Morgan Stanley.

[Robert Davies, analyst]

My first one was just if you could give us a bit more color on pricing in the backlog? And then the second one was just in terms of where the backlog is sitting now versus 1 year ago, has backlog continued to expand? Or have you kind of wound that down as your sales accelerated in this quarter?

[Gustaf Salford, executive]

Thank you, Robert. I think on the prices, just Sten asked a bit of questions around that as well. I don't know if I have too much more to add. We have been raising prices over the last, what is it, 6, 8 quarters. We start to see it coming through also in the P&L. It is around 1/3 to half of the backlog that has been kind of positively impacted, and we will continue to deliver on that in the coming quarters and years. On the backlog, I don't know exactly what -- I don't have the exactly numbers, but it has increased flat, similar levels as last year. And I think what you can see there as well is we look at the order growth in the year, you can get the feeling for that addition to the backlog from last year. Right now, it's -- for us, it's about to deliver that backlog into net sales and installations.

[Robert Davies, analyst]

Maybe just as one follow-up. Just around the current sort of financing situation of customers. Are you seeing any sort of changes in sort of credit conditions or financing for customers in emerging markets, particularly? Or is that not something that's changed at all over the last sort of 6 to 12 months?

[Gustaf Salford, executive]

I haven't seen any big change, but what the discussion I'm having is that some of our customers, quite a few are looking forward to a lower interest rate, lower inflation side because the inflation -- lower inflation results in lower cost for constructions. I think that's a key thing for the industry as such. And then lower interest rate, especially on the private side, it's easier for them to finance a new greenfield hospitals and cancer clinics and radiotherapy clinics and often in emerging markets, where we're strong as well. So I hear more positive discussions going forward on those 2 factors on the inflation and the interest rates in driving growth. And then, I mean, the China stimulus packages is in a way a part of that because that is low interest loans to replacement cycle in big parts of China.

[Peter Nyquist, executive]

Thanks very much. We'll move to next question.

[Operator]

The next question comes from the line of Julien Ouaddour, Bank of America.

[Julien Ouaddour, analyst]

The first one on the revenue in China specifically. So if I understand correctly, China, you're not certain to see, I mean, growth for the full year anymore. And Q2 is -- I mean, it's not yet like in a strong recovery mode for this country. I mean I was just wondering the -- I mean, like most of your peers, they have like kind of a cautious approach on China recovery timing. You -- I mean you will start probably to see strong order from Q3 onwards, but you have a 6- to 12-months lead time. So I mean, any -- like any assumptions in terms of like revenue recognition and if you have, let's say, like the time to see the benefits on the P&L for this year? And the second question, super quickly on the midterm targets beyond 2024, 2025. The 14% EBIT from next year onwards? Or it is still let's say like midterm, so it could come like so in the coming 3 years?

[Gustaf Salford, executive]

Thank you, Julien. I'll start with China and Tobias, maybe you can take the outlook question going forward. So China -- and I know there's been a lot of interest, of course, in China over the reporting cycle after the Q2s in the med tech industry. And I think we share the perspective that it's still impacting the anticorruption campaign. I think what we see for Elekta with the technology portfolio we have and the interest in radiotherapy, specifically in the investment cycle, we start to see that in Q3 and Q4, we'll start to see and have plans for good installations. And then exactly what that will translate in terms of revenue growth for China in the year, we'll see. But I think the wheels are turning faster and faster in China, and we will translate that into growth in the second half, I would say, for Elekta. But what the full year is, we need to come back to. Because as many other med tech companies are saying, there are still factors in China that is impacting us here now.

[Julien Ouaddour, analyst]

No, just like a quicker follow up. So you don't need to have the orders first and then need to wait 6 to 12 months to install it? I mean you probably install the backlog that you have already in China. That's what you mean?

[Gustaf Salford, executive]

Yes, we still have China. But China is often quite a quick time between orders to revenue, and we also have a factory and software development in China that we can deliver from directly. So we can have a quick turnaround between order and installation in China for sure. Tobias?

[Tobias Hagglov, executive]

Yes. Thanks for the question, and I'm maybe repeating myself. But I think -- I mean, in terms of the -- our financial targets here and the midterm target. I mean, I think actually, the comprehensive approach we're taking here is supported by the product launches, the price increases and also taking a command over the cost here will result in -- for us to achieve the targets of reaching EBIT margin of 14% or higher. Determined to do. And so we are very confident in that. We haven't provided a specific time point on that.

[Peter Nyquist, executive]

Thank you, Julien. And we'll move to the last question of this session. So please, operator?

[Operator]

And today's last question comes from the line of Oliver Reinberg, Kepler Cheuvreux.

[Oliver Reinberg, analyst]

Three quick questions. Firstly, on the sales dynamics. So I think you talked about that you have seen some kind of a pull-forward effect in the U.S. market. So can you just give us any kind of flavor how significant was that? And can we still expect sales growth in the second quarter on the back of that? So is there also a certain wish that there may be sales decline? That's question one. Secondly, on the cost savings. You talked about you're targeting SEK 250 million annualized cost savings. I think a larger part of costs have already been booked in Q1. So can you just give us a flavor of the SEK 250 million, how much do you expect to contribute to the P&L already this year? And then thirdly, I think in your prepared remarks, you talked about that you have less benefit from inventory valuation. So I just wanted to check, have you already seen any kind of inventory valuation upwards in Q1 this year as well?

[Gustaf Salford, executive]

Thank you, Oliver. I think I'll take the sales question, and Tobias will follow with the cost and the inventory valuation question. But if we start with sales, I have to just clarify, did you mean U.S. only in the comment on Q2 or Elekta total?

[Oliver Reinberg, analyst]

No, basically, how much the U.S. pull-forward effect is for the group?

[Gustaf Salford, executive]

Okay. For the group, not such a major effect, but for the U.S. or Americas reported numbers in the quarter, the 16%, quite a significant effect. So we are then expecting that some of that will have a negative impact on the Americas in Q2 because we got that volume into Q1. But for the overall Elekta, it doesn't have a huge impact. It is relating to some CT linac and MR linac projects in the U.S.

[Oliver Reinberg, analyst]

And can we say half of the 16% was supported by pull forward?

[Gustaf Salford, executive]

You can do that valuation.

[Tobias Hagglov, executive]

And then, Oliver, a question here on the spend reduction initiatives here. So out of this SEK 250 million, SEK 150 million approximately hit this year, and then the rest will then be year-over-year impact into next year.

[Oliver Reinberg, analyst]

Sorry, so SEK 150 million you're already going to realize this year?

[Tobias Hagglov, executive]

Yes.

[Peter Nyquist, executive]

Okay. Thank you, Oliver. Yes. Sorry, have you got one more question?

[Gustaf Salford, executive]

Take that question again.

[Peter Nyquist, executive]

Sorry.

[Oliver Reinberg, analyst]

And in your presentation slides, you talked about that the margin was supported by less support from inventory valuation. So I mean we obviously had the big benefit in Q1 last year. I just wanted to check if there was anything else being upward to evaluate in this Q1?

[Tobias Hagglov, executive]

And the answer is no. So that was related to Q1 last year, where we had exceptionally strong development for both the U.S. dollar and inflation. So this year and that is -- so that is just related to the year-over-year bridge from last year's gross margin.

[Peter Nyquist, executive]

Okay. Thank you all for all of these questions. But before ending, I would like Gustaf to close the call with some remarks.

[Gustaf Salford, executive]

Absolutely. No, so thank you to all of you for dialing in to our call here today. And what you can see what we have done in the quarter, just to summarize a bit, is we have really taken actions to improve profitability. It is what we discussed a lot around price increases that you've seen a bit in Q4, but now also in Q1, and there's more to come. We are continuing to working with efficiency measures and cost reduction initiatives, and the target is to generate annual cost savings by around SEK 250 million at the end of this fiscal year. And the key thing, as we also discussed throughout the call, but also in the Q&A, is the very positive and strong impact that our new product launches, Elekta Evo and Elekta ONE will have going forward. And they have been very well received among customers, and it is expected to have positive impact on our profitable growth going forward. So with those short remarks, thank you for dialing in.

[Tobias Hagglov, executive]

Thank you.