Elekta AB (publ)

STO:EKTA B

Earnings Call Analysis

Elekta Reports Robust Growth and Margin Expansion

Elekta, flowing with the current of its ACCESS 2025 strategy, noted a successful quarter with a fourth successive spurt in revenue growth by 10% and an expanded EBIT margin. The quarter was characterized by notable order growth—revived by major deals in India and Ukraine—and an improved cash flow. Americas displayed a solid 9% increase, while Europe delved into double-digit growth, contrasting the dampened performance in the Middle East and Africa. APAC, excluding China, rode a wave of double-digit expansion, driven by increased demand in India, Australia, and Japan. A recovery in China's order volumes is anticipated by Q4. The quarter ended with an impressive installed device base of about 7,250. Xoft's acquisition, now FDA cleared and CE marked, broadened Elekta's market-leading brachytherapy scope and promises enhanced cancer care reach. Enviable revenue growth in both EMEA and APAC contributed to the positive trajectory, enabled by the successful handling of inflation-induced challenges through strategic price increases and product expansions.

Return to Growth and Enhanced Profitability Amid Global Challenges

Elekta, a leading firm in precision radiation medicine, reported its Q2 2023/24 results revealing a story of resilience and strategic success. The company delivered its fourth consecutive quarter of revenue growth, achieving a 10% increase supported by robust solution sales growth of 15%. Gustaf Salford, the CEO, emphasized Elekta's ability to navigate a challenging environment with significant improvements in operational productivity and order growth—remarkable amidst a period of inflationary pressures and manufacturing cost challenges.

Strategic Acquisitions and Expanding Market Reach

The company's growth trajectory has been bolstered by acquisitions such as Xoft, which enhances Elekta's brachytherapy offerings. Further strategic moves such as the partnership evolution with Sinopharm in China enable Elekta to capitalize on a larger customer base, including underserved markets. The company celebrates continued success in mature and emerging markets, reflected in a book-to-bill ratio of 1.05 and an order backlog of SEK 46 billion.

Product Innovation Catalyzing Growth

The innovation pipeline remains a priority for Elekta, with investments in personalized precision through adaptive CT linacs, aiming for a 50% cost reduction per treatment. Notably, Elekta One software suite and Elekta Unity's motion management technology have been focal points at the annual ASTRO conference, indicative of strong product demand and potential for new orders.

Financial Prudence Amidst Expansion

Despite inflationary costs, Elekta delivered a strong EBIT margin expansion of 370 basis points over the quarter. Adjusted earnings per share grew by 70% compared to last year, evidencing financial prudence and the payoff from aggressive cost reduction measures. The gross margin still faced headwinds with a lower than desired 36%, due primarily to an unfavorable mix this quarter and inflationary challenges.

Looking Ahead: Positive Revenue and EBIT Margin Outlook

Elekta's management has set a target of more than 7% CAGR on net sales until '24/'25 with continued EBIT margin expansion, focusing on driving shareholder value. The forecast for the next quarter projects sustained revenue growth and EBIT margin expansion, albeit at a slower pace due to tougher year-over-year comparisons and ongoing inflation pressures.

Challenges and Opportunities in China

In China, Elekta faced a stark 50% decrease in orders due to delayed tender processes amidst an anticorruption campaign. However, the outlook for Q4 is optimistic, with expectations of tendering resumptions and strengthened partnerships, including with Sinopharm, which should help recover order flows.

Earnings Call Transcript 2024-Q2

[Cecilia Ketels, executive]

Good morning, everyone, and warm welcome to the presentation of Elekta's Second Quarter 2023/'24. My name is Cecilia Ketels, and I'm Head of Investor Relations at Elekta. With me here in Stockholm, I have Gustaf Salford, Elekta's President and CEO; and our CFO, Tobias Hagglov, who will be presenting the results.

Today's agenda starts off with Gustaf presenting some highlights of the developments, then Tobias will give you details on the financials and the presentation ends with Gustaf's view on Elekta's outlook. And after the presentation, there will, as usual, be time for your questions.

But before we start, I want to remind you that some of the information discussed on this call contains forward-looking statements. And they can include projections regarding revenue, operating result, cash flow as well as product 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 said, I hand over to you, Gustaf.

[Gustaf Salford, executive]

Thank you, Cecilia, and good morning, everyone, and thank you for attending our call. And we are really happy to announce that we continued to deliver on our strategy, ACCESS 2025 in Q2. We drove significant improvement and generated the fourth consecutive quarter with revenue growth and expanded EBIT margin. Order growth came back, supported by large deals in both India and Ukraine, and cash flow improved.

And if we now turn to our key components of the ACCESS 2025 strategy. We continue to strengthen our market-leading brachy portfolio with acquisition of Xoft, which accelerates innovation for brachytherapy in Elekta portfolio. And during the quarter, we have also successfully driven adoption by expanding radiation therapy in both mature and emerging markets.

Our latest Leksell Gamma Knife, Elekta Esprit, has celebrated great success during the quarter, many times reaffirming very long-time customer companionship. And in China, we have evolved our partnership with Sinopharm alongside already established partnerships within the cancer care ecosystem to reach a larger proportion of the Chinese hospitals and patients.

And if we go to the order development during the second quarter, we had an overall positive order trend and it's a sign of the large underlying demand for cancer treatment capacity. And this is, of course, after several years of underinvestment in many, many markets. The book-to-bill ratio was 1.05 and the order backlog amounted to SEK 46 billion, and we continued to pursue a faster conversion rate.

Americas grew with 9% with a strong growth in Latin America. The growth in EMEA was driven by double-digit growth in Europe. The Netherlands continued the strong momentum and Italy, drove the European development. And we also saw a large deal to modernize and expand the installed base of radiotherapy in Ukraine.

However, the growth in Europe was partly offset by low orders in the Middle East and Africa. APAC, excluding China, had a very strong double-digit growth rates driven by greater demand in India, Australia and Japan.

The weak order development in China is linked to the ongoing anticorruption campaign in the health care sector, and it's temporarily impacting order volumes across the industry, and we expect Chinese order volumes to recover during Q4.

And this recovery is supported by strong outlook for the Chinese market with the recent launch of the 5-year investment plan, our Elekta Unity receiving A class license and the joint venture with Sinopharm is proceeding according to plan. And also the latest Leksell Gamma Knife Elekta Esprit was launched in China during CIIE 2023. And we also will see that development going forward.

If we then zoom in a bit on some of the key deals and orders during the quarter, you will see here that, as I mentioned earlier, that we saw a strong deal in the Americas, the Panama [indiscernible] and it's really offering hope to cancer patients with its -- the deal we have with a comprehensive portfolio to also take a leading role in the Central American region.

And during the quarter, we also signed a significant $40 million order from one of India's largest and most advanced corporate healthcare groups, Krishna Institute of Medical Science or KIMS in Hyderabad. And the combination is really a solutions includes Elekta's full suite of hardware and software.

In October, we won a public tender to deliver several Harmony linear accelerators to help meet the demand for cancer care treatments with modern radiation therapy devices in Ukraine. And the first of these linear accelerators are expected to begin treating cancer patients in 2024. And the Harmony systems, they will be placed in half of Ukraine's provinces as well as the National Cancer Institute.

And if we now turn to revenue, we saw that Q2 was the fourth consecutive quarter of good revenue growth. Revenue grew with 10%, supported by strong solutions revenue of 15%. And I think we have really shown the flexibility and resilience in our supply chain, and we are now in a very good place to continue to drive revenue growth and working capital improvements.

And we're also addressing the continued impact that we saw quite a lot of in Q2 from inflation with price increases and new product launches across our portfolio. All regions contributed to the strong growth with double-digit growth rates in both EMEA and APAC. And EMEA showed strong growth both in Europe and the Middle East and Africa, and the installations in Europe were driven by recent large tenders in Italy and Spain, but also in the U.K.

Most markets in APAC showed good growth in installations, China, India, Thailand. And in the Americas, revenue was stable in North America with good growth in Latin America. So at the end of the quarter, Elekta had an installed base of approximately 7,250 devices.

And now to a couple of words around Xoft because in October, Elekta acquired Xoft business and by acquiring the technology together with transfer employees, we have really strengthened our position as the world leader in brachytherapy solutions. The Xoft system is FDA cleared and CE marked for the treatment of cancer anywhere in the body using a miniatures x-ray source to deliver precise concentrated dose of radiation directly to the tumor site.

The Xoft system has an installed base of more than 100 systems and through Elekta's network, the Xoft technology will now be able to reach many, many more patients. This addition to our brachy portfolio will enable more flexible and mobile treatments, expanding cancer care to new areas with strong demand.

And then finally, a few words about the annual ASTRO conference in the U.S. And we can see that our presence at ASTRO in 2023 here in San Diego turned out to be very successful with customer engagement significantly higher than the last year's as well as an increased amount of overall users and record high attendance at their own customer event.

Apart from launching our Elekta One software suite, the main attention at ASTRO was aimed at the important clinical breakthroughs of Elekta Unity's comprehensive motion management that has featured by several thought leaders across Europe and the U.S.

And these milestones mark the next phase of the Unity journey where clinicians are able to take the MR-linac technology to the next level of precision and adaptive treatments. And this will be a key trigger for new Unity orders.

And now over to you, Tobias, for a bit of a closer look at the financials here in Q2.

[Tobias Hagglov, executive]

Thank you, Gustaf, and good morning, everyone. I will start with the Q2 financials then. Our revenues continue to grow nicely in this quarter by 10% in constant exchange rates, supported by, as you heard from Gustaf, double-digit growth in EMEA and APAC, while the Americas turned to growth in the quarter.

We could benefit from a healthy growth in mature as well as in emerging markets. Profitability continued to grow strongly in this quarter by 370 basis points despite the lower gross margin than last year. Adjusted earnings per share grew by 70% in the quarter compared to last year.

If we look at the financial development in more detail, we can see that ForEx exchange rates had a positive impact on net sales of 6 percentage points, a negative impact on gross margin of 40 basis points, while contributing positively by 180 basis points to our EBIT margin.

Then look at the operational drivers to our gross margin. We benefited from the high sales growth, combined with successful cost reduction. The relatively higher growth of solutions led to an unfavorable mix in the quarter. And finally, we experienced inflationary pressure from materials and salaries. Moving down to our EBIT margin. We see further benefit from improved operational productivity while growing strongly.

Then looking into our expenses in constant currency and adjusted for items affecting comparability. All in all, despite the salary inflation, the operating expenses decreased by 1% year-over-year, driven by cost reductions.

Selling expenses increased by 4% year-over-year as we invested in more revenue-generating activities. Administrative expenses declined year-over-year following the cost reduction initiatives. And finally, net R&D expenses declined 6% year-over-year, driven by lower gross R&D.

We remain our focus on our innovation pipeline. As mentioned previously, we are targeting personalized precision through offering adaptive CT linacs and superior image quality, elevated productivity, targeting 50% cost reduction per treatment and integrated informatics and decision support. Gross R&D continued to decline on a rolling 12-month basis and ended at 12% of net sales in the quarter.

Moving over to the balance sheet. Net working capital as a share of sales ended at minus 3% in the quarter, which was lower than end of Q2 in the 2 previous years. Higher customer advances was generated by increased shipments and order intake. Accrued income remained high due to larger shares of installations in Southern Europe, where billing terms are longer. And our inventories are on a relative high level to secure future installations.

Cash flow after continuous investment was more than SEK 600 million better than Q2 last year. This was primarily driven by higher earnings, but also a slight reduction of working capital. Following the improved cash flow in the quarter, we ended the quarter in line with our target to be above 70% cash conversion.

Over to you, Gustaf.

[Gustaf Salford, executive]

Thank you, Tobias. And now we turn to the outlook section. And the outlook until '24/'25 is the same. It is more than 7% CAGR on net sales. It is a continued EBIT margin expansion that we have shown in the previous quarters. And it's also a dividend policy of more than 50% of annual net profit. All of this is in our focus on driving shareholder value in the coming quarters and years.

So if we then look at the outlook into next quarter, we see that we have a revenue growth and EBIT margin expansion is also expected to continue, however, at a bit slower pace, the comparisons are a bit more challenging in the next quarter. We also see continued inflation pressuring in Q3, and we also see that the long-term market trends is really supporting growth and investment in high-end radiotherapy equipment and margin expansion.

So if I then turn to the summary of Q2. We see a very strong order growth, excluding China. We have shown the fourth consecutive quarter with revenue growth and expanded EBIT margin. We have been driving improved working capital and cash flow. We see great momentum with market-leading product portfolio, and I highlight would be Unity and Elekta One. And we've also acquired attractive expansion into brachytherapy using a miniaturized x-ray source with Xoft.

[Cecilia Ketels, executive]

And with that, thank you, Gustaf. We will continue with a Q&A session. So please, operator, can you open up for the first person in line.

[Operator]

[Operator Instructions] Our first question comes from the line of Mattias Vadsten at SEB.

[Mattias Vadsten, analyst]

I will start with one here. It's on the wording for Q3 in the CEO letter, you said that the significant improvements will continue, but at a lower pace. So to me, this is not strange given the comps are less easy ahead, so to speak, based on the development sequentially last year. So the question is really, is this the reason for this comment rather than something worsening sequentially? Or how should we look on it? That's the first one.

[Gustaf Salford, executive]

Yes, if I start with the first one, you're right, Mattias, it is linked to the comparison. We have shown strong revenue growth now for 4 consecutive quarters. So the comparison will be more difficult here in Q3.

[Tobias Hagglov, executive]

Absolutely. I mean you saw here last year, we had a Q2 of minus 5% growth and Q3 of plus 8%. So -- and also a big difference in margins. So absolutely, Mattias.

[Mattias Vadsten, analyst]

Perfect. That's quite clear. Then how do you look upon momentum for Unity now? You mentioned it was strong on ASTRO. But can you comment on how the momentum has changed given the ViewRay situation perhaps? And also, if you could comment on how many orders and installations you've had sort of since beginning of this fiscal year?

[Gustaf Salford, executive]

So if we take -- thanks, Mattias. I will start here. So if we look at the MR linac or Unity, we see a great momentum. It is linked to partly because we deliver comprehensive motion management, that is a key technology to enable further adoption in many of the sites around the world.

We see the clinical evidence coming out as well. We see a higher throughput of patients per machine per day or per year around the world. That's very good for reimbursement and the profitability of the centers.

We see also a bigger interest in public procurements. We see the Class A in China coming through. We see, of course, an opportunity with ViewRay exiting because we see a big interest in many of those sites to continue with the MR linac technology.

So although it's kind of sad, I would say, for the MR linac industry that ViewRay have been exited, we see it as opportunity for Elekta to continue to deliver our technology around the world to continue to drive this, what we see is a paradigm shift in radiation therapy.

If you then ask the question, I mean, we publish our yearly numbers on Unity order units and revenue units. So it's not a number we give out per quarter. But it's a strong development at the moment.

[Tobias Hagglov, executive]

And we see a ramp up sequentially as well.

[Mattias Vadsten, analyst]

Perfect. Then just on the gross margin, it looks like, of course, headwinds from delivery of some orders that you maybe took a long time ago. So could you comment on the headwind from external factors on the gross margin. Now you mentioned some there and how much is mix? And to what degree can we expect higher gross margins going forward? Can you comment anything when it's relevant to look at the sort of 40% trajectory again?

[Tobias Hagglov, executive]

No, absolutely. And thanks for the question and it's irrelevant. I mean, gross margin for us is obviously very important. I think to start with, I mean, I would actually look at the year-to-date numbers as well, and I should have recognized that we have a higher gross margin than last year. I think that's a good starting point.

Secondly, when you look into the second quarter here. We have a very strong growth in our solutions business, which is very positive for us. We grew this by 15%, as you heard Gustaf mentioned, and this is good. It's just mathematically, it leads to an unfavorable mix in the quarter, but this growth we can then use to generate more service sales ahead of us.

Then talking about the gross margin. And actually, we stick to our plan, what we communicated at the Capital Markets Day, and that is that this fiscal year, it's more about the operating margin expansion. Then moving into next year, then the metrics on the gross margin will start to kick in. So that is actually in line with what we communicated, in line with our plan. And of course, we want to have a higher gross margin than 36%, but it's again according to plan, and it's actually year-to-date a better margin.

[Gustaf Salford, executive]

Yes, Mattias, if you look also at the inflation pressure, we see a lot of that in this quarter. So of course, we're not pleased with the 36%. But we had salary increases when we started our fiscal year, we still see material costs being high.

Logistics cost has gone down, as we mentioned in the last quarter call as well. But we expect the material cost inflation to go down going forward. And I think you've seen that in many other industries as well, that would also support our gross margin development going forward.

And then the prices, as we mentioned, and I think I mentioned it before as well, is that we have worked a lot with price increases across our product portfolio and our market. And as we mentioned before, we expect that to kick in and have a positive impact in our last quarter, so in Q4.

[Mattias Vadsten, analyst]

Yes, I think that's perfectly clear, and I will jump back in the queue. But maybe to the absolute prices. Can you comment anything, how much you expect prices to help solution sales into next fiscal year? Because you say it will hit with more magnitude during the -- towards the end of this fiscal year. So can you give any flavor there?

[Gustaf Salford, executive]

Yes. I think we -- what we said before and what we keep to is on the solutions side, I mean we've seen 3% to 5%, so mid-single digit, low to mid-single digit as many other medtech segments as well. So that's what we expect on the solutions side.

[Operator]

The next question comes from the line of Oliver Reinberg, Kepler Cheuvreux.

[Oliver Reinberg, analyst]

The first one was actually on China. So can you just provide a bit more color what kind of decline you have seen in China. When I look at the delta between the 4% and the 17% that you gave, I guess it points to roughly 2/3 decline. Is that the right number? And if so, I would assume that also China is a kind of more stable service business. So if you could just talk around that would be helpful.

[Gustaf Salford, executive]

Yes, of course. No, there was a big impact on orders in China in Q2. Not so much in revenue. We continue to install our revenue installations, but the tender processes have been stalled or waiting to get clarity on the situation. But overall, it's around 50% down in China in the quarter.

And we expect -- as I also mentioned before, we expect a slow Q3 and then we expect Q4 to improve because we expect the tendering processes to come back. We also have many positive drivers with our partnership with Sinopharm, with our Class A clarification on Unity as well as the investment plan for radiotherapy. So we'll continue to install and the orders will come back in the end of this fiscal year is what we see at the moment.

[Oliver Reinberg, analyst]

Perfect. And just secondly, on R&D capitalization and amortization, the capital [Audio Gap] chance to get a kind of hard number what you expect in terms of capitalization and amortization for the full year? And also when you expect this kind of gap to close in which year?

[Tobias Hagglov, executive]

Absolutely, Oliver. Thanks for the question. I will start with the comment here about the development here. The capitalization, if I start with that, that is just following accounting standards, what to capitalize and what not. In Q1, vacation periods are actually impacting the capitalization rate.

And then aside from that, it just follows the majority of the project and the normal seasonal pattern. When it comes to the amortization and the development into Q2, that was actually a finalization of one project of amortizing here. So nothing in particular there as well.

There if we look ahead then in terms of the hard numbers, as you were asking about, we have about -- if you look at the gross R&D as such, again, according to plan, we will increase gross R&D about SEK 25 million here to Q3. The amortization here will go up around also SEK 25 million while actually capitalization here will remain fairly stable between Q2 and Q3.

And then you have consequently an impact here on the net R&D about SEK 50 million. So that is the math of it. When you move then into the fourth quarter, we have a fairly stable development of gross R&D and actually the amortization will remain above this level and capitalization might go down a little bit, but be fairly stable. So that is the sequential development, what we see from now.

[Oliver Reinberg, analyst]

That's very helpful and precise. And can you just talk to when do you expect the amortization and capitalization to fully match each other, how many years will it take?

[Tobias Hagglov, executive]

I think, actually, what we are saying is that when you see the current development that the gross R&D as a percent of sales, it's have a healthy trajectory. The innovation pipeline is very important for us. It will generate a lot of value down the road, but that is actually trending downwards. We will also have, as previously communicated as well, an uptick of amortization. So you will see those getting closer.

We have not explicitly set a specific date for gross and net R&D. But the quality of earnings is important for us. And you see here the cash flow generation in Elekta and also this, this is accounting, and we believe in the innovation pipeline, and we'll continue to invest in that. But you -- what you also see here in terms of the gross R&D is also driven by the nice sales growth that we have and improved productivity in that sense. So that is what we see.

[Oliver Reinberg, analyst]

Perfect. Last question, if I may, to squeeze it in on GenesisCare, any update?

[Gustaf Salford, executive]

Yes, an update. So they came out just was it a week or 2 ago with that they are going through the process and they got new fundings. So they will continue as GenesisCare also going forward. So we expect to have a dialogue with them to get more clarity exactly what that will -- how that will be impacting us somewhere in the next quarter here. But overall, a positive message.

[Operator]

Next question comes from the line of Kristofer Liljeberg with Carnegie.

[Kristofer Liljeberg-Svensson, analyst]

I have 3 questions. First on the selling expenses. I noticed they are flat quarter-over-quarter despite the ASTRO conference. So could you explain -- and at the same time, I guess, you should have had some salary increases kicking in. So does this mean that you continue to do some efficiency work on that cost line?

And my second question, coming back here to Chinese orders. Just wondering what your visibility is that orders will really picking up again in the fourth quarter.

And then on capitalized R&D has been discussed here. But my question just is as this also follows the development of the product, does this mean that you are nearing completion on some larger R&D projects? Or is it more of a quarterly volatility and the seasonality you talked about?

[Tobias Hagglov, executive]

I can maybe start here with the selling expenses. I think, I mean here, you were talking about the conferences. We had ESTRO in Q1. We have the ASTRO in Q2. Obviously, both of them are big events for us. I think in terms of general here, I wouldn't read so much about into the sequential development. We have, as you see here, across our P&L, been successful in actually create a distinct gap between revenue growth and cost growth.

And that is important for us to continue structurally. Then you also see that we have a certain growth in -- year-over-year in selling expenses. And that is where we see the opportunity and we see the return, we will grab for that and generate more out of the investments that we do, regardless if it's CapEx or if it's R&D or if it's expenses. So that is what we see ahead of us.

[Gustaf Salford, executive]

Yes. And on the China order and the visibility, I mean, in, as I mentioned, Q3, we don't expect strong development. But in Q4, I mean, I was a week in China a couple of weeks ago and I discussed with many organizations, but also many customers. And that is the expectations I get from those discussions.

So we expect it to come back in Q4 in terms of the tendering processes and so on. That is the majority of the Chinese market. The Chinese market is somewhere around 80% public volume. So that is a very important part, of course, to show growth.

But I'm very much convinced that the need and the investments and the plans are there to continue to invest in the whole country in cancer care capacity and also with our joint venture with Sinopharm, but also through our different partnerships with other players, we will be able to drive strong growth in China in the next years. On the R&D side, if there's...

[Kristofer Liljeberg-Svensson, analyst]

Could I ask -- sorry. On China orders. So could we expect a massive pickup so that you will regain what you have -- what has been on hold now in both the second and third quarter? Or will this be more of a gradual, so maybe a small increase in China again in Q4 and then a larger increase into next year?

[Gustaf Salford, executive]

I mean I expect a strong Q4, but it's difficult to know exactly how that will pan out for the full year number. Of course, we need to get back to that when we have a better transparency. But we expect good order numbers there. But we'll get back to it in the next quarter and as soon as we know more.

On the R&D side, I think we've gone through historically, as you know, we had Unity project. That was a huge project that we ran over many years, and then we had a big increase in amortization during a period and then a reduction in capitalization. How we do our innovation projects right now is a broader portfolio. It's more smaller releases of innovations every year.

So it's kind of a different, different way of driving our innovation and product portfolio agenda. And we have been accelerating, as you know, and we have been launching a lot of products during the last 2 years, and we'll continue to do that. So don't expect any specific big movement rather that we'll get out with a lot of innovations for the ESTROs and ASTROs going forward.

Overall the last year, and that was also part of the cost reduction program, we have been working a lot with R&D efficiency and optimizing how we're driving our innovation funnel. And we'll continue to do that as well. And you've seen that on the gross R&D numbers compared to last year's.

[Operator]

The next question comes from the line of Hassan Al-Wakeel with Barclays.

[Hassan Al-Wakeel, analyst]

I have 3, please. Maybe to follow up on the Q3 comment. I appreciate the comments on comps. But could you give us more color on the degree of improvement that you expect in the second half? Is mid-single-digit constant currency growth a reasonable assumption? And how are the exit rates out of Q2 and into Q3? And what about the benefits accruing from pricing?

Secondly, can you talk about the orders and your expectations into Q3 given you've highlighted tougher comps? Should we expect negative order growth in Q3 returning to positive in Q4? And is this a function of China? And how should we think about the other regions?

And thirdly, can you talk about the improvement in free cash flow and working capital, which looks to be in part driven by improved advances? And how should we think about free cash flow in Q3 and Q4 given your commentary around growth margins and orders as well as the profile of customer advances?

[Gustaf Salford, executive]

Yes. Thank you, Hassan. I think I can talk a bit about the dynamics on orders into the next quarters and then Tobias could move into the cash flow. But if you look at where we are right now and revenue as well, I think the comparisons, especially on the revenue side, will be more challenging going forward because it's kind of the fifth quarter in a trend of really strong performance.

We don't guide specifically on the number into the next quarter for the full year. But we continue, as we mentioned, to have the midterm outlook at more than 7% and also to drive profit or margin expansion. And I think that's the ambition, of course, to drive revenue growth as well as margin expansion also into the next quarter.

If you look at then the order development, as mentioned, China will show not so strong numbers. That's what we expect in the quarter. But for the rest, we see a good underlying demand. We see a lot of activity in many of the markets. And that's what we expect from -- to turn a lot of that into orders for the coming quarter. So I think that's the clarity we can give at this point in time, and then we'll report out in the next quarter.

[Tobias Hagglov, executive]

Yes. And coming to your cash flow question, you saw the improvement in this quarter. We will continue with this work. I think, actually, when you look at the different components, we do have both seasonality and the pace up of growth are at a bit higher inventory levels right now. We have also some payment terms of successful deals in Southern Europe where the billing terms were longer. So the work here with cash flow and working capital will continue, and we see this on a positive note ahead of us.

[Hassan Al-Wakeel, analyst]

Very helpful. If I could just follow up. What impact do you expect to revenues either next year or maybe the year after from the order declines in China this year? Could it be more than a percentage point headwind to group growth?

[Gustaf Salford, executive]

China is quite a quick order conversion, I would say, that from order to revenue. So I don't see any big risks there. And then it's important to say the underlying need is there for both replacements and new capacities. So I expect that to pick up. And you've also seen strong installation volumes throughout the last quarter, but also I would say for last year. And we also expect that to continue.

[Operator]

The next question comes from the line of Rickard Anderkrans with Handelsbanken.

[Rickard Anderkrans, analyst]

I have 2, please. So in Q1, you were quite clear that you aim for order growth for the full year. I just wanted to confirm that this still remains the target and clear ambition from your end. So I'll start there.

[Gustaf Salford, executive]

Yes. It's a good start, Rick. And yes, we are driving for the growth for the full year.

[Rickard Anderkrans, analyst]

Okay. Very clear. And then a question. So at the ASTRO conference in '22, you highlighted relatively big tenders in both Poland and Croatia. And as far as I can tell these have not been sort of completed or materialized? And if that's the case, do you expect them to land during this financial year?

[Gustaf Salford, executive]

Yes, there were some delays, especially in the Polish tender, but we expect to know much more about Croatia very soon and then Poland a bit later.

[Rickard Anderkrans, analyst]

Okay. But most likely within this financial year?

[Gustaf Salford, executive]

Yes, especially Croatia.

[Operator]

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

[Lisa Clive, analyst]

Can you hear me okay?

[Gustaf Salford, executive]

Yes.

[Tobias Hagglov, executive]

Perfect.

[Lisa Clive, analyst]

Okay. Great. Just 2 questions on Unity. First of all, could you just give us an update on geographic split of Unity demand? And if there's any notable split between markets where there's more supportive reimbursement versus other?

And then also on that note, can you just give us an update on some of the key findings from the MOMENTUM research consortium? And historically, you were focused on getting to separate reimbursement categories. Just where are you on that? Or is that sort of less of a priority today?

[Gustaf Salford, executive]

Yes. Thank you, Lisa. So kind of geography of demand, so to say, and the MOMENTUM study. And then you had a second question. What was that? Sorry, can you take it again?

[Lisa Clive, analyst]

Sorry. So those are my 2 questions. One, sort of geographic split of Unity demand and then 2, any updates on the MOMENTUM research consortium. And specifically, if there's any movement towards sort of separate reimbursement categories?

[Gustaf Salford, executive]

Perfect. So if I start with the geographical demand patterns, I think it's a global trend. And you see it at ESTRO and ASTRO, MR/RT and MR-linac is really a big area, both on the clinical papers and scientific research, but also in terms of productivity and how to drive more patients through, et cetera. So we see big trend across the globe.

I would maybe highlight U.S. at the moment because of ViewRay exiting that we have a lot of interest in that market for technology with Unity because many of those sites and many of the leading institutions there have been treating with MR-linac for a long period of time and also see the big, big benefits.

On Elekta side and on the customer side, we focus a lot on getting more patients through, increase the productivity because that's the key reimbursement driver, of course, number of patients going through the clinic per day. And there, we've seen a very improvement trend over the last quarter, I would say that's very positive because more patients get treated with this fantastic new technology.

If you look then more on the reimbursement side, I think throughput is a key driver for reimbursement when it comes to the clinics, but we also see a lot of discussions progressing on the unit reimbursement or MR-linac reimbursement, both in Europe, we have highlights in Japan, for example.

We have a lot of discussions in China, parts of Europe and also the U.S. takes a bit longer, but we have good discussions there as well. But it's still -- with high throughput, with the existing reimbursement, it's still a very good often business case for those hospitals that is evaluating that technology.

If you look at the scientific evidence coming out in the clinical studies, they are becoming more of them, more output, more evidence. And we see also that many of our partners and the clinicians, they are really taking it to new areas. If you look at the HERMES study going down to 2 fractions for prostate cancer.

You see many examples in the U.S. that instead of treating a patient for 6 to 8 weeks, they go down to 1 week. That's dramatic improvement in productivity but also the experience for the patient. And we also see more and more of those papers coming out.

We see papers on oligomets, we see papers on pancreas, we see papers on liver mets. So it's becoming much more of a broad-based trend also on the clinical side. And also more and more papers and abstracts at ESTRO and ASTRO and JASTRO, for example, in Japan that's happening this week.

[Operator]

[Operator Instructions] Our next question comes from the line of Veronika Dubajova with Citi.

[Veronika Dubajova, analyst]

I have 3, please. Just apologies, I want to circle back to the order momentum for third quarter. And just if you could confirm whether you expect orders to grow in Q3 or whether you expect the China headwind to outweigh the growth that you're seeing elsewhere? That would be my first question.

My second question is just on your FX expectations for the gross margin for the second half of the year, given where we've seen currencies move to. And just maybe provide a general update on how currency is going to impact the second half numbers.

And then my final question is just looking at the business, obviously, you have seen -- if I take the last 4 quarters, I think your order growth is still tracking only in the very low single digit sort of 1% to 2%. And so I'm curious if you can talk through sort of what gives you the confidence in sustaining that 7% sales growth if orders are only growing at 1% to 2%.

And I'm not just looking at this quarter, I'm really looking at the last 4 quarters on a rolling basis. So if you could help us think through what we might be missing in that translation, that would be helpful.

[Gustaf Salford, executive]

Absolutely. I'll start on the order side, and Tobias will go into the FX. So I'll take question number 1 and 3 here initially. So China, we mentioned in orders for the next quarters, the impact, I think we don't guide on specific on orders, but one other driver, of course, is we had a really strong quarter in Europe last Q3. So that's a bit a difficult comparison.

But we see a strong performance in other parts of the world coming in. Exactly where we'll end up, we will not guide on that. But I think that will be the 2 or 3 key themes that, China, weaker Europe, Difficult comparison, rest of the world, stronger development, I think, on the order side into Q3. That's what we see at the moment.

I think what you miss in the order equation, Veronika, is 2 things. It's the book-to-bill ratio, where we have had a strong book-to-bill ratio over 1 for a very long period of time. You also missed the order backlog, I would say, of $46 billion that will -- sorry, SEK 46 billion that will support a strong revenue growth over the next year and years. So with those factors, I see that we have a strong support for our midterm outlook of more than 7% revenue growth, together with the margin expansion. On the FX side, I'll leave that to Tobias.

[Tobias Hagglov, executive]

Yes, Veronika, so we can actually start to talk about the gross margin impact. We see slight negative impact from FX on gross margin here for Q3 and Q4. So it's actually positive on revenues. It's a slight negative in terms of gross margin impact.

And then here, if you recall here from our financial statement, we had negative impacts here from the currency hedges here also second half of last year. So on an operating margin level, we will have a positive contribution from currencies. So that's how it's played out with the current levels that we see right now our currencies into the second half.

[Veronika Dubajova, analyst]

Very clear. And can I just ask one follow-up quickly on China and sales. I just want to clarify your comment a little bit here. I think Siemens Healthineers have obviously guided, given the short order to sales conversion, to some headwinds to sales growth over the next couple of quarters from the weakness in China orders.

I'm kind of curious, I think, Gustaf, your answer to one of the previous question suggested that you were not necessarily expecting that to be the case. But why wouldn't it be the case if you have a fairly short order to sales conversion? If orders are down 50%, 60% for 2 quarters in a row, why wouldn't we see China sales down 50% to 60% for the following 2 quarters after that in terms of revenues?

[Gustaf Salford, executive]

No. So I think the order, say, if we're 1 to 1.5 year between order to revenue on average for linac project, I think they will be able to catch up some of that effect. And I think the questions I got previously, I saw that more on maybe a rolling 12 months basis. So of course, there could be some effect in the quarter on the revenue side for China.

But being there, talking to the customers, talking to many different partners there as well, I foresee that we can drive a strong revenue numbers in China going forward. So that's what we see at the moment.

Then of course, when we have more transparency after Q3, we'll give an update there on China going forward as well. But what we see right now is strong installations going forward as well, strong opportunity on the Unity side in the next years and also that orders will come back in Q4 and onwards.

[Operator]

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

[Robert Davies, analyst]

I had just 2. Most of them have been covered. One was just if you could give me a little more color on just the APAC order trends outside of China. I think in the release, you called out some strength in Australia and some of the other regions, just be interested to get a bit more color in terms of what's going on there.

And then just the other one was tying into some of these questions around the medium-term growth outlook, I guess. Are you expecting sort of a wind-down or a decrease in your backlog year-on-year from accelerating organic sales growth deliveries? Because I think a couple of people touched on the sort of run rates on orders.

I think your book-to-bill year-to-date is 1.03. The order rates are sort of low single digit. How do you kind of get to that level without winding down the backlog? Is it fair to assume that organic growth is accelerating and your backlog is going down into next year?

[Gustaf Salford, executive]

Thank you, Robert. If I start with APAC, I see that as good growth momentum, large unmet need, I mean we talk about ASEAN countries, we talk about India, it's really I believe one of the areas with most growth potential around the world actually. Exactly the quarters and so on, we'll get back to that, but it is a good growth trajectory there.

On the backlog, yes, we have a big backlog and a lot of our initiative and priorities right now is to speed up the order backlog conversion into revenue as quickly as possible because the customer needs their products and solutions and service, and that's what we'll focus on.

The consequence of that will be that we will drive a lot in the backlog, we'll see exactly what we end up on, but we want to install it as quickly as possible. I mean -- and that could be a bit lower backlog than going forward. But of course, we also drive order growth around the world to fill the backlog. But I would say the big priority right now is to turn it into installed projects and revenue.

[Cecilia Ketels, executive]

Okay. I can see that there are no more questions. So with that, we would like you to listen in today. And if you have further questions, don't hesitate to reach out later on. And maybe some -- any words, Gustaf?

[Gustaf Salford, executive]

Thank you. Thank you, Cecilia. And really thank you to everyone for great questions and for listening in to our earnings call. And as we said, we drove significant improvements and generated the fourth consecutive quarter with revenue growth and expanded EBIT margin.

But we also saw the order growth coming back, and it's supported by large deals in both India and Ukraine. We also saw the cash flow improving in the quarter, and we're really looking forward to continue to deliver on our strategy, ACCESS 2025, in the second half of our fiscal year '24, '25. Thank you.

[Cecilia Ketels, executive]

And we wish you a great remaining day, and see you on the road. Thank you.

[Tobias Hagglov, executive]

Thank you.

[Gustaf Salford, executive]

Thank you.

[Cecilia Ketels, executive]

Bye-bye.

[Tobias Hagglov, executive]

Bye-bye.