Elekta AB (publ)

STO:EKTA B

Earnings Call Analysis

Elekta's Stable Growth Despite Headwinds

Elekta's Q3 earnings showed resilience in the face of a slower Chinese market and inflationary pressures. Order intake decreased by 17%, while the order backlog remained solid at SEK 42 billion, with an expectation of improvement in Q4. The company saw its fifth consecutive quarter of revenue growth, at 4% in Q3 and 8% year-to-date, and an expanded EBIT margin, despite a 3% reduction in operating expenses due to strong cost control. Adjusted gross margin grew sequentially by 90 basis points. Innovation continues, marked by the Best in KLAS award for MOSAIQ Oncology Information System. For Q4 and beyond, Elekta anticipates revenue and EBIT levels to align with the previous year's strong quarter, adhering to a midterm outlook of revenue growth above 7% and further EBIT margin expansion.

Earnings Call Introduction

During the Q3 Earnings Call for Elekta, Peter Nyquist was welcomed as the new Head of Investor Relations. CEO Gustaf Salford and CFO Tobias Hägglöv presented the quarter's results, with Mr. Nyquist ensuring an opportunity for questions after their presentations.

Strategic Execution and Financial Highlights

CEO Gustaf Salford reiterated the company's commitment to their ACCESS 2025 strategy, aimed at expanding global access to cancer care. Despite a 17% decline in order intake attributed to slow market conditions in China and tough comparables, Elekta celebrated a record of five consecutive quarters of revenue growth and expanding EBIT margin. Software milestones included the MOSAIQ Oncology Information System winning the Best in KLAS award and a collaboration with Bristol Myers Squibb. The ongoing focus on resilience led to the best Q3 cash flow in Elekta's history and the continual improvement of working capital structures.

Financial Performance and Innovations

CFO Tobias Hägglöv highlighted the growth in revenues, mainly from the Americas and APAC regions, and sequential improvement in gross margin despite inflationary pressures. Operational excellence led to a 90 basis point increase in operating margin for the quarter. R&D investments, contributing to net sales, denote a commitment to innovation as a key driver for future profitability. Expected currency impacts on financials were noted, as well as reductions in operating expenses due to cost control measures.

Working Capital Improvement and Cash Flow

Net working capital as a percentage of sales improved significantly to -6%, driven by reduced accounts receivable and better inventory management. The strong cash flow marked an almost 800 million SEK improvement year-over-year, with a cash conversion rate of 94%, surpassing the target of 70%.

Midterm Outlook and Shareholder Value Focus

Salford reiterated Elekta's midterm outlook, expecting a revenue growth above 7%, EBIT margin expansion, and a dividend policy of at least 50% of net profit. The Q4 outlook projected revenues and EBIT to be in line with the previous year's strong quarter, despite challenges such as a slower market in China and ongoing order conversions.

Q&A Insights on Growth and Market Dynamics

During the Q&A, the executives tackled questions regarding the Q4 projections of gross margin improvements and order intake patterns. Salford assured a drive for positive growth in Q4 despite a significant 17% drop in Q3 order intake. The discussion also touched on the absence of any major negative impact from a volume-based procurement policy in China, except for logistics disruptions resulting from shipping conditions in the Red Sea, which could extend to the next quarter but are not expected to greatly impact costs.

Order Backlog Stability and Unity Installations

There were no significant cancellations affecting the order backlog except for a currency impact exceeding 2.5 billion SEK and an acknowledged adjustment with GenesisCare. The Unity linac installations were reported to be progressing well, with an increase in the speed of installations compared to previous years, positioning the Unity platform as an important growth driver for the company moving forward.

Earnings Call Transcript 2024-Q3

[Peter Nyquist, executive]

Hi, good morning, everyone, and welcome to Elekta's Q3 Earnings Call.

Maybe it's a good idea to start to introduce myself. My name is Peter Nyquist. I will be the new Head of IR here at Elekta. I have previous experience from some other Swedish blue chip companies, like 10 years at Ericsson as Head of Investor Relations and, before that, at Electrolux as Head of Investor Relations and, before that, SCA Essity. So I have a few -- quite a few years in this line of occupation, experience from a lot of different kind of businesses. And I am really looking forward to work here at Elekta.

So with me here today in Stockholm, I have our CEO, Gustaf Salford; and our CFO, Tobias Hägglöv, who will present the results later on here. So today's agenda, we will start then with Gustaf presenting some highlights of the development of the quarter. Then Tobias will give you details on the financials on the presentation and ends with Gustaf's view on Elekta's outlook. And the presentation, there will be, as usual, time for questions after that.

But before starting, I would like to remind you that some of the information discussed on this call contains forward-looking statements. This can include projections regarding revenue, operating result, cash flow as well as products and product development. These statements involve risks and uncertainties that may cause actual results to differ materially from those set forth in the statement.

With that said, I will hand over to Gustaf. So please, Gustaf.

[Gustaf Salford, executive]

Thank you, Peter, and a big welcome to Elekta. It's amazing to have you on board as our new Head of Investor Relations, and thank you to all of you attending the call.

So we continued to deliver on our strategy, ACCESS 2025, in Q3 towards a world where everyone has access to the best cancer care. We drove significant improvements and generated a fifth consecutive quarter with revenue growth and expanded EBIT margin.

Order intake was negatively impacted by a slower China market, together with tough comparables in several regions. Order intake declined by 17%, and we expect the order situation to improve in Q4.

So if we now look a bit on how we delivered the strategy, and I'll give you a couple of examples how we delivered on it in Q3.

One example is our MOSAIQ Oncology Information System, and it's part of our software suite, Elekta ONE, and it won the Best in KLAS award, and I'll come back to this later in the presentation. We also announced a collaboration with Bristol Myers Squibb to develop a digital solution for patients with melanoma based on our digital platform, Kaiku Health. We won a major order for proton treatment planning software with our partner, IBA.

And as a part of giving access to the best cancer care, we have signed an important order with the Croatian Ministry of Health for Elekta linacs and brachytherapy systems. And we also won an order to transition a U.S. center to MR-Linac program with Elekta Unity.

In our efforts around resilience and process excellence, we focused on improving cash flow, which resulted in the best Q3 cash flow in Elekta's history. And going forward, we'll continue our activities to structurally improve working capital.

And now a couple of more words on the Best in KLAS award. It's based on feedback from thousands of clinical users, collected and evaluated by independent research firm, KLAS. And the last year's introduction of Elekta ONE, our Software-as-a-Service offering, demonstrated our focus on personalization, integration and a streamlined user experience. And it enables clinicians to boost productivity and enhance personalized care. And winning this prestigious award and increased use of Elekta's digital solutions globally is the result of our investments in software during the recent years. And we now really see how accelerated innovation brings a direct benefit to health care providers and the patients they treat.

And I would also like to take you through our strong innovation agenda that will drive growth in the years to come. And we have 3 main focus areas: personalized precision, elevated productivity and integrated informatics. And if I start with personalized precision, it means that routine personalization of every treatment from comprehensive motion management with Unity, but it's also about bringing online adaptive treatments to our CT-Linac portfolio. Personalized precision also means utilize patient-reported outcomes to monitor and optimize care based on our digital platform, Kaiku Health.

If we then turn to elevated productivity, it's truly enabled by our comprehensive Elekta ONE software suite. And Elekta ONE will drive towards 50% cost reduction per treatment from automating and workflows with SmartFlow and from also automating planning and delivery from SmartView and AutoPlanning.

Elekta ONE is integrated informatics and analytics across all our software, improving decision-making from data insights and real-world outcomes. This creates a new exciting opportunities for us to further leverage AI to optimize the patient's treatment journey.

If we now turn to the order development during the third quarter, we saw that order intake declined by 17% in Q3 and 7% year-to-date. However, if you look at the book-to-bill ratio, it came out in at 0.98, and the order backlog amounted to SEK 42 billion. And we continue to pursue a faster conversion rate from order to revenue.

And looking at the order backlog, it's still on a robust level, and rolling 4 quarters book-to-bill ratio is well above 1, a platform for future growth.

And if we look at the order development per region, Americas showed a flat development in the quarter.

EMEA declined by 11% and is mainly due to tough comparables year-to-date -- year-over-year, with last year's large tenders in Southern Europe. And as I mentioned earlier, we received an important deal from the Croatian Minister of Health, including Elekta's full suite offering.

Orders in APAC decreased by 36%, mainly driven by China. However, we were increasing our market share in China, and we expect order growth to come back during the spring. And overall, for Elekta and in the fourth quarter, we expect the order intake to improve.

And if we then turn to revenue, Q3 was the fifth consecutive quarter of revenue growth. We grew with 4% in Q3 and 8% year-to-date. Solutions increased by 4% and Service with 5%, and the negative impact from the disruptions in the Red Sea was approximately 1% point in Q3. However, this is, of course, a timing effect where revenues will be delivered in Q4. We are addressing the continued impact from inflation with price increases and new product launches across our portfolio. And we see that the effect from the price increases will gradually be seen as of Q4.

APAC grew revenue by 7%, where most of the market increased installations. China showed a strong double-digit growth, and we continue to have a market-leading position in the country. Americas sales increased by 6%, mainly driven by solid sales in North America. And EMEA declined by 1%, mainly due to tough comparables from last -- the installations of last year's large deals in Southern Europe and the U.K.

At the end of the quarter, Elekta had an installed base of approximately 7,300 units. That was up 3% year-over-year.

And with that, I turn it over to Tobias for the financials.

[Tobias Hagglov, executive]

Thank you, Gustaf, and good morning, everyone. Before starting, I also would like to take the opportunity to welcome you, Peter.

If we then look at our financials, Q3 marked a fifth consecutive quarter with profitable growth. In constant exchange rates, revenue grew with 4% supported by solid growth in APAC and Americas.

Adjusted gross margin increased sequentially by 90 basis points. Year-over-year, gross margin declined by 150 basis points. While logistics costs have started to come down, we have inflationary pressure from higher material and salary costs. Our operating margin improved by 90 basis points in the quarter, supported by continued sales growth and improved operational excellence.

If you look at the financial development in more detail, we can see that foreign exchange rates had a positive impact on net sales of 1 percentage point, a slight negative impact on gross margin, while contributing positively on adjusted EBIT margin by 80 basis points.

Then looking at the operational drivers to our gross margin. We benefited from continued sales growth. Inflationary pressure from materials and salaries cost continue in the quarter with pressure on the margin. Moving down to our EBIT margin. We benefited from higher sales and lower operating expenses.

Then if we continue then to look into our expenses in more details. All in all, despite seller inflation, the operating expenses decreased by 3% year-over-year, driven by continued cost control.

Selling expenses decreased by 2% and administrative expenses by 3% following cost reductions. We continue our focus on keeping a solid cost control to further leverage our margins. Net R&D expenses declined 4% year-over-year.

We remain focused on our innovation pipeline, as Gustaf previously mentioned. R&D is the ultimate way for us to improve our profitability by launching market-leading product solutions. It is key for us to continue to deliver new innovations to improve our margins. In the quarter, gross R&D declined to 11.9% of net sales on a rolling 12-month basis. This is a sequential decrease from 12% in Q2.

Moving over to working capital. Net working capital as a share of sales ended at minus 6% in the quarter, a significant improvement versus Q3 and previous years. The improvements compared to last year were mainly driven by lower accounts receivables and inventory. Accrued income has come down due to strong collections from projects in Southern Europe with longer billing terms. We have also managed to decrease our inventory levels through an efficient supply chain management.

Cash flow after investments amounted to SEK 631 million, and it was almost SEK 800 million better than Q3 last year, and it marks the best Q3 cash flow in Elekta's history. This strong cash flow was primarily driven by higher earnings and reduction of working capital. Cash conversion amounted to 94%, well above our target of 70%.

Over to you, Gustaf.

[Gustaf Salford, executive]

Thank you, Tobias. And I'll just give you some words about the outlook. So we are reiterating our midterm outlook of revenue growth above 7% and the EBIT margin expansion as well as a dividend policy of at least 50% of annual net profit. And we have continued to focus on driving shareholder value.

For Q4, we expect revenue and EBIT levels to be in line with last year's strong quarter, and we will continue to drive profitable growth in fiscal year '24/'25. And as I just said, our midterm outlook is unchanged, and it's our daily focus to deliver on our ACCESS 2025 plan.

We continue to see long-term market trends to support growth and investment in what we do, high-end radiotherapy equipment, and we also see a margin expansion. And we will continue to drive access to the best cancer care and creating shareholder value.

So to summarize our third quarter, Q3 marked the fifth consecutive quarter with net sales growth and EBIT margin expansion. Our investments in innovation and software are paying off. That's shown, for example, in the Best of KLAS award. And we delivered a record-high cash flow in the third quarter, the best Q3 in Elekta's history. Thank you.

[Peter Nyquist, executive]

Thank you, Gustaf, and thank you, Tobias. With that, we will then start the Q&A session. But before starting, a housekeeping topic. We will limit the number of questions to 2 per interaction.

So with that, operator, I hand over to you.

[Operator]

[Operator Instructions] The first question from Erik Cassel, Danske Bank.

[Erik Cassel, analyst]

So first question, I would just like to have some help to understand what happens with the order backlog bridge compared to Q2. So it's down SEK 4.3 billion Q-on-Q, with just SEK 1.2 billion coming from the Genesis cancellations. So I'm just curious to learn what happened to the other SEK 3 billion of orders.

[Tobias Hagglov, executive]

Erik, good to hear you. Yes, I can explain that. What you see here is a quite large impact from the currency moves in the quarter. So you actually have a strengthening of the Swedish krona or a depreciation of mainly the U.S. dollar but also the currency. So that currency impact sequentially between the quarters are more than SEK 2.5 billion. So that is the delta, I think, that you are looking for.

[Erik Cassel, analyst]

Okay, perfect. Good that there's not any other big cancellations. And then, Gustaf, if I heard you correctly, you indicated earlier in the call that what I actually interpreted as that we should expect organic order growth in Q4. Again, that's still feasible. Is that mainly on China coming back quite sharply? Or do you expect any other large tenders to materialize, say, Poland, for example?

[Gustaf Salford, executive]

Thank you, Erik. So China is an important market for Elekta, as we said, and we've seen now 2 quarters with a very slow market, almost down 50% for both quarters. So we expect China to come back. We've seen quotas coming out. We have a more positive outlook, for example, MR-Linacs in the country. And we expect also the larger tenders when it comes to regular linacs, we'll see better development during the spring and the summer here. So that will be a key driver.

But we also see other parts of Asia as growth drivers. And so we'll try to drive growth in most of our markets during Q4 for sure. But China will be maybe one of the larger drivers into that. So we expect Q4 to show order growth.

[Operator]

The next question from Mattias Vadsten, SEB.

[Mattias Vadsten, analyst]

My question relates to Unity. If you could update us on the progression here during the third quarter and a degree to which you're able to capitalize on the opportunity from the bankruptcy at ViewRay. I mean it doesn't look -- at least when I look at like Americas in the quarter, that you gained momentum from it. So yes, maybe some flavor and explanation for Unity in the quarter.

[Gustaf Salford, executive]

Thank you, Mattias. Now it was a good Unity quarter. We see a great momentum on the clinical side, patients, volumes treated, new indications treated. And I have myself visited many Unity sites around the world during the quarter. We have great interest from Europe as well when it comes to Unity and MR-Linac, the shift to MR-Linacs.

In the U.S. specifically, we -- I mentioned it in the call that we had one transition to Unity from a competitor in the quarter. And I think that's a very important signal for Unity that we start to see those opportunities that we've been talking about the last quarter is actually materializing. And I expect that to continue into Q4 and into the next year as well. So that's an important trigger point for Unity volumes going forward as well, but a good Unity quarter.

[Mattias Vadsten, analyst]

My next one is, I mean, in the CEO letter, sales and earnings flat year-over-year in Q4. At the same time, I think you have a positive effect from price increases from quarter 4, and it seems it will still be sort of easier to install and so on. So yes, just some underlying, how you think about it and how you come to the conclusion that you expect it to be flat perhaps and what the main headwinds are in terms of sales and EBIT? That's my second question.

[Gustaf Salford, executive]

Yes. I mean we go through the installation plan for the next quarter and also look into the next year. And what we see there is it will be in line with last year's strong level for Q4, but we also expect continued profitable growth and good installation in Q1, Q2 and also the second half of next year to support our outlook for more than 7% in a market -- or ACCESS 2025 period.

So I think it's a bit of a comparison in the fourth quarter. We see price increases coming through on our projects that has been in the backlog now turning to revenue in the P&L. So that's a positive driver, and we will continue to drive growth in the first half and throughout the next year. So I think it's a bit of a comparison where we grew quite strong, 10%, in last year's Q4.

[Operator]

The next question from Kristofer Liljeberg, Carnegie.

[Kristofer Liljeberg-Svensson, analyst]

Two questions then from me. First, when you say order growth returning in Q4, is that just to be back above 0 or something more significant growth?

And the second question relates to the gross margin and your -- what do you think about the ability to improve that in Q4 and into next year?

[Gustaf Salford, executive]

Kristofer, sorry, I'll take the first order question, and then I think Tobias will take the gross margin question.

But looking into orders, what we see right now is positive order growth. I don't mention a specific number, but we will drive for a good number in the fourth quarter. And that's what -- that's a big priority for us here in the coming weeks and months.

[Tobias Hagglov, executive]

Yes. Kristofer, and I can answer on the gross margin. I think when you look into the Q4 ascension on the line, in line here with last year's Q4, the big drivers there are that we continue to see inflationary pressure. And as you mentioned that we -- mentioned that we also have a positive impact here from the price/mix component as such.

Looking into next year, just as we communicated earlier on is that we are looking into a gross margin expansion in Q1. We had a very strong gross margin this year that can be taken into consideration. But otherwise, we're determined to deliver profitable growth here next fiscal year.

[Kristofer Liljeberg-Svensson, analyst]

So just to make sure I understand, so what you're saying is flat Q4 gross margin versus last year approximately?

[Tobias Hagglov, executive]

Yes. Yes.

[Kristofer Liljeberg-Svensson, analyst]

And what is then driving the sequential improvement from what we have seen in the second and third quarter? Is that volume related? Or is it that you're starting to see this positive impact from higher prices now?

[Tobias Hagglov, executive]

Yes, it's both. As you know, the Q4 is generally a big quarter. So you have some more leverage here from the sales component in general but also a positive contribution here price/mix, both sequentially and year-over-year, while also the -- when you look at the year-over-year component, the inflationary pressure continue.

[Operator]

The next question from Sten Gustafsson, ABG Sundal Collier.

[Sten Gustafsson, analyst]

Regarding -- obviously, a lot of questions about the order intake here. But just to clarify, you talked about growth coming back in China in Q4 and for the full quarter. But do you expect to see positive order intake for the full year since you're, I think, down 7% or something like that year-to-date? That would be my first question.

And also, do you actually see -- you talked about that you had seen the activity level going up in China. But have you actually started to sign orders already now in the quarter? And the -- given that we -- the softness we have seen over the past 2 quarters, what's the likelihood of those orders now being signed in Q4? That would be my questions.

[Gustaf Salford, executive]

Good questions, Sten. It's Gustaf, and thanks for those. So if we start on the overall order growth, we will be growing in Q4. That's what we see at the moment. I think we'll need to get back on the overall growth. But of course, the minus 17% in the quarter is a weak number, and we're driving for a good growth number in Q4, but we'll see where the full year number will end up.

If it comes to the Chinese situation, what we've seen during the last month or so is increased activity. And it's also important to say, if you look at the revenue side, we mentioned a high double-digit growth. So it's a strong installation number in China at the moment. So they need more capacity. So we're just waiting for these larger orders to come through. But as you asked, we have seen increased activity during the last months.

[Operator]

The next question from Rickard Anderkrans, Handelsbanken.

[Rickard Anderkrans, analyst]

So a follow-up on China. So we have seen a province in China implementing a volume-based procurement for Class B large medical equipment, including linacs. So what are your thinking around this dynamic for the Chinese market? That would be my first question.

[Gustaf Salford, executive]

Richard -- Rickard, sorry, Gustaf. So no, we saw that announcement coming out, and I think it was a great -- lots of interest around that topic in previous med tech companies reporting. And I think we have the same view that we haven't seen any specific impact except that announcement that came out. In what we do, high tech CapEx, complex products, we don't see that the volume-based ratios will have a big negative impact on this segment. We will continue to compete with innovation, new product launches, localization in China, and we foresee that we'll maintain and have a good price level there going forward as well.

[Rickard Anderkrans, analyst]

All right. Good. And just coming back a little bit to the Red Sea situation. You talked about the 1-percentage-point headwind to growth in the quarter. Should we expect the disruption of a similar magnitude in Q4 relating to Red Sea situation? Or what's your forward thinking and the current status with that situation?

[Gustaf Salford, executive]

Yes, we saw this effect, I mean, from the Red Sea shipping from China to Europe and Europe to China, so I'd say that was around 100 basis points in the revenue -- impact on the revenue in the quarter. We'll install those kind of delayed units in this quarter, but we foresee some continued [ disruptancies ] in the logistics chains here in the next quarter to come as well.

I don't have any specific number on the impact. But I think, overall, as we mentioned, we expect the quarter to be on the same level as Q4 last year. So I think that's the situation. We have seen logistics costs coming up a bit, but it's not that dramatic based on this.

[Operator]

Next question, Patrik Ling at DNB.

[Patrik Ling, analyst]

Just a short follow-up on the previous question regarding the order backlog. Maybe I did my math wrong. But to me, it seems like if FX impacted the backlog by SEK 2.5 billion, I'm still missing approximately SEK 0.5 billion from the backlog. So are there any other larger cancellations? Or are there any other effects that we should know about in the backlog?

[Tobias Hagglov, executive]

No, no other major effects. I said that it's more than SEK 2.5 billion actually coming from currencies. So we do have the GenesisCare, which you could read in the report, but other than that, it's no other larger cancellations in the quarter.

[Patrik Ling, analyst]

Okay. Okay. Then I also had a question on Unity. And I mean you've talked about Unity and your installation before. So could you update us a little bit on where you are on installation and how many you're installed now per month and how you're progressing with that?

[Gustaf Salford, executive]

Yes, Patrik. No, I think, as I mentioned before, it's a good Unity quarter. We have a much shorter installation cycle compared to what it was a year or 2 ago. So we're learning. We're installing faster. We still have the capacity to do the 24. We don't disclose any specific number quarter over the quarter, but we start to see a lot of installations around the world from our backlog, and we also have this opportunity, as I mentioned before, to transition previous MR-Linacs into a Unity program in the U.S., maybe particularly, but also in other places in the world. And we also see bigger volumes that will come from China going forward.

So I'm very positive on Unity in the quarter, and I'm positive on Unity in the coming quarters as well, especially on the installation side. So it will continue to be an important growth driver for Elekta because it is truly a paradigm shift in technology, and we start to see so many fantastic cases and patient treatments being done out there that was not possible before or even today with CT-based linacs.

[Operator]

Next question from Oliver Reinberg, Kepler.

[Oliver Reinberg, analyst]

The first one would be coming back on the order situation. So can you just talk to what surprised you? I mean minus 17% has been a meaningful decline. So we knew about China, but can you just talk to which region has been probably disappointing you? And considering that you now fully canceled the Genesis orders from your backlog, would you expect to take new Genesis orders going forward? That's question number one.

And second question, please, just on the situation in Americas, U.S., obviously, the orders have been flat in Q3, low single-digit growth, I think, in the first 9 months. So can you just probably provide the general outlook in terms of how you're performing in the U.S. And how happy you are with the progress since you have implemented the changes there?

[Gustaf Salford, executive]

Yes. Thank you, Oliver. I'll start with a bit around the world question on the order side.

So we talked a lot about China and APAC, I think. But if you look at EMEA, we are kind of exiting a period where that had a lot of recovery programs from the COVID situation and investments from the European Union into Southern Europe cancer care. We have then seen good progress in Ukraine, and we're seeing good progress now in Croatia. So we're getting large deals this year as well but not as large as the previous quarters. We also -- previous year, sorry. We also start to see more private investments throughout that region. That will be a positive driver because the region needs more capacity and more cancer care. That is true both for Europe and Africa.

If we look at the Middle East, it's a bit more of turmoil, as we all know, in that region. But I was down at Arab Health myself just a couple of weeks ago, and it's a lot of positive parts in the Gulf States and the Middle East. In Saudi Arabia, for example, that would be a growth driver going forward. So we're quite optimistic there as well.

If you look at the U.S., I think one of our biggest opportunities going forward in the U.S. is what we mentioned before, MR-Linac initiatives, but also on the Gamma Knife side with our new Esprit product as well as Elekta ONE. So I think we have a product offering that's well suited to drive growth in the U.S.

So that's a bit more flavor on those other regions. And we expect other parts of APAC to come back in the quarters to come.

[Oliver Reinberg, analyst]

And just to follow up, anything that surprised you negatively? And do you expect to book orders from Genesis going forward?

[Gustaf Salford, executive]

Sorry, on the Genesis side. So Genesis have gone through a reconstruction now, and it's kind of splitted into 2 different parts. It's the U.S. part versus the rest of the world part. So we are continuing to delivering to the rest of world part. It's Australia, it's U.K. and Spain, whereas the cancellation, that was for the U.S. part of the business. So we expect to continue and partner with GenesisCare in the rest of the world side of the business going forward as well.

[Oliver Reinberg, analyst]

But not in the U.S.?

[Gustaf Salford, executive]

Not as much in the U.S., correct. That's why we do the cancellation as we said before as well.

[Oliver Reinberg, analyst]

And generally, the progress in the U.S. outside MR-Linacs?

[Gustaf Salford, executive]

It's a good progress in the U.S. MR-Linac side. So the Unity is great interest in the U.S. in many of the sites. And as I said also, it's a very important trigger for us that we're now transitioning one of the competitor system into MR-Linac situation or program.

[Operator]

The next question is from Anchal Verma, JPMorgan.

[Anchal Verma, analyst]

This is Anchal Verma on behalf of David Adlington. I have 2 questions, please.

The first one on the tailwinds from ViewRay. Could you potentially quantify the tailwind and provide just a bit more color on the opportunity there? How are your discussions going with ViewRay's clients around converting them on to Unity? And anything you can disclose with the conversion of backlog there? That's question one.

And then question two, kind of coming back to your P&L. Your capitalized R&D has been increasing, and it was up for the quarter again. And just trying to understand when -- by when should we start seeing that kind of come back to the P&L and the gap close between amortization and capitalization of R&D?

[Gustaf Salford, executive]

Yes. So I'll take the first question. And as mentioned before as well, we see a strong opportunity, big opportunity especially in the U.S. but also other parts of the world to transition competitive systems or competitive backlog into Unity programs at those sites. We have one great example in the quarter in the U.S. that we'll disclose later, but we will also see more of them going forward as well because it happened in September, I think, time frame. And now we've been able to talk to those customers and transition them into a new MR-Linac program.

So more to come in that area. It's not something we quantify and disclose, but I would describe it as a big opportunity for Elekta going forward because many of those customers, they want to continue with a more adaptive radiotherapy and then Unity is the best option.

[Tobias Hagglov, executive]

And I can fill in here in terms of the capitalization and the R&D development. What you will see here, just in line with what we previously have communicated is that you will see the gross and net R&D continue to narrow. You saw in this quarter that it was a slight decline percentage-wise in gross R&D. That will continue into next year as well. You will also see that the amortization will gradually move up here. So you will see a continued and decreased gap in between those 2 lines there.

[Anchal Verma, analyst]

Sorry, just on the ViewRay, can I ask -- as you've highlighted, that would be a nice tailwind. Is that baked into your guidance for Q4?

[Gustaf Salford, executive]

I think, first, you will see primarily on the order side. And then you will see it coming into revenue at -- in later phases. It takes a bit longer than just a couple of months to do that transition also for this opportunity.

So first orders and then revenue into next year. So yes, from that point of view, it's factored in.

[Operator]

Next question from Hassan Al-Wakeel, Barclays.

[Hassan Al-Wakeel, analyst]

I have a couple, please. Can you talk about the drivers for the flat revenue development into Q4 and how we should be thinking about Q1 next year and whether next year is likely to be more back-end loaded given order dynamics? And what really gives you the confidence in growing above 7% when the last 9 months, order intake was down 7% in constant currencies?

And then secondly, on orders. If you could expand on the development in the quarter because this time last quarter when we spoke, you were expecting good underlying demand outside of China. And so how are you thinking about orders into Q4 for China and outside of China into new year -- into next year? And what about Asia ex China, which looks to be down 1/3 in the quarter on my math?

[Gustaf Salford, executive]

Thank you, Hassan. I will start there. So I think we discussed the Q4 on same levels as the strong Q4 last year throughout the call and in the presentation as well. And we expect going into next year to see strong revenue growth from the first quarter and onwards. So it's not back-end loaded what we currently see in our installation plan. So it should be a good growth quarter by quarter into next year. And I think that is really how we focus and work now, is really to deliver quarter by quarter when it comes to profitable growth and cash flow.

If we look into the next year on the midterm outlook, as we call it, the ACCESS 2025 period of more than 7% revenue growth, yes, we maintain that outlook. And yes, we will deliver on it by growing into next year.

On the order side, I think we discussed China a lot throughout the call. APAC was not strong either outside China. And we will also drive order growth in other parts of the market. So in that region in Q4 specifically, so we have a growth situation in those regions in Q4 is what we can see at the moment.

[Operator]

The next question from Veronika Dubajova, Citi.

[Veronika Dubajova, analyst]

Peter, welcome to Elekta. I will also keep it to 2. My first one is just trying to understand a little bit the competitive dynamics that you're seeing. And I'm curious, in particular, Gustaf, about the U.S. because, I think, couple of quarters, you were quite confident that you were kind of turning the corner with the momentum in the U.S. Obviously, looking at the Americas order intake growth in the quarter, that doesn't seem to be the case. We're hearing a lot from your peers that broadly the U.S. CapEx dynamic is improving.

So I was just wondering if you could help us shed some light on what is happening in the U.S. market. And as you think about your order momentum, what are you seeing where you're winning business and where, look, you might be losing some business? That's my first question, and I'll ask my second one after that.

[Gustaf Salford, executive]

Thank you, Veronika. So I mean the competitive situation broadly, globally, if I start there, and then I'll turn to the U.S. I truly believe and I see it every customer visit I do and every quarter in Elekta's model of being the leading stand-alone radiotherapy company with strong partnerships.

And if we then look more into the U.S. situation, I think it's very difficult to know the competition's order numbers because they don't report them. I think they sometimes have comments about how they grow. What we see in the U.S. is growth. If you look at the revenue and orders going forward as well, driven by our product portfolio when it comes to MR-Linacs and upcoming adaptive CT-based linacs and, I think, Elekta ONE is very important for Elekta in the U.S. because we have a large installed base of software in the market.

If we look at the Elekta's book-to-bill ratio, it's 1.08, if we look at the rolling 12 months basis. And then I think it's also important to say that we have different product offerings nowadays, Elekta. And the competition, they've gone into more value-added services, [ physics ] services, quality assurance services. That's their path. Our path is to continue to be the leading technology provider helping our customers automate their processes by technology. So I think that's also -- it's not apples-to-apples anymore when you look at those different drivers.

[Veronika Dubajova, analyst]

Okay. That's helpful. And then my second question was on gross margin for Tobias. Just as I was looking at the FX impact, it seems to me like there's still a pretty substantial FX headwind on gross margin. I might be doing my math incorrectly. Obviously, I know you guys hedge it, but just slightly surprised by your comment that you expect gross margin to be flat year-on-year in the fourth quarter, given that. Is that commentary before currencies or inclusive of currencies, if you could clarify that?

[Tobias Hagglov, executive]

It includes currencies.

[Veronika Dubajova, analyst]

Okay. So you would be up about 100 basis points underlying year-on-year?

[Tobias Hagglov, executive]

I think, actually, what we are looking -- I mean you saw the quarterly development here. It's -- the impact here from the gross margin was not that large. We had a slight negative margin impact. But essentially, I mean, we are responsible for the full P&L. So when we talk about gross margin, we talk about that, including currencies as well.

[Operator]

Next question, Lisa Clive, Bernstein.

[Lisa Clive, analyst]

You had mentioned in the commentary that you now have a shorter delivery time on Unity. Could you also talk about your lead time for Harmony and whether the length of it ever causes you to be in a sort of worse competitive position in terms of winning tenders, et cetera, and if there's anything that can be done from here, especially on -- particularly on Unity now that you have [ earned a little bit ] scale, whether there's also anything that can be done on the cost front? Unity, obviously, has a much larger -- much higher ASP than a traditional linac. Just wondering whether that gap can close over time.

[Gustaf Salford, executive]

Thank you, Lisa. I -- it was a little bit difficult to hear everything, but I hope I get it right when I start to talk about Unity and Harmony. So Unity -- sorry, MR-Linac, and Harmony is one of our CT-Linac platforms.

But if we start with Unity, yes, we have a faster transition from order to revenue. That's a positive. Yes, we are doing faster installations as well. That is a positive on gross margin. And we also see better and higher prices on Unity and MR-Linac in the backlog. So that's also a positive.

I think on the COGS side, it has been challenging to drive out COGS the last couple of years, both on the MR and CT-based linac when it comes to material costs. But we expect, actually, that to improve in -- during next year, where we see raw material prices and electronic prices to go down. So I think that will -- over the longer time frame, that will be a positive. And then we'll also see the leverage from top line volume when it comes to Unity.

Harmony is then more the CT-based performance linac that we have seen a good uptake on in emerging markets but also mature markets because one of the biggest challenges globally, as we know, is productivity. And this is a linac that could go down to a treatment slot of 7, 8 minutes, and that's out of great interest also in many, many mature markets.

We also see the volumes going up, so that's a positive, and also gross margin drivers coming from Harmony because we have a lower COGS position there as well. So we will work more and more with COGS and material costs into next year and the productivity when it comes to our service order fulfillment, manufacturing, workers and get the leverage from the top line growth, and we'll see that flowing into our gross margins in the years to come.

[Operator]

The next question is from Julien Dormois, Jefferies.

[Julien Dormois, analyst]

I have 2. The first one is partly a follow-up on Veronika's question about the order and sales trajectory in the U.S., where you [ see ], obviously, well, less interest compared to what you see in EMEA and APAC, especially in the past few quarters. So could this have an impact on your margin because, obviously, the U.S. is the most profitable region? So had those orders in EMEA and APAC get converted, could those present a headwind to your overall margin? That would be my first question.

And the second question is coming back to your backlog because it's quite striking to see that your overall backlog has quadrupled in the past decade. It has moved up from approximately SEK 10 billion to now more than SEK 40 billion. And at the same time, your sales have hardly doubled over that same period. So I know you expect significant backlog conversion in the coming quarters. But what do you believe would be a normative level of backlog to sales once you've converted the majority of the backlog that has to be converted quickly?

[Gustaf Salford, executive]

Yes, Julien. I think I'll start with the order question. I think maybe Tobias will follow up with part of the backlog question as well.

But orders, if you look at what we take as orders now, we've seen a good price increase throughout the year. But of course, there's always a market mix factor that you need to think about when -- depending on what regions you see the growth. But overall, we see price increases in our portfolio. And there is different margin levels: U.S., Northern Europe, Japan, higher prices; and then China somewhere in the middle. So -- and then some of the emerging markets, a bit lower.

But all in all, throughout a year, and I don't think you should always measure Elekta's performance on one single quarter's order performer. You should look more at rolling 12 and also the book-to-bill ratio. That's 1.8 (sic) [ 1.08 ]. And from that point of view, we will drive and we will see that price increases across the portfolio also coming into our gross margin and bottom line. The inflation we have been exposed as all other companies, especially throughout the last 12, 18 months from increased inflation on salaries, material costs and so on, and we expect that to -- situation to improve throughout next year, I would say. So I think that's the order situation.

If I take the historical order book-to-bill ratio, Elekta has often been at 1.2, maybe 1.3, sometimes 1.1 as we're now the book-to-bill ratio historically. And now we see a situation where we will install more of that and work hard with a faster order-to-revenue conversion. And that's what you've seen us focus on the last year, and you will see us continue to focus that quarter by quarter in next year. And then we have this SEK 42 billion order backlog that we will install from both on the Solutions side and, so to say, the Service contract side going forward as well.

[Tobias Hagglov, executive]

Yes. And Julien, and thanks for the other question. First of all, I think this is an important element of actually us when we have projected this outlook. We see our backlog is rightly so that it has grown, and we see this as a strong asset for us to actually drive backlog conversion, and then it's a strong foundation for our growth. And as you know, we have a certain time between order and revenues and a healthy pipeline for that.

So -- but we have not explicitly set a target level for backlog as such. But it is -- and again, it's a strong platform for future growth. That's how we see it.

[Operator]

The next question from Mattias Vadsten, SEB.

[Mattias Vadsten, analyst]

I have a follow-up. Maybe it's about next year, how we should think about it because one part is the exchange rate difference item in the P&L. So I think 8 quarters in a row had some material negative magnitude. If you could just speak about how we should think about it going forward.

And then the amortization part of R&D. You got the question earlier. But at what magnitude should this item come up? Because I'm surprised basically every quarter that it is not coming up more. So this is my question here as a follow-up.

[Tobias Hagglov, executive]

Yes. Mattias, maybe I need to repeat your second question there. But in terms of the FX move, I think there, it's structurally to look into the currency levels as such. I mean one is the just the P&L item, and that is when you look at the year-over-year impact, we have actually had a slight -- a certain negative impact here this year as well from revaluations on our balance sheet and net of hedging. And that, when you look at the year-over-year, will become then a positive.

When it looks to the currency levels as such, I mean, here, we benefit from, in general, a stronger U.S. dollar and -- mainly. I think where the currency levels are right now, they are at a fairly good levels for us when you're looking from a historical perspective.

[Mattias Vadsten, analyst]

Okay. And then on amortization, how substantial of an increase we should expect there going forward because it surprised me how slowly it is coming up given the...

[Tobias Hagglov, executive]

Yes, you will see an increase of amortization, and you will see an increase of amortization here in Q4. It will also continue to increase here in next fiscal year. And to give you some guidance of it, we're looking into maybe 100 basis points of impact here on the year-over-year impact from amortizations on the net R&D as such.

[Mattias Vadsten, analyst]

Okay. But if we look -- because LTM, I think it's 7.5% net R&D to sales. How do you -- could you give us -- is it 100 basis points? Is that what you mean?

[Tobias Hagglov, executive]

As a percent of sales, so you will have an increase in next year of amortization in absolute terms.

[Peter Nyquist, executive]

Thanks, Mattias, for those questions. We'll then move to the last question of this Q&A session, please, operator.

[Operator]

Last question from Mr. Kristofer Liljeberg, Carnegie.

[Kristofer Liljeberg-Svensson, analyst]

Just one, you talked about online adaptive treatments on your standard linacs. Is that going to come as an upgrade? Or are you now planning to launch a completely new linac platform in the coming years?

[Gustaf Salford, executive]

Thank you, Kristofer. A great question. So the key trend in radiotherapy right now, I would say, it's MR-Linac, but it's also about adaptive. And we are doing MR-adaptive treatments on Unity. And this has also enabled us to look into the CT-adaptive world, and we already today have some customers that are doing that with the current linacs.

But we are now making that into new solutions, new products. So we will launch CT-adaptive linacs, and we'll also launch capabilities to upgrade installed-base linacs into adaptive linacs going forward. So I think that's a very encouraging and positive product initiative that we have to both the installed base but also for new linacs going forward. So expect more news there going forward in the spring and during the autumn.

[Kristofer Liljeberg-Svensson, analyst]

And when it comes to new linacs, is that something that could be launched already at ASTRO this spring or ASTRO during the autumn?

[Gustaf Salford, executive]

Yes. We'll come back on the launches and so on. But I mean it's -- we are quite close here. So I'm mentioning in spring and autumn.

[Peter Nyquist, executive]

Thanks, Kristofer. And before concluding the conference call, maybe some final remarks from your side, Gustaf.

[Gustaf Salford, executive]

Absolutely. So just to conclude a bit on the quarter. We saw our last quarter to be the fifth consecutive quarter with net sales growth and EBIT margin expansion. We're also seeing that our accelerating innovation and our investment in software is paying off with, for example, the Best in KLAS award. And we also presented a record Q3 cash flow for Elekta.

So with those words, I conclude the call, and a big thank you for all of you for listening in and very good questions. Thank you.

[Tobias Hagglov, executive]

Thanks a lot.

[Peter Nyquist, executive]

Thank you.