Elekta AB (publ)

STO:EKTA B

Earnings Call Transcript 2021-Q3

[Operator]

Good morning, everyone, and warm welcome to the presentation of Elekta's third quarter in our fiscal year 2020, 2021. 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 newly appointed permanent CFO, Johan Adeback, who will be presenting the results.Today's agenda, start off by Gustaf presenting some highlights of our development, then Johan will give you details on the financials, and the presentation ends with Gustaf's view on Elekta's outlook. After the presentation, there will, as usual, be time for your questions.But before I start, I want to address our disclaimer. I need to remind you that some of the information disclosed on this call contains forward-looking statements, and this can include projections regarding revenue, operating results, 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, I hand over to you Gustaf.

[Gustaf Salford, President & CEO]

Thank you, Cecilia, and welcome, everyone, and thank you for listening in to our Q3 call. To kick off, I would like to present our strategy and our current priorities. Our strategy is focused on precision radiation medicine and all employees at Elekta are working relentlessly so that everyone with cancer should have access to and benefit from precise personalized radiotherapy.Helping our customers, their clinicians to improve patients' lives is what we do, and it has never been more important than today during the pandemic. It is crucial that cancer care and radiotherapy treatment can continue also under challenging conditions and lockdowns. Our current priorities are focused on 5 areas: driving resilience and digitalization efforts across the company; increased market access to precision radiation medicine globally; accelerating innovation in our linac family, the Unity platform and software solutions across our portfolio; and also drive growth and digitalization of service; and finally, to build strong partnerships as we continue to leverage our position as the only independent radiotherapy player of scale. We will come back to these priorities throughout the presentation.And if we now turn to a couple of highlights since the last report. We have seen a strong start for Harmony since the launch in September, with great customer interest and we have received orders in Europe as well as in Asia Pacific. And yesterday, we launched MOSAIQ 3, our latest version of our oncology informatics system that builds on decades of oncology software innovation to help elevate patient care.We also received the best-in-class award in U.S. for our Versa HD and MOSAIQ solutions. And in addition, we were awarded one of the world's most ethical companies according to the ETHISPERE for the third consecutive year. In terms of market access, we received clinical clearance for Unity in South Korea. And we have decided to go direct in Egypt. We continue to show resilience, and we are performing in challenging market conditions. Overall, the global market situation improved somewhat in the third quarter. However, COVID-19 continued to hamper order intake as the pandemic reached a new wave in some regions and vaccination was still in an early phase. In total, gross order intake returned to growth with a 2% increase based on constant currency. Strong growth was seen in North and South America and China as well as in MR-linac and the neuro business. Emerging markets continued to face the greatest negative impact.In terms of revenue, we experienced improved physical access to our customer sites and linac installations came back to last year's levels. And in addition, Leksell Gamma Knife and unit installations drove growth as well as strong performance in China. Our installed base grew with around 5% on an annual basis, supporting our long-term ambition to close the linac gap of more than 10,000 linacs globally.In terms of market performance and growth, we experienced large variations between our regions. So in summary, North and South America came in at plus 41% in the quarter. Strong growth in North America, but South America was more challenging. The region drove 29% order growth in the first 9 months. Europe, Middle East and Africa came in at minus 17% in the quarter and minus 9% for the first 9 months, and Asia Pacific was challenging in many markets, but China and Japan drove strong growth, so 8% for the third quarter. And for the first 9 months, the reading came in at minus 6%. And below, you can see some examples of the deals per region.And now to some of our strategic priorities. Innovations in radiotherapy have supported the trend towards more precise and efficient cancer care, a key enabler to continued treatments during pandemic. And we believe that this trend will continue to increase also after the pandemic, for example, the uptake of hypofractionation. As also presented in our Q2 call, in order to secure and drive long-term growth, we are accelerating innovation. We are focusing on 3 areas: our family of linacs, the Unity platform and software solutions across our portfolio, and I will explore these areas on the next slides.So if we go to Harmony, a really strong start and it is the latest addition to our family of linacs. And it's a solution balancing productivity, versatility and precision without compromise. Treatment slots can be reduced by up to 25%, enabling clinicians to deliver high-quality cancer care to more patients. And I'm very happy to say that we have seen great customer interest globally. We have received orders from 5 countries across Europe and Asia, and we're planning for our first installation in Turkey in the coming months.And in relation to the regulatory process, we received CE Mark in November, and the process for getting approval in the U.S. is ongoing, and we expect FDA approval during the spring. The Chinese National Medical Products Administration approval, we expect in the beginning of 2022.And now to another amazing innovation, Elekta Unity. We are successfully driving this paradigm shift towards MR-guided radiotherapy with Unity in the lead, and it's very encouraging to see the progression of the second phase of Unity and its journey. A phase focus on growth through further market adoption, clinical studies and gradual reimbursement.And we have now built a very powerful and scalable infrastructure for the evidence development journey with Unity. We have more than 50 consortia sites with 600 researchers. In total, there are now more than 300 peer-reviewed articles. And a key component is, of course, the infrastructure in the MOMENTUM study that will run over 5 years, including 6,000 patients. Currently, we have accrued around 1,400 patients and more than 150,000 images.And below, you see a couple of the first studies leveraging the infrastructure. You have the MR-ADAPTOR study at MD Anderson focusing on head and neck cancer. You have the HERMES study at Royal Marsden in London focused on prostate cancer. And you also have the UNITED study at Sunnybrook focusing on brain tumors. So we are very excited to follow these studies over the next years and accelerate the path to clinical evidence and reimbursement as well as to continue to advance the knowledge and application of MR-guided radiation therapy globally.We also see a steady progress in the clinical evidence journey. And here, you have a couple of examples from our sites in Utrecht, Tübingen and Royal Marsden. On the upper left-hand corner, we have an example from Utrecht on oligomets with 1 fraction and a high dose of 20 gray. And this could be compared to standard protocol of around 5 fractions. The second example is around bladder cancer, focusing on full online adaptive radiotherapy even with variable bladder filling.The third example is around markerless visualization of liver mets that are not possible to even see with regular radiotherapy treatment. And the fourth example is around rectum cancer focusing on margin reduction that is better for organs at risk. As you can see on this slide, it's very exciting to follow what our customers are able to plan and treat enabled with Unity.I'm also very happy to announce that we yesterday launched our newest version of our oncology informatics platform, MOSAIQ 3. It is an advanced oncology workflow and information management system. It makes the software more user-friendly through a more intuitive interface and it's guiding customers through the workflow to improve the radiation therapy process.It features automation and simplified user interfaces that will enable clinicians to streamline their work, and the solution provides powerful tools to oversee the patient pathway and enhance consistency and accuracy within radiotherapy. It also means better integration and efficiencies following changes in the hardware and MOSAIQ 3 is the base of our new linac, Elekta Harmony. MOSAIQ 3 builds on decades of oncology software innovation, and it's helping to elevate patient and cancer care.To another priority, driving service growth and digitalization is one of our key strategic priorities. And during the pandemic, we have focused on that our customers can secure patient treatments, and we have seen our customer satisfaction reaching all-time high.We continue to digitalize our service processes further, and we have the most advanced remote monitoring technology in the industry that dramatically decrease unplanned system downtime. It's enabled, for example, by our logistic platform that's taking predictive measures based on real-time data or our Internet of Things platform, IntelliMax, that's monitoring global usage and supporting remote support.And of course, several artificial intelligence modules are implemented in the offering. Our remote fixed rate has increased with 12% since the beginning of the pandemic to 64%, and we expect it to continue at high levels post-COVID.Now to our most important priority, both from a strategic and a sustainability perspective. And that is to improve market access to health care and precision radiation medicine globally. 5 out of 10 patients require radiotherapy, but only 2 out of 10 have access to it. And we need to change that. We're driving this area forward in 3 key areas. We expand the role of precision radiation medicines by market adoption of new innovations and we're strengthening our geographic presence in markets with large unmet need.We announced this week that we will start a permanent office in Cairo, Egypt, to address the shortage or radiotherapy delivery systems and software solutions in the country. And we will continue to drive education and digitalization efforts. There are many countries that do not have the human resources or the training and competence to use the techniques, and we are finding innovative ways of dealing with that challenge.And we will use the experiences from the pandemic to accelerate innovation and get closer to a world where everyone has access to cancer care. I am extremely proud to see that our installed base of linear accelerators has doubled over the last 10 years, growing with 8% per year over that period.So with that, I would like to hand it over to our new permanent CFO, Johan, to go through the financials. And I would like to say that I'm very, very pleased that Johan accepted to become the permanent CFO, and I look forward to continuing to work with him in his new role. So with that, over to you, Johan.

[Johan Adeback, Group Treasurer & Acting CFO]

Thank you, Gustaf. I am looking forward to continue as CFO now on a permanent basis. I've always enjoyed working at Elekta and will continue to do my best to contribute to delivering on our strategy together with Gustaf and the management team. I will now go through the financials, starting with net sales and EBITA margin development.In the third quarter, total net sales grew 7%, with Solution sales showing a strong 9% increase. Service sales in Q3 came in at plus 3%. Service sales to contract customers continue to grow in line with trend, but sales to noncontract customers were impacted by COVID. The strong performance in Solution sales resulted in a sales mix of 62% Solution and 38% Service in the quarter.For the first 9 months, we returned to net sales growth of 2% with flat Solution sales, and Service growing with 5%. Looking at our EBITA margin, we came in at 19.5% for the first 9 months and 18.5% for the third quarter. I will give some more details of drivers later in the presentation.If I continue with sales, the regional picture remained mixed in Q3. Starting with Asia Pacific. We delivered strong growth of 22%. This was mainly driven by China, which grew more than 30% and Japan, which also grew strongly. Turning to North and South America, we returned to growth with an increase of 7%. North America grew with positive contributions from U.S., Canada and Mexico, while South American markets continue to be challenging. Finally, region Europe, Middle East and Africa. Sales in Europe was stable, while Middle East and Africa reported lower revenue, which resulted in a 7% decline for the region in total. Overall, we saw better performance in mature markets, while emerging markets were more challenging.Gross margin came in at 38.7%, a decline from Q3 last year and the previous quarter Q2. The lower gross margin is explained by COVID-related increases in supply chain and service costs, the Solution/Service mix with higher share of Solution; and FX effects, mostly from the weaker U.S. dollar.EBITA margin increased versus Q3 last year, mainly due to cost control through resilience activities during COVID. Compared to our strong second quarter this year, the EBITA margin declined. This is mainly due to a lower gross margin. Net profit increased 4% compared to Q3 last year, with only small changes in net financial items, and with a tax rate of 23.5%.Gustaf mentioned previously our strategic focus areas, and one of them is resilience and digitalization. This is what we have done to keep the cost under control during COVID and stay resilient. Driving digitalization across the company and all areas is an important part of these initiatives. It's also about building resilience for a new normal way of working after the pandemic.From Q4 last fiscal year until Q2 this year, we adjusted our business. This was more of immediate crisis response where we incorporated cost-saving measures in the budget and operational targets, and also speeded up the already ongoing digitalization and efficiency enhancing initiatives.In the third quarter, we have continued with good cost control and the development and launch of digitalization solutions. When this phase will end, we do not know, but it will drive permanent improvements when we are back in a normal situation. So far, we have seen the travel cost decreasing with more than 60% during the pandemic. And looking into our marketing cost, we have a similar situation with around a 50% decrease.Of course, it will not be optimal for organization to keep these activities on such low levels after the pandemic. But with help of digitalization and the new ways of working, our ambition is to continue with a sustainably lower cost base in the new normal business environment.Let's move into expenses for Q3 as a result of both internal and external activities on digital platforms, expenses are lower than before the pandemic. And as I mentioned before, we are investing some of these savings into improved digital ways of working. Compared to the previous quarter, all 3 cost items here in the table increased in fixed currency. Compared to Q3 last year, we saw a decrease in expenses. The largest drop is in selling expenses, which includes savings in travel and marketing that we have discussed, but admin costs also decreased, due to the resilience initiatives.Net R&D expenses was relatively stable year-over-year as we accelerate our investments in new innovation. Gross R&D expenses have increased. And we have also seen higher capitalization levels from these investments. On a rolling 12-month basis, gross R&D expenses corresponded to 10.5% of net sales.As mentioned earlier, our EBITA margin for the first 9 months was 19.5%, corresponding to SEK 1.967 billion. This bridge illustrates the EBITA growth of SEK 332 million, or 20%, during the first 9 months.COVID and currency had a negative effect on net sales, which was mitigated by lower sales and R&D expense. Foreign exchange differences had a positive effect on profitability, with the largest effect coming from a negative impact we had last year. Overall, including the effect on all P&L lines, FX had a positive impact on EBITA of around SEK 60 million.Moving to cash flow. The strong performance continued in the third quarter. Cash flow after continuous investment for the 9-month period came in at SEK 886 million. And we achieved an operational cash conversion of 64%. On a rolling 12-month basis, operational cash conversion was a strong 82%.Net working capital decreased slightly in the quarter. And compared with Q3 last year, the change was also small. We divested our stake in ViewRay in the quarter, which further strengthened our financial position. Net debt-to-EBITDA stands at 0.35, and we have a very strong financial position, ensuring continued focus on investments in innovation and expansion.To summarize the financials, we continue to be satisfied with our performance during challenging circumstances.And with that, I hand over back to Gustaf.

[Gustaf Salford, President & CEO]

Thank you, Johan. I will say a couple of words on the outlook and then summarize the presentation. So outlook for Q4, and this is due to the present uncertainties related to the pandemic, we continue to refrain from giving new guidance, since we expect the pandemic to impact and disrupt cancer care also during Q4 globally. And there will be continued uncertainty for orders and delayed installations.So at the same time, we will continue to accelerate our investments in innovation to secure long-term growth. And long term, I'm also convinced that the long-term trend supports growth and investments in high-end radiotherapy equipment globally.So to summarize the quarter and the presentation, we are performing in challenging market conditions, both orders and revenue returned to growth and cash flow further improved. Margins were impacted by higher supply chain and service costs, Solution and Service mix and FX effect.We saw really strong starts for Harmony, and we see a great customer interest globally. We are successfully driving the second phase of Unity to accelerate the path to clinical evidence and reimbursement. We also launched MOSAIQ 3 yesterday on February 24. And of course, most importantly, we are fully committed to help clinicians saving patients' lives throughout the pandemic. So thank you for listening. And then I hand it over to Cecilia.

[Cecilia Ketels, Head of Investor Relations]

Thanks, Gustaf. We would like to use this opportunity to invite you all to our upcoming Capital Markets Day. You will get more information as we approach the event. But for now, we would like you to save the date, 7th of June, and we need to hold it virtual due to the pandemic. We hope you find it interesting as we will do some deep dives into Elekta.And with this, we open up the lines for your questions. Please, operator, over to you.

[Operator]

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

[Annette Lykke, Research Analyst]

My first question will be -- I know you refrain to say anything about sales growth or order growth in Q4. But could you say that if you see any reasons why it should be lower than it has been in Q3?Also, in respect to installations, how many of the Unity installations? Or are you willing to say if you have made any Unity installations in the 21st Century order in the U.S.? And do you see this as essential to the stimulation of additional orders for Unity in the States?Then also maybe with focus on U.S., hypofractionation seems to have been the go-to strategy during '19. Do you welcome this trend? And how do you see this in respect to MR-guided radiation therapy? And do you see a risk of overcapacity for the regular linacs, in particular, in the U.S. market? And finally, just a cash flow question, receivables have improved a lot, down SEK 600 million during this quarter. I'm aware Q3 last year was really poor. Should we see this as a comparison effect? Is it COVID 19-related? Or are you getting more disciplined in respect to making cash collection?

[Gustaf Salford, President & CEO]

Thank you, Annette. I think I'll kick off, and then Johan will answer the cash flow question. But if you look at the impact on all the revenue from COVID throughout the autumn and now early spring and winter, I mean we saw an improvement in the beginning of the autumn in many regions, Europe, for example, and then it worsened quite significantly in the late autumn and in the winter, and we haven't seen that improvement, really, yet.The same, you can say, for emerging markets, except China. That's really, really strong, and lots of market activity, lots of installations and they have really accelerated out of COVID in terms of our market segment.Looking ahead into this quarter, as I mentioned for the outlook, it is uncertain. And I would highlight Europe, we follow it, of course, closely as everybody else, and we see vaccines going out and so on. But it's too early to say exactly when that will improve. But we have a positive outlook, of course, throughout the spring and the summer due to vaccinations.I think the underlying demand has not changed in any region, I would say. It's still a huge demand, probably larger than before the pandemic for radiation therapy. And there has been a lot of cancer backlogs being built up throughout the world. So Q4, I think we'll see gradual improvement. That's my hope. But of course, that's dependent on the lockdowns in the different countries. If we take the Unity in the U.S., the big GenesisCare order, it's going according to plan. We are installing the linacs there and it's according to the plan we have. So we are really happy about that order and how it's progressing. And we also get very good customer feedback on how we're supporting those installations in the U.S. under, sometimes, quite difficult circumstances and the COVID, of course. The hypofractionation trend...

[Annette Lykke, Research Analyst]

And on the 21st Century, did you install any Unity systems in the U.S.?

[Gustaf Salford, President & CEO]

Yes, we don't give the Unity installations. But on the question, overall on Unity installations, as we mentioned, there's been a good contribution on the revenue growth from MR-linacs globally. So compared to last year, we are having a nice growth. And that's a sign that we start to get better access also when we have global installation chains like we have for the Gamma Knife and for the Unity. So we are starting to get better access and get to more normal level of Unity and Gamma Knife installations.On the hypofractionation trend, that has been -- had a huge tailwind, of course, during the pandemic because many of the cancer clinics want to minimize the number of visits to the cancer clinics for the patients. So we've seen a study in the Lancet from the U.K. where they brought down lots of patient visits to the clinics due to hypofractionation, especially the example is breast cancer, that's an interesting study.And it also shows that some of the cases are treated more surgically with radiation therapy. And that's also a trend we see. And we believe this trend will support, as we mentioned before, SRS/SBRT, Unity, of course, going forward. And we support it. This is why we spend time and resources thinking into innovations in order to enable faster, more efficient radiation therapy in cancer care.But of course, there will be impacts in the installed base that a lot of customers need to upgrade the installed base. And in some sites, they will be able to get through more patients during the same kind of time slots due to hypofractionation as we see in the U.K. during the pandemic.On the cash flow, I leave it to Johan.

[Johan Adeback, Group Treasurer & Acting CFO]

Yes. So yes, if you look year-over-year, I agree, accounts receivable was down significantly, but it's challenging, I think, to look at individual working capital items and draw conclusions. Obviously, as we we've seen, we have large foreign exchange effects there. So I think it's more -- I prefer personally to look at net working capital, and that decreased, improved with SEK 100 million year-over-year. And I think that's the -- it makes more sense. But you can draw more conclusions by looking at working -- net working capital, not AR as an individual item.And as I mentioned in my presentation, working capital has been much more stable. As you can see, I mean, it's a relatively small change year-over-year. It's a relatively small change quarter-over-quarter. And that's -- we've passed the Brexit impact we have with very large increases in inventory, also partly due to the Unity launch with the Chinese Unity we discussed previously. So overall, I would say that working capital improved year-over-year, it improved quarter-over-quarter and that's a key component in the strong cash flow we had.

[Annette Lykke, Research Analyst]

Yes. We can see that from the numbers. But my question was more in relation to you had in the past sort of maybe a little less of a discipline in relation to collect your cash. Has that improved? I know it was an issue, Q3 last year, and you have a tendency to collect all the cash in the fourth quarter. So my question is, have you performed a more disciplined cash collections during the first 9 months than you usually do? Or should we also, for the fourth quarter, expect quite a deal of cash collection in that quarter?

[Gustaf Salford, President & CEO]

On the first part of the question, yes, we are performing better on collecting on our receivables. That's a fact. We've had issues in some markets historically, and we have improved that significantly. And we don't guide on cash flow either, but let me put it like this, it's an ambition to smooth them out, the performance of many metrics, including cash flow for the quarter.

[Johan Adeback, Group Treasurer & Acting CFO]

Yes. And I mean this is the best start of the year we have had on the cash flow side, Annette, and we've been working a lot on the underlying processes and the collection. And if you remember last year, we mentioned Service invoices in the U.S., for example, and that we have now fixed. And on the Brexit effect, that was -- hasn't been any significant, I will say, big effect. Of course, there's many implications of it, but we haven't seen any dramatic negative impacts over the last couple of weeks and months here from Brexit on our supply chain. So that's positive.

[Operator]

And the next question comes from the line of Patrick Wood from Bank of America.

[Patrick Andrew Robert Wood]

I have 2 questions actually. So maybe on the first one, interesting stats on the remote monitoring side of things. How do you think about that long term? I mean, presumably, there's a bunch of costs you can take out long-term with more efficient use of engineers, which is supportive of the margin. But is there a risk that customers sort of ask for price concessions on what they're paying on service contracts if there's less work or physical element and your margin goes up? I'm just kind of curious to see how you feel about midterm, what that means for your business? So that's the first question.And then the second question is you touched on pent-up demand. Just kind of curious how you feel about that factor because the industry has been in slightly slower growth because of COVID, how that could play out over the next year or 2?And then maybe 1 final one I'll sneak in. Why do you divest your holding in ViewRay? Was it functionally just because you feel good enough about Unity you didn't feel the need to have another MR exposure on that side of things? I'm just curious.

[Gustaf Salford, President & CEO]

Thank you, Patrick. So great question. And it's very interesting on the remote monitoring. So we are up to 64%, that's significantly higher than last year. And it's a great value for the customer because the customer, they value uptime. They value being consistent in their treatment. Of course, we need to show that benefit to them. But we have a lot of digital tools to do that in reports and so on. So they realized that we fix a lot of issues overnight, for example, and they get that information as well from us to secure that we show them the benefit.And for me, that's just the first step in a way our service transformation that you secure remote monitoring and fixing the machines. But the next step is more value-added services around the service offering to make sure that we help the customer to get more efficient. So I think we have a lot of interesting areas to drive on the services side in this industry going forward as well. And I see that as one of the growth factors of Elekta going forward. I'm positive on that trend.And we also have the efficiency on our side. We don't have to send out as many -- I mean engineers to the customer site if we can fix it remotely. But at the same time, we need to then invest in innovation in our service tools like artificial intelligence, like IntelliMax to support the trend. So more digital investments, and I would say, less physical visits of our engineers. And that's what we learned throughout the pandemic that the customer would prefer that we don't send so many people to the site when it comes to physical maintenance.The question on -- sorry, the second question was on...

[Johan Adeback, Group Treasurer & Acting CFO]

Pent-up demand.

[Gustaf Salford, President & CEO]

Pent-up demand. Yes. And the third was ViewRay.So pent-up demand we came into this pandemic with the market growing 10% to 11%, if you take the overall order intake of all the players in this market. So there is a strong underlying need and growth for the equipment.Then it's very difficult to say exactly how the curve back to those levels will look like. But I think there is a big need, and we see it in installed base. I'm also mentioning there's more than 10,000 linacs need around the world. And that's why I was talking about market access a lot, that we'll enter into new markets in Africa as we did now with Egypt. Also looking in other emerging markets. And I think that will also drive the growth going forward. But it's too early to say in a certain quarter and so on. But I think we'll an see an improvement throughout next year.On the ViewRay side, we thought that as a good opportunity to divest here a bit earlier in the quarter, early in January. We were part of an offering a bit more than a year ago. Now ViewRay did another offering and secured its finances. So we thought it was a good time to exit. But at the same time, we work with driving together with them paradigm shift of MR-linac into radiation therapy. So we're excited about those discussions, of course. So we have thought it was a good timing to do it here in January.

[Operator]

The next question comes from the line of Michael Jungling from Morgan Stanley.

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

I have a few questions, please. Firstly, on Unity, can you confirm that you received only 1 order in the quarter, at least that's what I interpret from your press release this morning. And if that is correct, what is the issue of not receiving more orders in the quarter?Secondly, on order backlog of the SEK 32 billion, what confidence can you give us that this number is still the reliable one for forecasting with a pandemic sort of backdrop. I don't think you've made any adjustments or impairments for the order backlog? Do you foresee this as something that needs to be done, perhaps, under the new CFO?And then thirdly, on linac utilization, can you give us a sense of what it is amongst your installed base for the first quarter, the second quarter and the third quarter?

[Gustaf Salford, President & CEO]

So can you -- the last question, what was that you said, the third?

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

It's linac utilization side. I'm trying to understand whether -- how much your linacs are utilized by your customers for Q1, Q2 and Q3, just to get a sense of patient throughput?

[Gustaf Salford, President & CEO]

Yes. So I will start with the Unity question, Johan can take the order backlog, and then I will come back to the utilization of the linac question.So Unity. You can see in the presentation, Michael, that we referred to 3 Unity orders, and I can also say there are more orders than that in the quarter. But we don't disclose each and every order throughout this year, as we've said previously, but it's not 1. So I'm not sure where you saw that. But you can see a couple of interesting examples in the PowerPoint presentation.On the utilization question, on the linac side, we have talked about it in previous quarter. We saw a decline because we track these machines and the beam on day-by-day, and we saw a decline maybe around 90% early in the pandemic. It continued for a couple of weeks, maybe months, and then it recovered to 100% and actually over. There was a big local variation. So China had a dramatic drop a year ago after the Chinese New Year and then recovered quite quickly. Europe had a bit and U.S. had a bit longer drop, but then it recovered over 100%. And then in some emerging markets, they have not yet still received or got up to 100% again.And I think I kind of triangulate that a bit with the patient volumes and what you see in other studies. And often, it's focused on the U.S. and Europe, but you saw that patient volumes went down with around 80% -- up to 80% early in the pandemic. But what I can see and what I hear from customers is that most of the clinics are back to 100% currently. And the feedback I get is that you cannot really wait with cancer care, you need to treat the patients, and that's not the same for all other diseases and indications.On the order backlog question, Johan?

[Johan Adeback, Group Treasurer & Acting CFO]

Yes. Now -- well, we don't see any change at all, really, from the pandemic. I mean there is normal level of cancellations. I mean there's a small and very low percentage level that we have as -- continuously, and that's where we are now as well. So no, we have not seen any reason or any indications that the order backlog would not be, in any better word, shape, than it was when we went into the pandemic. So nothing that would change for that.

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

Okay. Maybe I can follow-up sort of on the accounting side. If I look at bad debt expenses, if I go back to 2016 and '17 and '18, you had bad debt losses and you displayed them in your accounts. If I look at the last 12 to 18 months, there is no such sort of debt losses being recorded anymore, despite the pandemic. Can you just comment on what's happening on the bad debt expense in conjunction, obviously, with this very high accrued income amount in your balance sheet, which is up significantly since last year. So around some sort of color on bad debt expenses and accrued income, please?

[Johan Adeback, Group Treasurer & Acting CFO]

Yes. Yes. On bad debt, so similar to the backlog comment, the -- maybe it's surprising, we've seen very little of it. I mean it's been -- we have not seen any significant that we have needed to do any significant bad debt provisions or take losses due to the pandemic. So far, that's been very positive, much better than I expected when we went into this pandemic. We were a bit more worried, but the actual numbers have been low. Sorry, you had a second question, I didn't catch it.

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

It was just in relation to accrued income. It's going up again. I mean the receivables amount is going down, but the accrued income is increasing. I was just curious why that was, and hence, also in relation to this bad debt question. So maybe a comment on accrued income, why that is going up, please?

[Johan Adeback, Group Treasurer & Acting CFO]

I would say, I mean if you -- it's Unity related mostly, I would say. We have these -- we discussed these Chinese units, but we have others as well. So that's the key driver of the -- why accrued income is up in the last 2 quarters.

[Gustaf Salford, President & CEO]

And I think the key thing is to look at the stability in net working capital as a percentage of sales, together with the strong cash flow generation throughout the 3 quarters and the cash conversion of around 80%. So I think we are generating a lot of cash. And as Johan has said, we were more worried about bad debt, but have very strong cash in, as we call it, development throughout all our different sales and service regions globally.

[Johan Adeback, Group Treasurer & Acting CFO]

Yes. I'm really happy about the cash flow, that's for sure.

[Operator]

And the next question comes from the line of Kristofer Liljeberg from Carnegie.

[Kristofer Liljeberg-Svensson]

Yes a few questions. First, is it possible to maybe quantify a little bit more the negative factors for the gross margin to really understand what's happening there. You mentioned about the Unity orders. Is it possible to maybe give a figure for how much the new products, including Harmony, is adding to the order growth?The question is because you seem maybe more excited now about new products than before. And then I just wonder, you mentioned during the presentation that service to noncontract customers were down in the quarter due to the pandemic. I'm just struggling to understand why this is happening now and not earlier in recent quarters?And maybe just quickly, could you quantify the FX impact on EBITA in the third quarter. My calculation shows minus SEK 30 million. I don't know if that's correct.

[Gustaf Salford, President & CEO]

Yes. The first one was easy. So that's correct, minus SEK 30 million, we said, if you take the 2 different EBITA impact, if you go through the P&L.If I start with the Harmony question and Johan, you can go into the gross margin, and I can take the service as well. But Harmony, the new products, I think we're still early days in Harmony, of course. So we have been able to sell it, take orders for just a couple of months. So we're happy about the uptake, but I won't say it's material part of our growth in the quarter. I expect it to be going forward, but it will replace also existing linac platforms that we've had like Synergy or Infinity. But it will drive growth. And we also, as we mentioned before, see higher price realization on the product as well, as it should be with all the value we bring to the customer with faster workflows, more software development in MOSAIQ 3, et cetera.On the service side, what we have seen is that we have been able to service the installed base under our service contracts. And we've done a lot of remotely. We have got access to those sites. But then we have the segment of our service that is more, what we call, time and material when we go out to customers that might not have as much -- they don't have a service contract, but we still supply time and material. In those sites, we have not received as much access. But if you take the overall installed base and service costs and revenue, then we got better access overall. So that is driving the service costs in the quarter with service activities.

[Kristofer Liljeberg-Svensson]

But I mean -- so the question relates to the -- I think you highlighted that as a factor that maybe service was not growing as much as in the first and second quarter. Is that the factor? Or it's something else explaining service is only up 3% year-over-year?

[Johan Adeback, Group Treasurer & Acting CFO]

I think, I mean if you look at it, we had some of that effect already in Q2, and we see service grew 4% in Q2, and it's now 3% in Q3. So there was some of that in Q2 as well, but it's more of it given that COVID came back strongly in the third quarter is the reason why we mentioned it now. So it's been there. That's the key driver why service growth is lower than trend and what you would see from where we have the contracts.

[Gustaf Salford, President & CEO]

And then I think there was a question on gross margin, Johan, on the banking of the FX.

[Johan Adeback, Group Treasurer & Acting CFO]

Not quantifying that, but at least saying what -- the supply chain and service cost is the biggest part. Then it's the Solution/Service mix and then FX. It's in that order of magnitude when it comes to the impact on gross margin.

[Kristofer Liljeberg-Svensson]

Sorry, could you repeat that again?

[Johan Adeback, Group Treasurer & Acting CFO]

Yes. Supply chain and service costs, which had increases, that's the biggest, the largest of the 3. Then it's the Solution/Service mix, then the smallest impact of those 3 came from foreign exchange.

[Kristofer Liljeberg-Svensson]

Okay. And do you expect all these 3 items to remain this negative in Q4?

[Johan Adeback, Group Treasurer & Acting CFO]

If you look at Solution/Service, maybe not looking forward, but looking back, if you look at that mix in the last Q4s, we had last year and the year before that, we've had a high level of Solution sales. So that's maybe an indication of what we can expect for Q4. The supply chain and service costs are very COVID-related, so -- and we are still in COVID, but logistics costs and so on, it's difficult to give a forecast, but we're saying that we all see that pandemic FX is -- I guess, I'm not going to mention or talk about that. But the other 2, at least, same guidance, I think.

[Kristofer Liljeberg-Svensson]

Okay. And I guess, the supply cost, there's no possibility to forward this to the customers?

[Johan Adeback, Group Treasurer & Acting CFO]

No. It's more -- I mean, as an example, we still get access -- we can still install our products, but everything is more expensive, flying, hotels, logistics cost because of all the restrictions and requirements we have when we are doing these efforts so we foresee that the impact, at least for a couple more months, but then we believe it will normalize when there's an opening up of countries and health care systems.

[Kristofer Liljeberg-Svensson]

And then you talked about higher service costs, that's the same, that it's higher.

[Johan Adeback, Group Treasurer & Acting CFO]

Yes, higher cost is actually due to more difficulty of doing business in the regions. But we still -- I mean the positive thing is that we get access, but it's more expensive to do those efforts throughout the last 3 months and a couple of more months is what we can see right now.

[Operator]

And the next question comes from the line of Veronika Dubajova from Goldman Sachs.

[Veronika Dubajova, Equity Analyst]

I have 3, please. My first one is just kind of big picture question on the order momentum. If I look at you in this quarter, and this is against a very easy comp from Q3 last year, your order growth has noticeably slowed down. And I think it's in very stark contrast from what we've seen from everyone else in the industry, both kind of within radiation oncology, but also more broadly. So I'm curious how you guys are thinking about competitive positioning, in particular, in that kind of core linac market. Stripping out Unity and Gamma Knife, it would seem to me that you are losing some market share. So I would just love to get your thoughts on that. That's my first question.My second question is, can you confirm that there were no Unity orders in the U.S. this quarter?And my third question is you have mentioned in your prepared remarks that you do expect to see sustainably lower cost base once we come out of COVID. Would just love to get your thoughts on kind of quantifying that? Do you think this is a couple percentage points? Is it something more substantial? And I appreciate there's a lot of uncertainty. None of us know exactly what the world is going to look like as we get towards the end of the year, but you must have some sense for quantifying that. So if you can help us think through that, that would be great.

[Gustaf Salford, President & CEO]

Thank you, Veronika. So I'll talk a bit about the order growth, market share, and I'll leave it to Johan to talk about the cost impact going forward. If you look at order growth, I don't think I agree to the picture. I think we are growing faster than the market if you look at a rolling 12-month basis, but also the last quarter in terms of order growth in kind of oncology segment in radiation therapy. If you take our measure of the market share, we are gaining share on the linac side. That's what we can see in the last quarters.And the Unity, we don't disclose any specific market, though you have a couple of examples in the PowerPoint, but we'll not disclose specific markets on Unity bookings. And with the cost aspect and going forward, Johan?

[Johan Adeback, Group Treasurer & Acting CFO]

Yes, very reasonable and good question, but we will need to come back on it. We're not ready to quantify that yet.

[Veronika Dubajova, Equity Analyst]

Okay. Gustaf, can I just follow-up? I mean not to be kind of discourteous about this. But you grew orders 1.5% this quarter on a comp of minus 11%. I look at Varian comp adjusted, they grew 900 basis points, almost 1,000 basis points faster than you. I appreciate there is some volatility in there. But looking from the outside in, it doesn't seem to me like you are gaining market share. So I mean can you maybe give us a little bit more information because on the face of it, it doesn't look like you are actually winning share?

[Gustaf Salford, President & CEO]

I think if you look at the rolling 12 months basis and market of radiation therapy, we are growing faster than competition. And I think for the quarter, we can say, okay, comparison on an easy comp last quarter, but still, we're growing faster than competition in that period as well.And then when you track market share, we internally look more the linac volumes and so on. And we see good development in many regions there as well. Going forward, I think it's very important, of course, for us to have the launch of Harmony, and I foresee that that will be a very positive growth driver in segments you're referring to, the linac segment. So that's my perspective on that question and the numbers that I can see.

[Operator]

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

[Elisabeth Decou Bedell Clive, Senior Analyst]

A few questions. Just on the back of your announcement about Egypt, what's the portion of your EM territories are you direct in right now versus the local distributors? And perhaps if you could give that split to us sort of ex China and then remind us of what you're setup in China specifically.And then any commentary on margin differences in those regions that you are direct versus the distributor? I'm just wondering if you do go more direct over time, what the margin impact could be?

[Gustaf Salford, President & CEO]

That's a great question. So we often talk about distributor share of total revenue. That's how we see it because we have distributors primarily in Africa, APAC and South America. So that would be around 15% of our revenue coming from distributor markets. When we go direct into market, we get access to the service revenue because that's done by the distributor. So then you get a bit of a revenue growth because you add that to our revenue. And you also get that, often, good margin business. And then the plan is always to grow faster when you go direct than the distributors have done in the past.So you should have revenue growth impact from it, and you should have a good contribution from going direct. So often, it's quite good business cases to do it. But it needs to be around, I often say, 30, 40 linacs in the market for that to make sense. The key aspect of it is the service revenue you get from going direct and often the closeness to the customer and the customer relationship that's absolutely key in these markets. So that's the perspective.

[Elisabeth Decou Bedell Clive, Senior Analyst]

And then commentary on just the split in China?

[Gustaf Salford, President & CEO]

So 15% is distributed versus non-distributed markets. And sorry, the split you were after, Lisa, that was...

[Elisabeth Decou Bedell Clive, Senior Analyst]

Yes. No, that makes sense. That's fine.

[Gustaf Salford, President & CEO]

So for China, it's a direct market for us. So it's primarily Africa. The biggest volume out of those 15% would be APAC countries and then African countries and then South American countries, I would say in ranking.

[Operator]

And the next question comes from the line of Sten Gustafsson from Nordea.

[Sten Gustafsson, Senior Analyst]

Firstly, on Harmony, could you tell us if the orders you have received in Q3, are those from new customers? Or are they replacing Synergy and Infinity linacs, that would be helpful.And also, with regards to the CMD, should we expect new midterm targets to be announced at the same date?

[Gustaf Salford, President & CEO]

Yes. So if -- thank you, Sten. So if I start with Harmony, it is a mix, and that's what I think we can see going forward as well, a mix of existing and new customers. And it is a product that's very suitable for greenfield markets and greenfield sites so I foresee that, relatively, the share of new customers will be high going forward on Harmony. That's the strategy with the product as well.On the Capital Markets Day, yes, we -- our ambition is to have updated guidance at the Capital Markets Day in June.

[Sten Gustafsson, Senior Analyst]

Excellent. Just a follow-up on the Harmony. So of the orders you received, how many of those were greenfields in Q3?

[Gustaf Salford, President & CEO]

I need to get back to the exact percentage there, but it was 5 countries, we said in the PowerPoint presentation.

[Sten Gustafsson, Senior Analyst]

Sure. And in terms of number of the Harmony machines, is that, like, 10? Or is that 5?

[Gustaf Salford, President & CEO]

We haven't disclosed that specific number.

[Cecilia Ketels, Head of Investor Relations]

Okay. We are at the hour. So if you have further questions, please reach out to me directly after this call. And we thank you all for listening in and wish you a nice remaining day. Thank you.