Elekta AB (publ)

STO:EKTA B

Earnings Call Transcript 2021-Q2

[Cecilia Ketels, Head of Investor Relations]

Good morning, everyone, and warm welcome to the presentation of Elekta's second quarter in our fiscal year 2021. My name is Cecilia Ketels, and I'm Head of Investor Relations at Elekta.With me today here in Stockholm, I have Gustaf Salford, Elekta's newly appointed President and CEO; and Johan Adeback, our Acting CFO, who will present the results.Today's agenda starts off by Gustaf highlighting the development in the second quarter, then Johan will give you details on the financials, and finally, Gustaf will take a view on Elekta's outlook. And after the presentation, there will, as usual, be time for questions. But before I start, I want to remind you that some of the information discussed on the call contain forward-looking statements, and these include projections regarding revenue, operating result, cash flow as well as products and product development. And these statements involve risks and uncertainties that may cause actual results to differ materially from those set forth in the statements.And with that, I hand over to you, Gustaf.

[Gustaf Salford, Acting President & CEO]

Thank you, Cecilia. Today, it was announced that I've been appointed as the new CEO of Elekta. I'm very humbled and proud by the trust and confidence in me shown by our Board of Directors. Ever since I started at Elekta, every day, I'm enjoyed being part of a truly global company, delivering innovation that helps our customers to improve and save lives. I look forward to leading a fantastic company together with all my amazing colleagues around the world.I would also like to start with a couple of comments about Elekta's purpose and strategy. To help clinicians to improve patients' lives has never been more important than today, but also more challenging due to the COVID pandemic. All employees at Elekta are working relentlessly so that everyone with cancer should have access to and benefit from precise personalized radiation therapy.We will continue to leverage our position as the only independent radiation therapy player of scale and also continue to form strong partnerships. We are confident that we'll continue to accelerate with a clear focus on our customers and their patients.And if we now turn to a couple of highlights from the last quarter. One main event was the launch and regulatory clearance of our new Harmony linac. I'll come back to Harmony later in the presentation. We also received the EU Medical Device Regulation, or MDR certificate, for the existing linac portfolio with ongoing processes for the remaining products in our portfolio. We see strong momentum for MR-linac, and we received regulatory clearance in China in August, opening the Chinese market for additional Unity orders. Of course, the key focus is to secure continued high levels of machine utilization globally during COVID, and we have managed this well with uptimes at normal levels or higher.We have also shown resilience and performed in challenging market conditions. In the quarter, we managed to perform better than the overall radiation therapy market, both in terms of orders and revenue, with improved margins and stabilized cash flows. From a margin and cash flow perspective, the first 6 months has been the best start of a fiscal year ever for Elekta in absolute terms.Regarding orders and revenue, we saw a stable development during COVID but below historical levels and the long-term potential for the radiation therapy market.During the quarter, we experienced a continued negative impact on orders due to lockdowns and reduced access to customers, especially in emerging markets, and the order development came in at minus 2% in the quarter. However, some markets -- in some markets, the situation improved. Europe returned to order growth, and our global linac volumes grew and gained market share. We continue to drive revenue from our strong backlog, resulting in 3% growth. We saw good growth in Asia Pacific, with a very strong development in China and Europe. And in Europe, we saw increased linac installations. Our installed base continues to grow with around 6% on an annual basis, supporting our long-term ambition to close the linac gap of more than 10,000 linacs globally. Our installed base growth and the service business continues to support Elekta's resilience, and we are currently focusing on expanding our service offering and reach across regions and business lines.Digitalization is key for the service business, and we have the most advanced remote monitoring technology and uptake in the industry, which dramatically reduces unplanned system downtime. We use artificial intelligence to diagnose, predict and correct errors before they rises and also to improve response and resolution time to customer. We see continued improvement on our customer satisfaction from already high levels, and I'm especially pleased to see this during the COVID pandemic. It is a sign that our service engineers and organization is doing a fantastic job around the world under very challenging circumstances.If we now turn to the overall market development in the quarter. I would like to share some observations. On North and South America, we saw U.S. patient volumes increase during the autumn following -- followed by a worsening COVID situation in the end of the quarter. CMS released Radiation Oncology Alternative Payment Model, or RO APM. This model is now set to start in July 2021, and we believe the announcement will reduce uncertainties for the providers in relation to future CapEx investment decisions.We see less face-to-face customer interaction. For example, this year's ASTRO was fully digital. And although our virtual events and user meetings worked well in a virtual environment, we, of course, missed being able to interact with our customers in person. For Europe, Middle East and Africa, we experienced an improvement in the beginning of the quarter, especially in North Europe, but the situation deteriorated in the last month. We start to see first signs of stimulus packages in parts of Europe and also larger focus on radiation therapy and cancer care, for example, the work on the upcoming European Beating Cancer Plan. In Asia Pacific, China started to get back to normal levels throughout the quarter, and there are no major issues in relation to customer access or procurement processes. In the rest of Asia Pacific, we see very varied level of activities, where some markets still have very low levels of business activities.Europe's order performance varied across the regions. We saw strong order recovery in Europe in the quarter, but the situation was challenging in many emerging markets. North and South America came in at minus 12% in the quarter and plus 25% for the first half. Europe, Middle East, Africa, at a strong plus 20% in the quarter and minus 3% for the first half year. And Asia Pacific, at minus 12% for the second quarter and also minus 12% for the first half. And below, you can see some examples of deals per region. I'm especially glad to see the first Unity being ordered in China after the regulatory clearance and also the first orders for Harmony to the French market.We participated in the first major face-to-face trade show, the China International Import Exhibition, CIIE. And as a market, China is back to normal levels, and we saw strong interest in our solutions, especially Unity. We celebrated our market-leading position with a ceremony for the thousands installed Elekta linac in China, something we are very proud of.One of the key events in the quarter was, of course, our launch of our new linac platform, Harmony. It's a solution balancing productivity, versatility and precision without compromise. For example, when it comes to improved productivity, the new fast track in-room experience reduces patient setup time by as much as 50%. Combined with further workflow enhancements, treatment slots can be reduced by up to 25%, enabling clinicians to deliver high-quality cancer care to more patients. The products also have smaller size to fit into smaller existing bunkers. And we're offering the product in 2 versions, Harmony and Harmony Pro, in order to offer full versatility. We received CE Mark early November, and we expected FDA approval in the beginning of the next calendar year, and then Chinese National Medical Products Administration approval in the beginning of 2022. We have received great customer feedback on the solution and its enhancements of workflow and ease of use, and we see a very strong demand and traction for the new platform.After Q2 close, last week, we launched Elekta Studio, which with the ImagingRing is a true 3D image-guided adaptive therapy suite for brachytherapy. In the Studio, the imaging is coming to the patient instead of having the patient being transported around in the hospital to get the images, saving time and personnel resources. The white bar, 121 centimeters in diameter, also enables to do the treatment without moving the patient for both gynecological and prostate cancer, securing the precision and patient comfort.Now to Unity. We see a very strong and accelerating development for Unity. More than 1,700 patients have been treated by customers for more than 30 different indications. The pace at which this breadth of clinical experience can be achieved is unprecedented in our field. We're seeing clinicians focus on disease sites that we did not expect, and this is just the start of the discoveries that we can make. We can actually see what is happening during treatment. And we see very good progress on the MOMENTUM study that now includes more than 800 patients treated for more than 30 indications. Overall, there's a strong increase in the number of MR-linac-related scientific publications globally, a trend that will continue going forward.We also had our 15th MR-linac Consortium meeting virtually with more than 550 customers from almost 50 sites and 18 different countries. It was a great interaction in sharing our best practices. And just to mention a couple of examples where Froedtert & Medical College of Wisconsin describing their work on both liver and pancreas cancer cases, Negrar in Italy with scientific publications around bone oligomets or [ node boost ] treatments. And a year ago, we invited you to see a Unity treatment in Tubingen, and today, they have done more than 2,800 treatments -- fraction, sorry. And with that description of the strong global and positive momentum for Unity, I hand it over to Johan.

[Johan Adeback, Group Treasurer & Acting CFO]

Thank you, Gustaf. I will go through the financials, starting with net sales and EBITA margin development. As you know, the pandemic has reduced access to our customers and have delayed installations, which, in turn, has negatively impacted solutions sales. Service sales has, however, continued to grow throughout this period. In the second quarter, the pandemic effect on sales was somewhat lower, and we returned to sales growth after 2 quarters with declines. Total net sales increased 3% in the quarter, with both solutions and service sales growing, solutions with 2% and service with 4%. This also resulted in a normalization of a sales mix to 60% solutions and 40% service.For the first 6 months, sales was down 1%, with solutions sales down 5% and service growing with 6%. Although we are pleased with the net sales development under the challenging circumstances, we are not satisfied from a more long-term perspective and expect to get back to a significantly higher growth rate post the pandemic.Our EBITA margin came in at a strong 20%, both year-to-date and on rolling 12 months. In the second quarter, EBITA margin was 21.3%, and I will give some more details of drivers later in the presentation.Continuing with sales, the regional picture was mixed in Q2. Starting with Asia Pacific, we delivered strong growth of 32%. This was mainly driven by China, which grew more than 50%. And here, we are back to normal business conditions.Turning to North America. We saw a decline of 16% from COVID-related installation delays. Canada was the exception and showed good growth in the quarter. Finally, region Europe, Middle East and Africa. In Europe, we had positive growth. In Middle East and Africa, we reported lower revenue, which resulted in a small decline for the region in total. Overall, we saw better performance in mature markets, while emerging markets were more challenging.Gross margin was in line with Q2 last year but down from Q1. The decline from the first quarter was primarily due to the normalization of product mix with a higher proportion of solutions sales in the quarter. Bottom line, we increased net profit with 70% after high financial costs and with income taxes on the same percentage level as in the first quarter.Moving on to expenses. The pandemic has led many of our internal as well as external activities continuing on digital platforms. Product launches and ASTRO, as Gustaf talked about previously, are some examples of virtual meetings that resulted in a lower selling expense. We are investing some of the savings in selling and administrative expenses in improved digital ways of working, which enable us to build a lower sustainable cost base.Selling expenses continued on a very low level but was slightly higher than in the first quarter as travel increased somewhat. Admin expenses decreased, and the change from the first quarter came mostly from the reduced external services spend.Turning to R&D. On a rolling 12 months basis, our gross R&D expenses increased to 10.4% of net sales from 9.7% last year as we continue to invest. Net R&D expenses decreased somewhat in the quarter compared to last year from high capitalization and lower amortization. In constant currency, we also saw an increase from the first quarter, even though amortizations came in at a lower level.As I mentioned earlier, our EBITA margin for the first half year was 20%, corresponding to SEK 1.303 billion, and we continue to successfully mitigate the negative market conditions through resilience and good cost control. This bridge illustrates EBITA growth of SEK 316 million or 32% during the first 6 months compared to last year. The negative impact from the decline in net sales was mitigated by favorable effects from higher share of service sales and higher-margin products as well as with significantly lower sales and R&D expense.FX also had a positive impact on the profitability, with the main effect coming from a large negative impact we saw last year. The net effect from foreign exchange when taking into account effects on sales and costs was approximately SEK 90 million.Moving on to cash flow. We saw the strong earnings result in a higher cash flow for the first half year. Cash flow after continuous investments came in at SEK 389 million, and we achieved an operational cash conversion of 50% for the first half year and 61% rolling 12 months. This is the best ever in a fiscal year for Elekta.Net working capital increased in the quarter, mostly from higher accrued income from a number of Chinese and Japanese projects. In the quarter, we repaid SEK 2 billion in outstanding loans. As we see the stable earnings and cash flow development we have experienced warrants a lower cash position. The repayment have had no effect on net debt, and we maintain a high cash position also after this loan repayment.To summarize the financials, we are satisfied with our performance in the second quarter and first half, especially given the challenging market conditions. And with that, I hand the word back to Gustaf.

[Gustaf Salford, Acting President & CEO]

Thank you, Johan. And now I would like to discuss a bit on our strategic priorities going forward. And we see 4 key areas right now. And of course, it's about continuing our resilience activities, it's about adapting to new ways of working around traveling or marketing activities and a more flexible work environment for employees. Also, of course, reducing COGS, always a focus area for us, and to continue with simplification of our processes through better IT systems and digitalization.We will drive innovation for long-term growth and accelerate our investments in order to develop the best new software and solutions and platform going forward. Service is crucial for Elekta, and we will continue to focus and drive also a bigger focus on customer satisfaction, new innovations in this field, but also improving processes with more automation, standardization and centralization. We'll also leverage on partnerships, as Elekta always has done, and we will continue to be the largest independent player in radiation therapy of scale, and we'll also form strong partnerships. So we're confident that we'll continue to accelerate with a clear focus on our customers and their patients.And now to a brief outlook in Q3. We expect the new way of lockdown measures to affect us in the third quarter with continued uncertainty in order growth and increased risk for delayed installation impacting revenue. We, of course, focus on resilience activities to control our costs, as we've shown in the first half, and prepare for getting back to growth. We will further strengthen our investments in innovation to capture long-term growth trends. So with that, I would like to thank you for listening in. And I will look also to address a special thank you to all our customers, the clinicians working day and night to prevent the effects of COVID pandemic on cancer care. And we are dedicated to support, to keep their devices and solutions up and running during challenging circumstances. We will keep being resilient throughout the pandemic and support our customer for as long as it takes.And with that, I hand it over to Cecilia.

[Cecilia Ketels, Head of Investor Relations]

Thank you. And as you probably remember, ESTRO was postponed in spring in April and will now start on Saturday and be virtual. So if you are interested, please join us in Elekta's Lunch Symposium, for example, or visit our virtual booth. However, you will need an ESTRO pass to join this event. And with this, we now open for questions. So please, operator, will you give the instructions and let the first question in. Thank you.

[Operator]

[Operator Instructions] Our first question comes from Annette Lykke from Handelsbanken.

[Annette Lykke, Research Analyst]

Congrats on some very nice margin here in the second quarter. First of all, in respect to margins, could you, Gustaf, help us a little bit on how we should see it beyond COVID-19? You have an EBITA margin of 21% for the second quarter. It will be very nice to have some indications where you see should we go back to normal levels, as it were before COVID-19, or are you still expecting to see some sort of savings to continue looking into beyond COVID-19? Then my next questions goes to the service business and the installed base you have. Right now, solutions, as I -- account is down around 10% for the first 6 months. How long will it take before the decrease in solutions potentially have some impact on the service and service software that you are selling to the installed base? Or will you be able to compensate for that by winning new contracts? And then on the win of market share, could you share a little bit with us where it is you see Elekta having your game changer? Is it Harmony? Is it Unity? That will be that. And then I will jump back to the queue for my other questions.

[Gustaf Salford, Acting President & CEO]

Thank you, Annette. I will start with the margin question and with the solution question and then the market share increase. So if we look at the margins, as we see it, right now, of course, the expenses are low, travel, marketing events, internal meetings as well. And we are working diligently and have many projects running to continue to make these savings sustainable. Of course, we want to start to travel again to meet customers, and we see those requests coming as well. So we'll not continue on these low levels, of course, but we are not expecting to get back to the high levels we were before COVID because of these initiatives. Exactly how much that will be, we'll need to get back to because it's difficult to predict. We see that will probably mostly affect the sales and marketing expenses and maybe admin, to some extent, because that's the primary functions that have a lot of events and also traveling. I think, as always, and we start to talk about it more and more, is the mix between solutions and service, as you said, Annette, that really understanding the impact on that on our margins. And we are focusing a lot on the service business right now, the service initiatives throughout the installed base, to have a good strong growth there as well, and that should have a positive effect on margins.And then how to compensate for the lower solutions, if I understood your question right. Going forward, I see this more as a delay actually on the orders and some of the installations due to COVID. The demand is the same, if not even higher, going forward for our products. We have said it many times, but there is a gap of more than 10,000 linacs around the world. And every second, cancer patients should get radiation therapy, but it's actually just accessible to 2 out of 10 cancer patients around the world. So I see it as a pent-up demand that will be released when we see more certainty after COVID.Market share increase, we saw very strong development in Europe in the quarter. And it's -- you can say it's not just about Unity, and Harmony has not yet made a big impact on the market shares because it's going through the different regulatory processes. So it is about our existing platforms like the Versa HDs, for example. That is taking share around the world. So I hope that answered your questions, Annette.

[Annette Lykke, Research Analyst]

Yes. Just on, for example, the marketing spending, would you -- I mean before COVID-19, you were around the 10%. Would it be fair to assume those should be closer to -- would you have a saving of maybe 50 basis points? Or is it 100 basis point that we should see the margin -- the adjusted EBITA margin being closer to 19%, 20% or something like that? Just an indication of how much you believe you could continue to make as a saving for, for example, next year.

[Gustaf Salford, Acting President & CEO]

Yes. I think it's too early to assume anything there really, but we are driving initiatives to reduce travel and more kind of different meetings, both internally, externally. But we'll need to get back to exactly how that will impact the margins.

[Operator]

Our next question comes from Michael Jungling from Morgan Stanley.

[Michael Klaus Jungling, MD, Head of MedTech & Services and Analyst]

I have 3 questions. The first one is for Gustaf. Can you be perhaps a little bit more precise about whether you intend to make some meaningful changes to the strategy of Elekta? And I'm talking here about geographical focus and also the technology focus. Will Unity be the same important growth driver as it was before under a different leadership structure? And perhaps also comment around M&A. Question number two is on government grants. You mentioned that in the first 6 months, you had SEK 40 million of grants, but you didn't mention that in the first quarter result. Does that mean that you booked SEK 40 million in the second quarter? And are there more grants coming up in the second half of your fiscal year that you could perhaps indicate for us today? And then finally, on order bookings, can you comment on whether the second quarter had an impact from Harmony? I suspect not, given the way that the regulatory time frame worked out, but maybe if there was. And also, should we expect, therefore, in Q3 a pretty meaningful pent-up demand order number coming through for Harmony?

[Gustaf Salford, Acting President & CEO]

Thank you, Michael. So the question is meaningful changes in strategy, governmental grants and the order uptake, Harmony, and kind of the ramp-up of -- that was my understanding of the question. So if I start with the first one, meaningful changes to the strategy. I'm a true believer in executing on our focused strategy on Precision Radiation Medicine. I think that's clear to say, focusing on helping our customers, the clinicians treating patients. But geographic areas, I think Elekta, in my mind, has always stood for early out in markets, emerging markets. We have followed the growth, we will continue to do so. So I think you will continue to see that around the world. But I think that has not really changed. It's what we have always have done, and that has made us successful historically.Unity, of course, a key growth driver, both in terms of volume, innovation and a number of patients around the world. So that's key. But I would say, Elekta, in many years, if you compare it to right now, has never been in embedded product portfolio situation with Harmony, with Unity. You saw the [ recurring ] or the Elekta Studio coming out as well, more and more interesting software solutions. We're #1 or #2 in all our 5 segments, so I think you will see a balanced portfolio strategy going forward. It's not just about Unity. We have a lot of other growth opportunities as well.And growth in terms of M&A, it's something we're always looking for, both on the innovation side. You saw Kaiku, you saw ProKnow, you saw SmartClinic, or PalabraApps, that had been added very successfully to our software portfolio. But you will also see more going into new markets, and that could be both from own operations but also from acquiring companies. I think, Johan, you have the latest on the governmental grants.

[Johan Adeback, Group Treasurer & Acting CFO]

Yes. I would say that mostly of this came in, in the second quarter, but there was some of it in the first one as well. We -- most came in the second quarter.

[Gustaf Salford, Acting President & CEO]

And then on the Harmony. So it's, of course, early stage from a volume perspective with Harmony, but we see a very good interest and traction for the product, and we see the first orders coming in. I was referring to the 2 linac deal for France, and we see more and more of that activity going on, especially now after CE Mark that we recently achieved. So I think that's where you see the first orders coming, and I see that will be a positive contribution both to Q3 and Q4.

[Michael Klaus Jungling, MD, Head of MedTech & Services and Analyst]

Okay. Can I quickly clarify this then, with these government grants mostly in Q2, anything coming through in Q3? Because if I look at Q2, they probably benefited your margins by maybe 100 basis points or a bit more. Is there a similar magnitude of benefit in the third quarter coming from government grants?

[Gustaf Salford, Acting President & CEO]

I don't have that number available, so we'll need to get back on that one.

[Michael Klaus Jungling, MD, Head of MedTech & Services and Analyst]

Okay. And then briefly also on order bookings. So can I just confirm that Harmony did not have a meaningful impact yet on Q2 order bookings but is perhaps likely or at least the numbers line up in a way that Q3 could be benefiting materially from Harmony. Is that a fair summary?

[Gustaf Salford, Acting President & CEO]

Yes. It's kind of built up the demand, and we just recently got the CE Mark. So you're absolutely right.

[Operator]

Our next question comes from Veronika Dubajova from Goldman Sachs.

[Veronika Dubajova, Equity Analyst]

Yes. I will keep it to 2, please. My first one is just on the outlook statement for fiscal 2021. And I'm just curious, what do you guys need to see to be able to provide guidance? I mean I appreciate there's a fair amount of uncertainty, but at the same time, you continue to have an order backlog that is supportive, you have the revenue growth year-to-date that has been fairly predictable to a large extent. So I'm just surprised that 2 quarters in, you're still unwilling to give us a guidance. And if you can talk to what it is that you need to see to be able to give us a guidance for the full year, that would be helpful. And then just related to that, the China Unity revenue recognition, do you anticipate the 2 remaining Unities to be recognized in Q3? And then my second question is, please, on the moving pieces of the R&D expense line. Slightly surprised by the low amortization figure in the quarter. Is this the new run rate we should be anticipating? And then, Gustaf, I noticed you made some comments around sort of your desire to increase R&D spending as you move into Q3 and Q4. Any guidance or insight you can give us into what the magnitude of that increase is, that would be great.

[Gustaf Salford, Acting President & CEO]

Thank you, Veronika. And around guidance and uncertainty, it's not our unwillingness not to guide, but we go out to the customers, we ask them for orders and when they want to start to install the linacs. And when they are not sure, I think it would be almost irresponsible of us to guide. We need to have that clarity from the customer base in order to then be able to predict in more detail our revenue and order over the next 1, 2 quarters. But as I mentioned, I see a great potential, and I see a pent-up demand post-COVID. But exactly when that will happen, it's difficult to say. So as soon as we get that clarity from the customer base, it's easy for us then to also look forward to look for the growth numbers and also look for the innovation initiatives as well.I think you just mentioned -- I can take the R&D question as well and our additional acceleration of those investments. We believe that's very important to kind of take the opportunity right now to invest in innovation to secure long-term growth over the next 1, 2, 5, 4 -- 4, 5 years going forward. So that's what we're saying. And historically, we said around 10% to 11% on -- as a percentage of sales, and we believe that will then be a bit higher going forward. And then, Johan, on China?

[Johan Adeback, Group Treasurer & Acting CFO]

Yes. The Chinese unit is, as you know, we took 3 -- revenue on 3 of them in the second quarter, and we do expect to take revenue on the remaining 2 in the third quarter. And maybe a bit comment on the R&D expense. So we saw a decrease in amortizations in the second quarter. And this is, as it is for capitalizations as well, dependent on where projects are, so when you can start capitalize and when you finish the amortization. So we had reduced amortization -- projects where amortizations was ended was a key driver in the second quarter, but also some in Swedish krona terms, some foreign exchange effect making it lower.

[Veronika Dubajova, Equity Analyst]

And Johan, is that SEK 160 million or so of amortization the right run rate going forward? Or would you expect it to pick up in Q3 and Q4?

[Johan Adeback, Group Treasurer & Acting CFO]

I wouldn't expect it to pick up in Q4 -- or Q3 and Q4. But as I said, it depends on where projects -- when projects come to the phase when you can start to do amortization.

[Operator]

Our next question comes from Kit Lee from Jefferies.

[Nyeok Lee, Equity Analyst]

Two questions, please. I think first question, just on Unity in 2Q. Can you just provide us with more color just around installation start and obviously order intake of Unity in 2Q? And I guess for installation as well, what would be your plan just for Unity on installation starts for the year? And then my second question is just on the situation in China. Can you just give us an update on the linac quarter, whether the tendering is now progressing? Or is there still some bottleneck issues in the market when it comes to licensing? And also for the Unity system, can you just confirm if that would be a Class A or Class B system for the licenses?

[Gustaf Salford, Acting President & CEO]

Okay. Kit, I'll start with a bit on the Unity, and then we'll go to China. But Unity, overall, I mean, we see very good traction. We highlighted a couple of deals in the material, but we have more. So you saw the first Chinese deal coming in post the regulatory clearance, and then we also mentioned one important deal in the U.S. But we have more than that. It's not on last year's level, I can say that as well. But we'll not disclose the number quarter-by-quarter, as we said in the previous call.So on the installation side, that's going well. It's a bit more challenging, of course, now during COVID. But we see good installations, we see shortening of the installation times and so on. So it's progressing according to plan but a bit more challenging due to COVID, as I mentioned.On the China situation and the licensing and so on, there we see a great opportunity and a great potential. And we saw it that the CIIE, so the Chinese International Import show, that's very big interest for Unity. And so that's a brief summary of the Unity situation in China. And we also see the regular linac volumes coming back to normal levels, with both public procurement processes ongoing as well as private initiatives in the Chinese market as well.

[Nyeok Lee, Equity Analyst]

But if you look at the additional quarter that was announced back in 2019, has that started to come through in terms of the tendering process and the order intake you see in China?

[Gustaf Salford, Acting President & CEO]

The program we mentioned, 1,400 linacs, I think, back then, if that's what you are referring to. So I think there's not been clear earmarked units linked to that plan. And I think the plan didn't roll out as expected. But still, we see a huge unmet demand in China, and we foresee very good volumes going forward as well. But it's difficult to link it to the plan actually.

[Nyeok Lee, Equity Analyst]

And can you just confirm if Unity is a Class A or a Class B system in China?

[Gustaf Salford, Acting President & CEO]

I need to get back on that one.

[Operator]

Our next question comes from Kristofer Liljeberg from Carnegie.

[Kristofer Liljeberg-Svensson]

I have 3 questions. First, around the cost. And there, the government grants you talked about, what line in the P&L do we see them? And how should we think about operating costs in the third quarter versus the second quarter? The second question relates to cash flow. You mentioned the higher accrued income was related to China and Japan. Could you give some more explanations for that? I guess you might have not sent the invoice, for example, for the unit in China. What's the reason for that? And then on the Unity installations, just a follow-up. If you could say how many installations started, i.e., revenue recognized in the quarter, and how many installations do you expect now for the full year.

[Gustaf Salford, Acting President & CEO]

I need to get back on which lines in the P&L we have the government grants. I don't have that in front of me, so I need to go back to that.Accrued income, I can -- as you pointed out, it came mostly from the 3 Unities we had in China. We had a couple of Japanese projects and so on. We do expect to invoice most of that in the third quarter. So the expectation is that, that will come down from those projects.And in Unity installation starts, I mean we prefer not to go into the details on numbers on all of this for Unities or for other products as well. So I don't have a comment on that one.

[Kristofer Liljeberg-Svensson]

Okay. Part of my first question was also about operating costs in the third quarter versus the second quarter.

[Gustaf Salford, Acting President & CEO]

Yes. Again, looking forward, given the -- how it looks in -- when it comes to pandemic and so on, we -- the expectations is that we will continue to have low costs going into the third quarter. And so I'm not going to give you an exact forecast on it, but we expect continued low cost level in the third quarter, where we stand today.

[Kristofer Liljeberg-Svensson]

And the comment that you want to accelerate, I think, it was R&D investments, how material is that on a sequential basis here in the third and fourth quarter?

[Gustaf Salford, Acting President & CEO]

It would be a gradual ramp-up, but I think it's more that we give an indication that we will continue and accelerate innovation investments over the next months, quarters here and years as well. Then, of course, some of it will be capitalized and it will not be the same P&L effect, but we are driving new innovations, software and on our new platforms.

[Operator]

Our next question comes from Sten Gustafsson from Nordea.

[Sten Gustafsson, Senior Analyst]

Yes. Coming back to the Unity installations here, and I appreciate you don't want to go into exact details for the quarter, but could you talk about the visibility for the coming 1 to 2 years when it comes to Unity installations? I think you should have a backlog of Unity orders of something like 40 to 50 systems. And my question is, well, if we assume that the COVID-19 will sort of go away fairly soon or at least the vaccine is coming, which will help, when it comes to installations, what type of visibility do you have to install your backlog over the coming 1 to 2 years given the feedback you hear from customers? That would be interesting.

[Gustaf Salford, Acting President & CEO]

Sten, it's Gustaf here. So the visibility from that perspective, we have installation start dates in our contracts and so on, but it's more if something changes in the customers due to COVID or lockdowns, or focus on COVID treatments in a specific hospital needs to push that forward a bit. That's what's difficult to evaluate right now. But I mean we have full visibility on the installation start dates in the coming years from a contractual perspective.

[Sten Gustafsson, Senior Analyst]

So do you feel comfortable that your backlog would be installed over the next 2 years?

[Gustaf Salford, Acting President & CEO]

We often say, I think, that's a good number often to consider, that between order and revenue on the regular linac projects, it's around 1 year. It can, of course, be shorter and longer. On a more like a Unity or Gamma Knife, we have seen more around 15 to 18 months, I would say, on average. I expect that actually to shorten a bit going forward with Unity when we see volumes increasing.

[Sten Gustafsson, Senior Analyst]

And I think you previously have said that you have the capacity to install 2 systems per month. Has that changed?

[Gustaf Salford, Acting President & CEO]

No, it's the same, I would say. We have that capacity, and we can build it up as well with adding more resources. And we're doing that continuously. We train new installers and service engineers and so on to cater for that future growth.

[Operator]

Our next question comes from Scott Bardo from Berenberg.

[Scott Bardo, Analyst]

So firstly, please, on Harmony. Have you had any expressions of interest or any success in upgrading your existing order book for standard linear accelerators towards Harmony? Perhaps if you can share some sort of insight there and how realistic that may be to upgrade your existing order book, please. Second question, on Unity. It seems like your enthusiasm for Unity is increasing. You talk about accelerated interest, yet the disclosure surrounding Unity is decreasing. I appreciate, of course, you don't want to provide near-term guidance here. But of course, we, as analysts, need to try and model your company effectively to allow effective capital market valuation for the business. So I'd just like to push you on a few points here for Unity, please. Can you please tell us how many Unities you have yet to install and book as revenues? I think that's an important number for us all, please. And could you also please share with us what the dynamic looks like in terms of leads out there at the moment that you're talking to customers? How is the market opening up as you enter into this new phase as you communicate? Last question, please. Again, Gustaf, I very much appreciate the comments about the near-term uncertainty and business managing quite well. But you refer constantly to the medium-term outlook remaining robust for Elekta. We don't have a medium-term outlook in the market with respect to financial guidance. So the question is, is there any view in your mind why your business can't grow in this high single-digit, low double-digit category as previously outlined? Has anything changed in your perspective at this point?

[Gustaf Salford, Acting President & CEO]

Thank you, Scott. So I think we went through -- if you remember from the capital days 3 years ago, we had kind of 3 phases in our Unity commercialization. The first phase was, of course, to get to the unit number, the 75, and get it at the first phase. The second phase, we set back then as well, was more about the clinical adoption, gradual reimbursement, going into new countries. And the third phase would be start around 2022 would be more about having reimbursement and further growth phase. So we saw it. When we hit the target, we went into the second phase. Then we start -- then we stop being so explicit quarter-by-quarter on all the numbers because we're not doing that with Gamma Knifes or linacs and so on as well, is part of our business. We have 5 strong business lines, as we call them, that will drive our growth going forward. Unity is one of those that we are super excited about. And we see -- we're doing what we say. We see that in a second wave here, with that traction building in the consortium meeting with more than 550 customers talking what they can do about this fantastic product. And we also see that we have more than 25 -- around 25 clinical machines treating patients. So I think you will hear more about Unity and more details about Unity, but we would not go back to guide on Unity numbers by quarter. We don't think that's the right thing to do.Midterm guidance compared to historical levels, you have followed this market for a long time, Scott, and you've seen it going up and down, but you saw it also being over 10% before COVID hit. And we also expect to see very positive development. Exactly what that will be after COVID is difficult to say. But as -- with a huge underlying demand, especially from emerging markets, we have a positive growth outlook, but it's too early to say any specific numbers at the moment.

[Scott Bardo, Analyst]

And on Harmony then, please?

[Gustaf Salford, Acting President & CEO]

Sorry, Harmony. So on the opportunity to kind of upgrade the -- already -- from the order backlog, we see good opportunity because of the tractions from the products -- or from the customers for the products. So we see good opportunity. It's too early now to say in this quarter, in the Q2, but we'll see good opportunities for that also in Q3 and Q4.

[Scott Bardo, Analyst]

Understood. And maybe last question, Gustaf, and I appreciate you've had a lot to sort of deal with this year for the company in unprecedented times. But given there has been some changes in the end market, and obviously, your portfolio of products is strengthening, when can we expect some sort of capital markets event where Elekta sets new targets, midterm targets for the group, implies that sort of volatility? Is that something we can expect in the near-term horizon?

[Gustaf Salford, Acting President & CEO]

Yes. Our ambition is, of course, to give a capital markets update as soon as we can. We wanted to stabilize a bit, so we can have the clarity from the installed base, and then we're ready to talk more about the next year and the years after. I cannot commit to a certain date here, but we'll get back to that as soon as possible. I just wanted to say...

[Scott Bardo, Analyst]

Does that say likely, next year, we'll have that sort of event?

[Gustaf Salford, Acting President & CEO]

Yes. Let us come back to that, Scott. This is quite a new announcement here today. So let me come back with that. Just a clarification, Scott, on unit in China -- to your question, Kit, that will be a Class I -- Class A, sorry, device. Just to clarify on a previously asked question.

[Operator]

Our next question comes from Lisa Clive from Bernstein.

[Elisabeth Decou Bedell Clive, Senior Analyst]

I have 3. During the 2018 CMD, the previous CEO indicated that Unity had the potential to convert 1/3 of the market to MR-linac by 2023. Do you still believe this is an achievable target? What steps need to happen in terms of time line of clinical data publication and reimbursement in order to get there? Second question, and you commented a bit on this, but just asking from a slightly different direction. Your total order backlog has steadily increased over the years and is now around 2x your annual gross order intake, while your larger competitor has stayed sort of near parity between their gross order book -- or their order backlog and their gross order intake. Does this mean it's taking you longer to deliver machines? Or is this somehow putting you at a competitive disadvantage? And what really needs to happen in order to decrease the size of your order book? Is it just coming down to -- I mean you mentioned training people for installation. So is it just greater investment in installations and manufacturing? And then last question. Could you provide any comments -- I believe your list price for Unity is about $8 million to $10 million. Could you comment on what the realized ASP that you're generally getting is today versus that list price?

[Gustaf Salford, Acting President & CEO]

Thank you. So on the first question, I mean, the market potential for Unity, we've said since the Capital Markets Day that it will be addressable market of around 25% is what we believe that the MR-linac technology should take -- had the opportunity to take of the total market. It's also kind of those numbers, if you look at what additional cancer indications and treatments you can do with MR-linac compared to a regular CT-based or cone beam CT-based linac. So that's how we see it going forward. That will, of course, take some time, but that is a huge opportunity for us.On the order book question, our large order book, I mean it's very good to have right now, of course, where we convert that order book to strong revenue numbers in the months and the quarters that we are right now. I think when you compare with competition, I think they have a bit different market mix, so they're more based in the U.S., and they also have a bit different ways of booking orders as well is my understanding.On the price levels, I mean, it's now -- we're in the second phase, and we see also a bit more varied price levels in the markets, but it's not something we disclose externally.

[Operator]

Unfortunately, this is all the questions time permits, so I'll hand back to the speakers.

[Cecilia Ketels, Head of Investor Relations]

Yes. And I mean if you have more questions, please don't hesitate, but reach out to me after the call. But we would like to thank you for participating today. And thank you, and have a good day.