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Elekta AB (publ)
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Ladies and gentlemen, welcome to the Elekta Q3 report. [Operator Instructions] Speakers, please begin.
Thank you very much. This is Gunilla Öhman of Elekta. I'm very sorry we were late due to technical problems, but you're still welcome to our third quarter report for our fiscal year 2018 -'19 that we issued this morning. So with me is Richard Hausmann, our CEO; and Gustaf Salford, our CFO. And our agenda for today is shown here. So Richard will begin by describing the quarter in short and some highlights and events during and after the quarter. Gustaf will dig deeper into the financial. And we will end with Richard rounding up and invite you all to Q&A session. So welcome. Just a reminder, some of the information discussed on this call, including our projections regarding revenue, operating result, cash flow as well as the products and product development, contains forward-looking statements. These statements involve risks and uncertainties that may cause actual results to differ materially from those set forth in the statements. With that, I hand over to you, Richard Hausmann.
Okay. Thank you, Gunilla, and good morning, everyone. This is Richard Hausmann, CEO of Elekta. Summing up, our Q3 report, we can really see strong growth in the market. As far as Elekta has been doing, our own order growth has been accelerating in the quarter, and we have seen strong net sales growth in all markets and in all product lines. After the FDA clearance of Elekta Unity in December, we have strongly growing interest from customers and received great feedback from the hospitals that are now treating patients. Our 7 orders for Unity in the quarter are encouraging, but even more uplifting is our robust sales funnel. As for margins, both growth and EBITA margins are somewhat disappointing and it's something that we take serious and we are addressing already. I will come back to that in a few minutes. Before we go into the quarter and our numbers in more detail, I would like to share some thoughts on our strategy and how it links to our actions. The future of our industry is in Precision Radiation Medicine, including diagnostic quality imaging at the point of treatment, real-time adaptive treatment planning, data-driven personalization and intelligent automation. We believe that this will significantly improve current treatments, enable better patient outcomes, as well as better patient comfort and increase operational efficiency for the clinic. The double-digit order and net sales growth, which we saw across our regions underpins the growing need for effective cancer care globally. With our strategy focusing on Precision Radiation Medicine launched at our Capital Markets Day in September last year and our broad range of solutions, Elekta is well placed to continue to meet this demand and to win share. We are convinced that Precision Radiation Medicine will continue to drive our growth in the years to come. With precision, we mean the ability to treat exactly where the tumor is, saving surrounding tissue, reducing side effects in the patient. Elekta has a history of innovation in this area of its product and technologies, such as our founding product, Leksell Gamma Knife, image-guided radiotherapy with linac and, most recently, with our Unity, which combines high-field, high-quality MR imaging and high-precision linac treatment. These help to deliver optimal individualized treatment for every patient. With radiation -- with the word radiation, we focus on providing unmatched competence and expertise based on our heritage and catering to the global and increasing need for radiation therapy. As a company, we are committed to bring high-quality radiation treatment to people in need everywhere around the world. And with our focus on medicine, we support cancer patients and clinicians throughout the treatment pathway, enabling better decisions and driving continuous learning and improvement of treatment and outcomes. So linking our strategy into action, where are we? Well, precision, in my opinion, starts with good and patient-focused design. And that's exactly the award that we won for Unity earlier this year. It's one of the most prestigious awards for design in the United States, and we are happy about this. We are also satisfied that, following FDA clearance, hospitals in the U.S. have immediately started treating patients using Unity, making the highest-precision radiation treatment available also in the United States. At Arab Health, we took another step on our path to making high-quality radiation treatment accessible to all when we signed an order for the first Unity in the Middle East. And in China, we launched the Radiation Therapy Academy, helping share knowledge and making better clinical decisions. Finally, our MOSAIQ oncology information system won the best-in-class award for software and services, linking very well to our focus on medicine in the patient journey. So looking at our report, we had a double-digit growth in orders of 12% in constant currencies for the quarter, with net sales growing 14%. We continue to see a strong market with good growth. As for the margins, however, the picture is not -- for the last quarters, not as positive. The gross margin was lower due to an unfavorable project mix and price pressure in mature markets as well as some continued ramp-up of commercialization efforts of Unity. In addition, we continued investment in China related to the government's recently announced plan for advancing radiotherapy. This led to an EBIT margin of 15.2% in the quarter and 18% -- 18.2% on a rolling 12-month basis. I am not satisfied with this margin level, and we have ongoing measures to improve this, such as cost-reduction programs. I also see significant further improvement potential in our ongoing process excellence efforts, as we have done them over the last few years already. Despite unexpected strong Q4, we will not be able to compensate this shortfall in EBITA for Q3 and the quarters before for the full year. As a consequence, we have reduced our margin outlook for the year from 20% to around 18%. At the same time, we have raised our net sales growth target from around 7% to around 8% to reflect our good dynamics in the market. Looking at the regional development, North as well as South America, order intake increased by 16% in the quarter. The strong performance in the region was a result of a rebound from the poor second quarter as well as growth in South America also the later continues to be quite volatile. And Europe, Middle East and Africa reported growth for both consecutive quarters, 5%. Europe, in particular, delivered stable results. I was also happy to see 5 new Unity orders in the regions during -- in the region during the quarter. In Asia Pacific, orders were up 20% in the quarter. The region showed good growth in general. And China, where we are market leader, saw double-digit growth as well. In general, we are optimistic and expect continued favorable market conditions worldwide. Elekta Unity has a -- had a good quarter, and we see an increasing momentum with several highlights from the quarter underlying this. Just to mention the few of these blue boxes you see on front of you, the first patients were treated in the United States at MD Anderson Cancer Center and Froedtert Medical College of Wisconsin in Milwaukee. More than 80 patients have now been treated with Unity, and more than a thousand online adaptions (sic) [ adaptations ] have been performed, helping to reduce damage of healthy tissue and organs at risk. I was happy to personally sign our first order in the Middle East, in Bahrain, and we launched Unity in China as well as the MOMENTUM program globally. We are happy to see 7 clinics now treating patients, with 10 more being installed as we speak. I myself visited the University Hospital of Tübingen not long ago and witnessed at firsthand how they treat patients. It was amazing to see the ease and speed. I saw 5 patients being treated in the 3 hours I was there. The feedback we get from customers who are treating patients with Unity is that it is delivering to the promise to fundamentally change radiation medicine. This feedback, together with the 7 new orders in the quarter and a growing sales funnel, makes me even more confident that we have made the right decision and the right bets when we started to develop Unity and bringing it to clinicians and patients. As I said, I'm particularly excited about the clinical results, and that's the reason why I would like to share with you a few of those more clinical pictures. And then it's all about seeing more clearly what to treat, monitor the motion, adapt in real time to changes, treat accurately and even assess response. On the left side, you'll see -- on the most left side, you'll see a breast cancer patient, and the accelerated lymph nodes are very significant in those cases. I don't know if you can see the dynamic of the picture, but with the MR-linac, you can really detect and see the lymph nodes in the axillary region, and you can separate them from those who are drained by the arm -- with the arm and drained from the breast. You want to treat those which are drained from the breast selectively because if you do the other one, then you would have side effects like swelling of the arm because of the damage of the lymphatic system. This is proven, shown in various cases already that this is possible with the MR-linac. If you look at the middle image, you'll see a case of esophagus carcinoma, a cancer in the esophagus. And what you see there is a cut through the body, an MR cut through the body. And next to the blue area of the cancer, blue surrounded area of the cancer is the descending aorta, which is, as we know, a large vessel which you better don't hit with radiation. That's the reason why esophagus carcinoma was not really treated frequently with radiation. With Unity, it's possible because you'd really see exactly at each moment in time and for each fraction exactly the position and size of the cancer, adapt to it and that, in that way, stay away from the sensitive organ, the aorta and others in the region. And then I would like to highlight this on the second from the right picture, this area of the lymph node -- secondary lymph node metastasis of a prostate cancer. Very close to the bowel, this is the dark area on the right side of it. You have to stay away from the bowel, you want to see that exactly. These are very tiny lymph nodes, excellent image quality, and that's possible with high-field MR imaging as it is on our Unity. And last but not the least, if you want to know if there's a result also -- a response, so to say, on treatment with radiation, you have to prove if the radio sensitivity of a particular patient or cancer is there. And that's also possible with the MR -- high-field MR. So in other words, you can save even -- if you see there is no response, you save on the treatment and save also money and burden for the patient in that sense. In the next slide, I just add a few more cases because they come from all over the place now. And this is a variety of applications from pancreatic cancer, to liver metastasis, to head and neck tumors, to ovarian cancer, oligometastasis are a big application of it. Of course, rectal cancer and prostate are also amongst them. Everything which is in the abdomen and pelvis or in very difficult and complex regions like the head and neck is now addressable by radiation therapy. So we have in total now 39. As I said, our sales funnel has continued to grow in the quarter. Looking at the total number of system as of today, we are now at 39, including the 7 we booked in the third quarter. That's 1 in Australia, Olivia Newton-John; the People's Liberation Army Hospital in Shenzhen in China. And in addition to them, we have 3 in the Netherlands, Nijmegen and 2 in Utrecht, adding them up to 3 MR-linacs in Utrecht now. We have one in La Paz, Spain; and the first in the Middle East, in Bahrain. We are still on track for starting installations of one system per month this fiscal year. Finally, we had a couple of events that were worth highlighting in the quarter not only because of their success but also because they so clearly show how our strategy is coming to life. Firstly, the Arab Health Congress. We have an ambition of catering to the growing need of cost-effective, high-quality cancer care across the globe, and the Congress proved to be an excellent setting to work towards that goal. Apart from the first Unity, order in the Middle East highlights during the Congress, including a reference site agreement in Jordan, orders valued of more than $20 million and great customer interaction and feedback. Secondly, we hosted our largest user meeting ever in China during the quarter, the Elekta Precision Radiation Summit, with more than 1,000 participants. The highlight was the launch of Elekta RT Academy, which will support knowledge sharing within several focus areas, very well received. I was personally there at this event, and I really enjoyed this really active interaction with the customers and the academical and educational aspect of this meeting. With this, I hand over to Gustaf.
Thank you, Richard, and this is Gustaf Salford, CFO of Elekta. I'll now go through the main events in the quarter from a financial perspective. We had a strong net sales growth but weaker gross margin development in the quarter. Our net sales grew by 14% and were now 10% year-to-date in constant currencies. All our regions and business lines show growth. And solutions grew by 12% from strong installation start numbers, and service is growing by 7% from a large installed base and renewal of service contracts. The gross margin was lower than expected due to unfavorable project mix in primarily mature markets and expenses for continued Unity ramp-up. To summarize, this led to an EBITA margin of 15.2% in the quarter and 18.2% on a rolling 12-months basis. So now to the EBITA bridge year-to-date compared to last year. We continued to see strong volume improvement due to increased installations and service growth amounting to SEK 578 million. However, price and product mix effects, together with COGS, had a negative effect of SEK 361 million. Also, investments in the ramp-up of Unity, selling expenses and less R&D capitalization add up to SEK 386 million. And during the first 3 quarters, we also got the positive impact from currency on EBITA level of some SEK 68 million, and that is at similar levels of -- as we had of the Q2, so not a big effect here in Q3. All in all, EBITA came in at 15.8% year-to-date. So now to expenses, and our expenses declined slightly compared to Q2 levels in constant currency. Both selling and R&D expenses were lower, but we had some increases in administrative expenses, partly due to our preparations for Brexit. I'll come back to that. If you compare to Q3 last year, our expenses are significantly up. Selling expenses increased by 7% versus last year, explained by investments in Unity launch activity. Also, R&D expenses increased due to higher R&D amortization and lower capitalization following the CE Mark of Elekta Unity in Q1. If we adjust for this effect, you'll see that our gross R&D spend is actually downward 5% versus last year and 1% versus last quarter. In relation to net sales on gross R&D spend, it's now at 11% on a rolling 12-months basis. Then in the coming quarter, as we've done here in the initial of the year, we will continue to focus on cost control in all areas. If we look forward then on our EBITA for Q4, we expect it to improve from current levels, reaching around 18% for the full year. This is a change from our previous guidance of around 20%. The main Q4 drivers supporting our updated full year view are scale on revenue and improved product mix and increased mature market volume with higher margins. To capture future growth, we will continue to invest in innovation projects. And we've also decided to continue with the investments in key growth markets, for example, China. Our outlook for EBITA FX effect has changed from the Q2 view of SEK 175 million to our current view of SEK 115 million. And now to working capital. The main working capital movement in the quarter was the increase in accounts receivable, was mainly linked to invoicing for products shipped in the end of the quarter and increased service invoicing. Day sales outstanding is at a negative 51 days, up from negative 64 days last quarter. Net working capital levels are at minus 9% of net sales. And we project to continue to operate at negative working capital levels also going forward. Our cash conversion came in at minus 10% for the quarter. And we are at plus 52% on a rolling 12-months basis. As you see in the table to the left and as I mentioned previously, increased working capital was the main driver for the lower cash conversion. The increase in financial net in the quarter is related to the repayment of external debt. This is a one-off negative impact, and it will be more than offset by reduction in interest expenses over the coming 2 years. In the coming quarter, we are focusing on driving a strong cash generation, enabled by collecting the AR generated in Q3. We continue to focus on achieving a stable and a strong cash flow going forward. And then turning to our financial position. Net debt amounted to SEK 1.5 billion at the end of the period, represented 0.6x EBITDA, an increase from the last quarter due to the lower cash flow generated. We're looking at the debt maturity profile to the right. There are a couple of events in the quarter. We repaid a $50 million external loan with maturity in 2021. And we also renewed a euro loan in SEK until 2020 to optimize our maturity profiles over the coming years. With this, we now have a good distribution with a low [ refinancing ] risk over the coming years. And then to Brexit. There will be a significant effect, of course, here in Q4. And our goal is to ensure that the goods and services, medical products and devices, that we're sure that we provide it to our customers and that will not be adversely affected. And therefore, we have been preparing for various Brexit scenarios so that we can ensure that the production and deliveries will continue as scheduled. These actions include mitigation measures with a number of areas such as supply chain, regulatory affairs and movement of people. One key initiative is the formation and implementation of Elekta Solutions AB, a Swedish legal entity that is used for transferring regulatory and transactional activities from U.K. to European Union. We also continue the ramp-up of linac production volumes in China. So Elekta is prepared for Brexit and for the coming quarters. And with that, I would like to hand it over to Richard.
Yes, thank you, Gustaf. So some key takeaways from today's report. In summary, double-digit order growth and net sales growth; strong Unity demand and great customer feedback; margins to be improved; investment in innovation and market expansion is ongoing; and the radiation -- Precision Radiation Medicine is the future. Finally, we changed our guidance for the full year with an upside on net sales to 8% -- around 8% net sales growth. And we expect to reach an EBITA margin of around 18% for the full year. With that, I hand back to Gunilla to start the Q&A session.
So please, welcome with your questions.
[Operator Instructions] Our first question is from the line of Annette Lykke from Handelsbanken.
My first one will be on China. You have now, I guess, close to completed most of your installations there of the 5 clinical systems. When should we expect clinical data to be completed in respect to achieved Chinese FDA approval? And also in respect to China, it is my understanding that you're working on a new regular value margin -- a regular linac margin. When should we expect to see that one being commercial in China? And then a follow-up question to China is that, with these upcoming protos of close to 1,200 value models, how should we see that in respect to the poor sales mix you had in this third quarter?
Okay, I'll take that. The CFDA study, you're correct. We have installed the 3 systems, which are the official ones. We're doing the CFDA study. There are 2 more installs as well. So the study results, we expect probably towards the end of this calendar year, then they need a certain time for evaluating it, et cetera. So our last estimate is that probably at the end of next -- of this fiscal year, in April, May, like 2020, we get the final release. And the value linac timeframe in -- this is a development which is happening in China, of course, supported by the global architectural team, et cetera, we see that this will be released at the end of this calendar year, so in 2019 -- end of 2019. And yes, this program of the Chinese government, which was announced like a few months ago, on these 1,200 more linacs to be installed, et cetera, what we see right now is that the Chinese health authorities are now basically developing that into concrete licenses. Different hospitals and cities are getting these distributions of the licenses. It will take certainly more time to really get to tenders and then to final orders, but we see momentum in the overall program to be executed.
But if we look at the COGS on this new value model, I assume you would choose this one in China or in U.K. What would be the COGS effect or the gross margin effect from the additional orders in China?
We have a target for our COGS reduction on this one, of course, as well. The main focus is also not only on COGS -- it's not only on COGS reduction, it's also on simplification, smaller footprint, ease of use, and these topics to be prepared for more rural areas of China. But there's also the component of COGS reduction and simply -- as well as simplification in the product.
Our next question comes from the line of Romain Zana from Exane. Okay, and Romain seems to have dropped off. Our next question comes from the line of Ian Douglas-Pennant from UBS.
So I've got a few. I'll just -- I'll keep it down to 2. And so on order cancellations, am I right in thinking that you had something like SEK 450 million in orders coming out of the backlog this quarter? It seems like a much larger number than we're used to. And if that is -- if my math is correct, could you go into why? Secondly, on the gross margin, it does seem that the 40% appears to be the new level. You're delivering that all this year. Could you explain why this is -- appears to be much more than just a quarterly issue, why that there appears to be some kind of longer-term change here and maybe go into a little bit more detail on what the cost-control initiatives that you alluded to in your prepared remarks actually involve and how substantial this might be?
Thank you, Ian. Now I'll take the order backlog question. So we are reviewing our order backlog on a monthly and quarterly basis to go through the projects and special focus then on older projects, of course. And then we had a bit higher cancellations in the quarter compared to our average, and that was related more to larger deals that were delivered partly, but there were a couple of projects that we canceled out from those agreements in agreement with the customer. So that is on the order backlog side. So on the gross margin side, it was weaker than expected in the quarter. We came in at this 40.8% in isolated Q3. And as we described, it's really about the project mix and price, particularly in mature markets, so Western Europe and the U.S. We see that the trend to stabilize and improve when we look at orders and order backlog and order intake, so we'll see that it will improve from that point of view. And at the same time, we're driving a lot of COGS initiatives, both on existing linac platforms but also on the Unity project. That will also improve. And then in the quarter, we have some additional Unity ramp-up cost and in service, installation costs to install the machines we have out there. And I also see that as a temporary effect, where we then build up more Unity revenue and not as much installation and service resources going forward.
And can I just follow up on the order question? Because you report gross orders. I mean, in the scenario that you canceled an order, removed it from the backlog, and then sometime later, that customer put in another order, would that then go back into the gross order intake for the second time, just theoretically?
Not if it's still the same order. And if it's a new contract with the customer, then we put that as an order. So it should not be -- absolutely not the same order. But if it's a large customer, sometimes, they update their contracts into new sites and new contracts, and then we'll cancel those older projects.
Great. Could I just ask one more quick one? And when do you think we'll start taking orders for linac and monitoring them?
We expect that happening in Q4. As usual, it takes a little bit longer because we were really rigid -- and I pointed it out already in the last call. We were very rigid in the United States with the FDA regulations not to presell. So we have not officialized any pipeline, et cetera, so -- and have not allocated really officially the people to sell. And we have started that immediately after the FDA clearance. But we have a strong pipeline there. We have -- we are installing the ones which we are now having had from the more research side. Memorial Sloan Kettering, for example, is going in as we speak or is already in and will be finalized soon. So a lot of customer visits now happening to the sites which are clinical. As well as the ones in Europe, they come over from the U.S. partially even, so we see the dynamics starting now.
And our next question goes now back to Romain Zana from Exane BNP. And we seem to have just lost him again. So our next question comes from the line of Kristofer Liljeberg from Carnegie.
Coming back to margins, considering that this mix effect has been ongoing now for quite some time, don't you think there's a structural problem with pricing? And also, how should we think about the EBITA margin now for the next few years? You previously talked about the flat margin, but then the base was supposed to be 20%. Now the base is 18%. So do you still expect to be around 20% for the next few years?
So on the midterm guidance question, we keep our midterm guidance. That has absolutely not changed because of Q3 here. And to the product mix question, we have had a good software launches and focus with MOSAIQ Plaza. That's one area that we see good momentum in right now and upgrading our software installed base, and that's a big opportunity for us. Of course, it's also the newer business that has relatively higher margin that we are driving a lot across the different regions. And then we also have better margin products relatively like the brachy business as well. And then we continue to see a big opportunity in our service business, working with service excellence on the margin side, but those opportunities to drive the service revenue over the coming years here. So that's the key margin improvement areas that we'll see not only here in Q4 but also in the years to come.
And then by the way, just to add on that, of course, we'll see -- we are expecting a strong Q4, as you expect from us from the years before. And we are executing also there. And one additional thing about this project mix is also related to Unity because we have now installed and revenue taken, the ones which are -- let's say, the one which -- the early ones, the consortium member sites, and some of them have added to our development efforts. So they had enjoyed better pricing because we value that input, yes. From that point of view, the margin on those ones was lower than we expect overall for Unity. So from that, I see also a positive sign.
Well, I believe that must have been in the plan, so there's something that makes you more confident now about this mix effect improving because, if I remember correctly, this is something you have talked about for quite some time.
In principle, you're right. Theoretically, should have been [ plannable ]. But in detail, there are shifts back and forth between the quarters, and some of these very early contracts were also not completely transparent for all of us, and we had to do the final calculation, et cetera, and then it ends up in this one, okay?
And then on Unity?
Good temporary effect is the answer. It's a temporary effect.
Okay, okay. And on Unity, good to see 7 orders in the quarter. This level, do you think -- is this the new normal level? Or could it accelerate further in the coming quarters with U.S. coming on board as well?
Well, first of all, we are absolutely confident about the 75 for mid of 2020. And as I said, the pipeline is quite dynamic, so we are optimistic.
Okay. So does that mean we could expect Unity orders accelerating further or remain at this level?
We don't see that as a per-quarter number to guide on, frankly. We see a more dynamic -- we will see a more dynamic order income of Unity definitely. But as I said, we guided more towards the 75, and we will see more, yes.
Our next question comes from the line of Patrick Wood from Bank of America Merrill Lynch.
The first would be on the like-for-like sort of ASP pressure that you guys are talking about. Rather than the mix, I'm just curious where you're seeing that ASP pressure manifest not by market but more by areas. Is this more about the Unity systems, or is this much more in the legacy business? And how is that looking in terms of discussions from customers? So some more details there would be great because there's quite a big effect. And then the second question I had was, do you guys have any thoughts on the leaked proposed Rad Onc bundle in the U.S.? Just kind of curious to get your thoughts on that.
Okay, I'll take the first one. From what I see is a bit of -- I mean, on the margin side, you have to realize that much of it we are now realizing, and the revenue have realized this basically in deals which happened like 1/2 year or 3/4 year, a year ago, yes? So this -- and what we saw, of course, also because of our success in our tech strategy, for example, also in United States, that our competition was kind of reacting, yes. And we not always gave up, yes, on those reactions, yes. So that was one effect in the United States, for example. And I also can be specific in some other countries, like India, where we were extremely successful a few years ago and are still, they wanted to fight back. And that could put the margins under pressure, yes. And the second question, Rad Onc bundling in the U.S.
Rad Onc bundle.
We don't see at the moment any effect on that one, to be honest, which we would attribute to this one.
Our next question comes from the line of Hans Mähler from Nordea Markets.
First on Unity, when it comes to Unity pricing, I guess you're still in the range of $8 million to $10 million in terms of ASP. Can you tell us a little bit if this still is the case and if the ASP on the recent missions has moved in any direction in -- within that range? And also secondly, on the working capital, the impact from Brexit and so on, should we assume that what happened in the quarter is, to some extent, permanent, so that we should see net working capital come much closer to 0 going forward?
I'll take the first question about average prices. Actually, we keep this guidance on $8 million to $10 million. We are getting more and more confident in our customer. Customer visits also are really quite exciting so -- because we have now these clinical cases to show, and it clearly shows the difference also to our main competitor. So we want to -- we'd kind of -- with this clinical experience, we are supporting the differentiation of our products with the competitive products. So from that point of view, we want to keep that price level.
And Hans, I would also like to say thank you for all your questions. Sometimes challenging, but they have always been constructive, so thank you for that. And also good luck going forward, I would like to say. But back to your working capital question. If you look at inventory, currently, it is a bit elevated because of we have surplus for dealing with Brexit. We need safety stock in different areas to be sure that we can supply our customers both within the U.K. and outside -- or in the European Union and in other markets. So that's the inventory. So that is a temporary effect that we foresee will go down as we have more security around the consequences of Brexit. When it comes to the main move in the quarter, the increase in AR, that is its effect we have in this quarter. We'll collect those project and service invoices here over the next quarter. So that's a big focus for Q4 right now.
Our next question comes from the line of Veronika Dubajova from Goldman Sachs. And Veronika seems to have dropped off. So our next question comes from the line of Johan Unnerus from Pareto Securities.
Yes, some follow-up. First -- you have earlier spoken about launches. If you could please confirm that this value linac is ready to be launched or you expect it to be ready to be launched in the end of the year. And also earlier at the ASTRO, you alluded to that we will have -- see upgrades and new versions for both the planning system and their workflow system in first half of this year. Is that correct?
Yes, still correct. As I said earlier before -- earlier right before that the value linac is scheduled to be released end of this year -- calendar year. And yes, the TPS system, Monaco, with the new version -- actually, there are 2 new versions, to be honest, coming out, one smaller one and a bigger one, during this year. And also, MOSAIQ with this new MOSAIQ Plaza editions, these topics are all on plan for -- as we communicated in the fall last year.
Excellent. And on the gross margin, you pointed several drivers are likely to improve going forward. It looks like you will hit something around 41.5% for the full year or thereabout. You will obviously expect to increase that the next year. Is it possible to reach level like the year before? I think it was 43.1% or something. Or is that too high?
Well, as you know, the margins are related, of course, one, to the price; and the other side of it is the COGS. And we are really working on the COGS. We're starting to more intensively again work on the COGS because, in the past 2 years, we have really focused especially engineering effort on the Unity. And the COGS reduction is not only talking to suppliers to reduce, for example, parts price et cetera, it's more about that the engineers also have to help to reengineer components or to approve other component suppliers into the system. And this was a little difficult in the time of the Unity, so we prioritized the Unity development -- launch and development more. So now we have resources back on the other topic. And yes, we will expect actually that we drive down our COGS level, that we regain the old margins. What we also see is a stabilization of the price levels already since quite a few quarters. We monitor that very carefully. That means that there is no price erosion happening right now. We have initiated some configuration definitions, et cetera, and new marketing efforts, which obviously have worked out quite well and stabilized the price.
Yes, that's useful. And what about the Unity and the support more automated adaptive solutions on the Unity platform? We haven't got any detail, timing for that. Should we expect to see that within 2 years or 3 years or possibly faster?
Well, as the Unity road map, first of all, I have to say we would really -- I mean, maybe at some point, we should do an event for you at one of our customer sites because it is amazing to see that happening, how that really works, yes, and the workflow is really well. But yes, there is a first version of software update, of course, coming that will integrate also automatic gating, and we expect that during this year. And -- but it works really, really well, pretty well already today, and it's highly accepted. As a matter fact, we see that, for example, the service effort, which are a little bit an -- a picture of -- an image of the stability of the system are rather low of the installed base, which we have already, but we are monitoring that, and it takes a little bit more time to get solid numbers. But it seems to be a very much -- a very well developed and mature product which we have brought to market. So from that point of view, I think that's an important statement to start with. And then what you referred to, I think, is the more real-time adaption (sic) [ adaptation ], real real-time adaption (sic) [ adaptation ] as well as mix-up of the topic also that we have as works in progress at Utrecht, but it definitely needs more time to develop because that's a very significant software tool, and it need to be well tested and automized in the proper way. But our systems, from the hardware, from the whole configuration and architectures they, of course, are able to do so, it will take probably 2 to 3 years more to get it then out there.
So that's a reasonable time expectation, 2 to 3 years from now?
Yes, yes.
And we now try to go back to Veronika, Veronika Dubajova from Goldman Sachs.
I have 2, please. My first one is on the pricing pressure comments that you have made so far this morning. I am surprised to see -- yes, we see gross margin declines both for yourselves and for your peers in the past couple of quarters. And I know, Gustaf, you have said that when you look at the order book, you feel that you have good visibility on pricing stabilizing, but you had also said at the outset of the year that gross margins would come in a little higher than they have. So I'd like to understand a little bit better what exactly is going on when it comes to pricing and to the extent that this is an -- what gives you the confidence that this is not an industry-wide issue that is impacting everyone that we see? My second question is on Unity and the sales funnel that you keep referencing in the U.S. I was a little surprised not to see any orders in the U.S. this quarter. What do you think is holding people back? Is it the price point? Is it the degree of critical evidence that you have for the product? And if it is indeed clinical evidence, what do you think people will need to see in terms of the number of months of evidence before they are happy to go ahead with the purchase?
Okay, let me take the price development question. No, as I mentioned, I mean, looking in our order backlog and orders coming in, it has been stabilizing and improving. Then we saw in the actual quarter now, the 2 quarters, the installations we're doing driving the revenue. And there has been a bit of this unfavorable market mix and Western Europe with lower price points. And that has then weighed down the margins. I see that as temporary, and we'll get better margin days from mature markets as we go into the Q4 and also into next year. So that's a key driver. But if you look further out, because it takes between 2 to maybe a year to translate -- 2 quarters to a year to translate the order backlog into revenue in many projects, then we'd see this effect of improving price levels or ASPs. So I don't see it as an industry-wide issue, anything like that. It's more a timing issue.
Yes. And then to your second question, Veronika, from the Unity orders in the United States, it simply takes a little bit. And the U.S. customers, not all of them go to Europe and want to see the clinic of -- clinical situation in Europe. They waited also for the other ones. Now MD Anderson and University of Wisconsin, more of those ones. And it just takes a little bit. We have not expected for the first -- for this Q3 an order from the United States. We are more optimistic, of course, this quarter, yes.
But Richard, I mean, do you think people need to see more data? And how much data do they need to see to be willing to purchase one of these?
I don't think they need to see so much more data like a study or so. If you would go there, I mean, I'm happy to bring you to one of those sites, Veronika. If you see what's going on, I have even personal friends which, unfortunately, developed cancer, and they are going into that. Because if you have to make your own decision, and you have an abdominal lymph node which you want to be treated on or something, you understand it, and the doctors even understand it even easier. And so I think it is helpful to do this MOMENTUM program because, at some point, of course, for reimbursement, and those kind of topics, you need a statistical relevance. But for the purchase decision, this is so obvious, if you see it, you believe it.
Okay. And can I just confirm very quickly my last question. On China, you had said last quarter you expect to start seeing benefits from the quota as of the fourth quarter of the fiscal year. Are you still on track for that?
As I said before, we have good growth in China. It's always a little bit difficult to differentiate which deal is now from the new program and which is from, so to say, normal business. We see good dynamics there. There we see that, as I said before, that these 1,200 systems or so which were kind of -- are now distributed and licensed out, and yes, I'm still optimistic that we are moving forward on that one as well.
And our next question comes from the line of Romain Zana from Exane BNP Paribas.
Can you hear me now?
Yes.
Yes.
So first question, on Unity, I was wondering if you can share how many patients have been treated so far by Unity and maybe if you can give us an idea of the average workflow treatment time compared to a conventional linac. Second question is more basic regarding the revised sales guidance to plus 8% for the full year. Is there any specific headwind that we -- that you anticipate in Q4 that could explain the sharp deceleration to the implied plus 2% in Q4, or is it just to be cautious?
Okay, I take the first one on Unity before Gustaf goes into the margin topic. So we have -- at the moment, I think last we count, we have a count of 80 patients; in total, 1,000 fractions already. And all of those fractions have been adaptive. We actually even checked that on top of it again because we almost didn't believe it. But then you see adaption (sic) [ adaptation ], both on [ phase ] as well as on position, in a routine way. Now if you divide this, it seems that there are like -- yes, on average, like 15 or so, close to 15 fractions per patient. I have seen also cases in particular in the abdomen with 30 fractions. But there is also a tendency to use less fractions because -- on a higher individual dose because of the exactness of the treatment. So the treatment times are between -- average between 35 and 40 minutes. We have also seen treatments in 15 minutes from some customers, when they adapt on position basically and -- but it's also very helpful, so yes, 35 to 40 minutes.
And on your EBITA question, going from the 16% we have year-to-date and then to 18% for the full year and the change from 20% to 18%, I think it's important to say we will deliver a strong Q4, taking us from the 16% to 18%. So the re-guidance has not really anything to do about Q4. It's more the year-to-date performance, as Richard also mentioned initially.
I'm sorry, the question was -- no, the question was on the sales guidance actually, so...
The sales guidance, sorry.
Yes, yes, on the 8%, so it implies a pretty sharp deceleration in Q4 compared to the plus 10% already achieved over the past 9 months. So that's what I was asking about. Is there any specific headwind that you anticipate already, or is it just to be cautious?
So on the sales growth, to the 8%, how we see it is we have a strong revenue growth, the net sales growth year-to-date. And it's a bit of a difficult comparison because last year with the IFRS 15 restatement year. But how -- when we look at this, we see that last year was 29% of our total revenue in the last quarter, so it's a strong revenue quarter in Q4 last year as well. But we have a more positive outlook, and we changed to the 8%.
So it's more a question of comps?
Yes.
Our next question comes from the line of Scott Bardo from Berenberg.
So a bit of a focus on margin, please. Obviously, it's always regrettable to see margin guidance downgraded a couple of months after a Capital Markets Day, where you set a midterm framework. So I just want to be entirely clear and just follow up on Kristofer's question. Is it the current expectation that for fiscal '19, '20, you'll be at 20% EBITA margin? And if that is the case, can you please give us some comfort as why we should believe that, given that we haven't been able to obtain this year's guidance? So a bit more clarity there, please. Also, in the first half of the year, clearly, gross margins have been soft, and you've highlighted a whole series of reasons why that was the case. But we're very clear and transparent that this should improve as the years go on with increased service recognition, more mix from North America, more Gamma Knife and all these sorts of developments which appeared to have transpired in the third quarter but have not uplifted gross margin. So is it the fact that, actually, price pressure is getting worse sequentially? Or what really has been the surprise here? Because I'm guessing you didn't want to downgrade your guidance and would have been pulling out the stops to really deliver a decent Q3 gross margin, that hasn't materialized.
Yes, so if I start, Scott, with your EBITA question, and back to the Capital Markets Day. So we keep our mid-term guidance of having EBITA in the over 20% over the period, with 200 basis points increase in the out years of that period until 2022, 2023. And then also top line growth, revenue growth of 8% to 10%. So, that's what we foresee for next year as well. And then as usual, we set the yearly guidance for next year, done in the Q4 report in more detail. And then the drivers is what we've said and talked about quite a lot here. It is about the top line scale on top line, improved gross margin from product mix, and then COGS program would be extremely important. We continue focusing on SG&A and OpEx cost as we get the leverage from the top line and that gives us this positive margin development as we look forward.
Okay. And just you've called out Unity bookings as being dilutive to gross margin or at a lower price, if you like. And clearly, that's having a material bearing on your group performance. So can you please clarify, given that Unity is now an important growth driver for Elekta, what sort of gross margin uplift this product has as compared to your standard portfolio? It's swinging around, and we don't know the numbers, and that obviously is having a bearing on full year, so it will be useful to have a bit of clarity, please.
So we are not talking about individual margins of individual products yes. But as I always pointed out, that Unity has the potential of lifting up our margins. But in the early cases, as I point -- as I said before, where we have had the consortium members, the collaborative partners, yes, the margin is not as high or was not as high as we expect on the [ M&A ] -- is a slow business.
Okay. And last question, please, just -- again, I'm sorry to keep going on the same old ground, but a lot of these things that you've discussed in the third quarter we have been discussing all year, increased investments and some of these regional developments. These shouldn't have come as a surprise. So trying to understand what has caught you by surprise. Is it that price has decelerated or, in the sense, price pressure is -- has gotten worse? I can't recall Varian calling out any price pressure, so I really just want to understand that if there was one main item that caught you by surprise this quarter, what was it, please?
So it sounded to me like 2 questions. So the investment question and the first question you have, Scott, what's different a bit now compared to the beginning of the year or a couple of quarters ago, it's China is a bit different. We foresee even bigger opportunity in China because of the plan. So we need to continue to invest in areas like order fulfillment, service but also sales and marketing to cater for those volumes. Taken us by surprise this quarter, I mean not much but we have distribution in mature market, putting this negative project mix. So what we installed in the year -- quarter and generated a revenue, and for example, in Europe, was more in the South Europe compared to the North Europe, and that then gives you lower margins. But that will recover when the North European projects will be installed as we go forward.
Okay, great. And then just a point of clarification then. The softness that you've seen in -- booking service and things in the first half of this year, is that now all fully resolved? Or can that come back as an issue again? Or...
So it was the services was primarily in the U.S. in Q2 where we had a big negative service number, and we have fixed that problem. And the processes are up and running, and we are booking those orders and the renewals also talking we're about in U.S. So that's resolved.
Our next question comes from the line of Alex Gibson from Morgan Stanley.
I have 3 relatively quick ones. Going on to that point of America service revenues, can you clarify how much of the order intake was related to the service revenues that you were expecting in Q2? My second question is on Unity orders or installations that were recognized as revenues in this quarter, seeing it's had a big impact on your gross margin, it'd be good to get a sense of how many of those orders to the consortium member were booked as revenues. And then my last one is, since you brought it up, can you define the key differentiating features that your -- you believe that Unity has versus your competitor products aside from the stronger magnets and imaging?
Yes, to take them -- I mean, what's the service question in Americas, the second question was, Alex, sorry?
Unity revenue.
Unity revenues in the quarter and then Unity versus competition, I guess. Okay, I'll start with 2 first questions. So on the service side, you can see in Americas, we had a strong Q3 number, plus 16%. So the projects -- or the process is fixed on service renewals. We haven't disclosed any specific numbers, but I'm confident that we have the processes in place to drive that service order growth in the coming quarters here, and you saw it already in this quarter. And when it comes to Unity revenue in the quarter, we continue to miss part of having around one project at the start of installation in the quarter. So we had a couple of start of installations, and we had also upgrades and also the upgrades to clinical machines in the U.S. of the 2 U.S. machines in MD Anderson and Froedtert.
Okay, and coming to the differentiation, I mean, as you pointed out, it's not only the field strength, but the field strength has a lot of aspects which relate to then other components. For example, our system, if you look -- if you would stand in front of them individually, book your patient or user, it's extremely much more patient friendly and user friendly and much, much more well developed, yes. So wide or short magnet and the workflow at the machine is amazingly better. This is related to the design and -- of the magnet, which is more or less the clinical 1.5 Tesla magnet modified, rather than a complicated and long and narrow magnet, even at low-field strengths but simply not patient friendly. The other thing -- the other component is that our workflow overall on the machine is really well thought through. The image quality, which is related to field strength, gives you just a better way to act on the images, easier segmentation, easier sort of adaptation. Last but not least, we also strongly believe that our support overall as Elekta and our knowledge, which is in the linac itself, yes, is quite different to what our competitors are providing. And all together, it is quite a different quality of roundness, so to say, of the system to -- and it gives more opportunity, fastest scanning time, faster treatment, yes, with more precision than our competitor.
Based on your discussion so far with customers in the U.S., has the issue of having to kind of retrofit a bunker to accommodate your Unity come up in many discussions? Are people planning to build new bunkers? Or are you having to refurbish?
This is not a major issue for us because, I mean, in my -- in discussions -- some of the discussions I had or in most of the discussions I had, the issue was not so much the redesign of the bunker because, by the way, also our competitors have to redesign their bunker -- the bunkers to do -- to fit the systems in. In many cases, our customers or new growing percentage of [ engineers ] things have been prepared already because they ask for our drawings already years ago, and they are now having typically in the new cancer centers 4 to 6 linacs and 2 bunkers, which are then prepared for holding larger machines like ours -- like our not larger than normal linac machines, like our MR-linac. So it's not a big topic. But it needs, of course, preparation. And that is also related to another question that was asked earlier. In the then concrete case of an order, it needs to be evaluated in detail, et cetera, et cetera, but it's not a hindrance of anything.
Okay, that's great. And one final quick one on the service revenues for the U.S. Would you say the majority of that 16% order booking that you took in the quarter in the U.S. which related to those service revenues that you were going to renew in Q2 but didn't, or are these new orders?
I mean, it's both. You mean new orders at the point of sale of a new investment or...
Yes, so half, half. Yes, so the -- could we...
We don't go out with the ratio there, but what we've seen is the fix of the process and doing a lot of these order -- service order renewals, and that turns then out to revenue. So that has been effect. But we have also booked new orders in the quarter both with service and products, of course.
The relative size is easy by -- easier explained by the size of the installed base. I mean, we have more installed systems than we sell new systems, yes, so it must be a bigger part is from the renewals, yes. And as Gustaf said, there was a process issue, and I pointed it out last time in the quarter 2 call, which we have fixed, and obviously, the recovery is there, yes.
Thank you. As we have now reached the end of our call, I now hand back to our speakers for any closing comments.
Yes, okay, so let me close things -- the call with a few statements. First of all, I truly believe that we are on a good run. I'm not satisfied with the margin development in that particular quarter. We see quite a positive momentum in the Q4 again. And as we point out, we don't see it as a sustainable situation. And overall market is good. Products are well accepted. Unity is moving forward very well. So overall, I'm quite positive for the future.
Thank you, Richard. And thank you, Gustaf. And thank you all for listening and asking good questions. And our next quarterly report, the Q4, is on May 29, so looking forward to talking to you then. Thank you so much for today.
Bye.
This now concludes our presentation. Thank you all for attending. You may now disconnect.