RaySearch Laboratories AB (publ)

STO:RAY B

Earnings Call Transcript 2022-Q2

[Unknown]

Hello, and welcome to the presentation of RaySearch interim report for the second quarter of 2022. My name is Eva Nelson, and I will be the moderator here today.

Joining us in today's webcast is Johan Lof, RaySearch Founder and CEO; and Bjorn Hardemark, Deputy CEO and also our Interim CFO. Johan and Bjorn will give you a short summary of the quarter, including the financials, and then there will be some final remarks. And after that, we'll open up for your questions, which you can either ask orally in the call, you need to be in the call to ask an oral question or submit them in the text field here under the presentation. After the meeting, you'll find the presentation on our website.

And with that, I hand over to you, Johan, please go ahead.

[Johan Löf, executive]

Thank you, Eva. And also a warm welcome from my side. I'd like to start by explaining why we decided to postpone this interim report. In the second quarter, revenues for 2019 and 2020 have been corrected due to previous error. The error was introduced in 2019, where RaySearch got a large order from MedAustron. The deal was separated into performance obligations in an incorrect way, which impacted amounts and timings for the revenues. This has been corrected now. There it was discovered relatively late, and it took some time to finalize due to the complexity of the deal.

So during the quarter, the gradual return to normal conditions continued, even though it didn't go as fast as we had hoped. Order intake increased by 12%, and we also had a slight increase in revenues by 3.7% compared to last year. Operating profit was minus SEK 20 million.

I would like to point out here that because of technical accounting effects, the large delivery to MedAustron in the second quarter only had a small impact on our revenue and earnings during the quarter. MedAustron, which is a carbon ion center in Austria, has been a RayStation customer for many years. And in 2019, they also ordered RayCare and RayCommand.

At the same time, they placed orders for RayStation, RayCare and RayCommand for an identical center in Iran, all 3 systems, RayStation, RayCare, and RayCommand have been in clinical use at MedAustron in Austria since April 2022. In accordance with the applicable accounting standard IFRS 15, the 2 orders must be accounted for as 1 agreement and, therefore, results in revenue of only EUR 0.8 million for the second quarter.

What remains now according to the agreement is one more software delivery to Austria and the delivery of all 3 products to Iran. If and when these 2 deliveries can be made, around EUR 11 million in license revenues remains. So overall, this is our largest deal so far. After the next delivery to Austria, it will generate payments for support of about EUR 1 million per year. And until today, we have already received EUR 5.1 million in advanced payment.

So apart from the business transaction itself, it's also very satisfying to know that our products increase MedAustron's capacity to treat cancer patients. They are at an all-time high every day now and we look forward to the continued collaboration with this state-of-the-art center.

We received a number of significant orders during the second quarter. The one for Tongji Hospital in Wuhan is for RayStation to be used with their Mevion proton machine. Hong Kong Sanatorium & Hospital, this is our first RayStation order for protons in Hong Kong. Norrlands universitetssjukhus in Umeå, Sweden, is for regular photons. We have had research collaboration with them for many years, and I'm very happy that our technology will now be used clinically at another university hospital here in Sweden.

The carbon ion center at the Seoul National University Hospital in South Korea placed an order for RayStation in the second quarter. And in the beginning of July, they also ordered RayCare, which is a great milestone that we have. We started to get additional RayCare orders now after the pandemic.

Other large orders so far after Q2 came from University of Mexico and Harris Health System, both for RayStation and for photons. And together, these last 3 orders I mentioned have an order value of SEK 41 million.

So now let's take a closer look at the results for the second quarter. Bjorn, please go ahead.

[Bjorn Hardemark, executive]

Thank you. So as Johan already mentioned, the order intake increased by 12%. Net sales increased a bit, but there was some tailwind from currencies there as well. So at constant currencies, we would have been at negative 5.5% in net sales. It's mostly the dollar that, as you know, has strengthened quite a bit compared to the Swedish krona over the whole last year. Operating loss and operating margin was negative correspondingly. But we note that the cash flow was positive at around SEK 17 million continuing from last quarter, which had a positive SEK 35 million.

All right. So looking at the order intake over time, as you know, the pandemic started to impact the order intake in mid-2020. But from end of '21, we have seen effects declining. So here you see the margin shows when COVID started, and you can see the increase in order intake primarily after the pandemic had started to recede. As Johan mentioned, we've made a correction to the previous error, and you will see it impacting some of the figures in the report to the extent they cover the periods of 2019 and 2020. We also note the still increase of backlog compared to the previous quarter. So we remain at an all-time high.

That was all from me. Thank you.

[Johan Löf, executive]

Thank you, Bjorn. Some final words on cost reduction program that we introduced in the fall of 2021 is continuing. The number of the employees decreased by 11% compared to a year ago. And the costs for travel and market events are half of what they used to be before the pandemic.

On the other hand, costs increased because of employee changes in the finance department so we had to hire consultants and also due to lower capitalization and higher amortization. So the effects of the program haven't been fully reflected in operating profit. But we do have noted a positive effect on cash flow.

The market conditions, as I said before, are improving but slower than expected. Also because the timing of a couple of larger transactions can have a big impact on sales for a single quarter. We are used to quarterly fluctuations. And as I said before, the market is still a bit unpredictable after the pandemic. But despite the delayed recovery of the market, I'm quite optimistic about the future. We will continue to follow our chosen path with a focus on sales, product development and cost control.

And in combination with the positive cash flow and again an all-time high order backlog, we have a solid foundation for a return to growth during the year. Thank you.

[Unknown]

Thank you, Johan and Bjorn. And we now open up for questions. So operator, over to you.

[Operator]

[Operator Instructions] The first question comes from the line of Kristofer Liljeberg from Carnegie.

[Kristofer Liljeberg-Svensson, analyst]

I have 4 questions. Maybe if we start with MedAustron and a few ones related to that. So when you ship the next or deliver the final software to the clinic in Austria, will that generate any license sales when that happens? And also could you talk a little bit about the timing here and when we should expect the service revenues of EUR 1 million annually to kick in?

And then after that, I guess, what's required [indiscernible] deliveries to book any more sales from this deal. Could we expect some cash payments before -- additional cash payments before that happen? Maybe if we start there, and then I have some other questions related to other topics.

[Bjorn Hardemark, executive]

Yes. Should I start with the next delivery to Austria then? We expect to deliver the next version by the end of this year, but it will be followed by some testing and commissioning. So we expect the revenues from that delivery to be at the beginning of next year. And then the next question was about the delivery to Iran, right?

[Johan Löf, executive]

So Kristofer, please repeat the second question.

[Kristofer Liljeberg-Svensson, analyst]

It's -- yes. So what I wonder is when you do that shipment of the final software to Austria, will that [indiscernible] on additional license revenues to be booked or some with...

[Johan Löf, executive]

That's already answered.

[Bjorn Hardemark, executive]

Yes, there will be both license revenues and cash payments at that time.

[Kristofer Liljeberg-Svensson, analyst]

Okay. And is it possible to say how much of additional payment of the total you will receive for that?

[Bjorn Hardemark, executive]

It's still a rather small fraction due to how the 2 agreements are combined under IFRS 15. So compared to the total order value, the next delivery will still be comparably small fraction.

[Kristofer Liljeberg-Svensson, analyst]

Okay. But on the other hand, it seems that you have received some cash payments, so will there be additional cash payments?

[Bjorn Hardemark, executive]

Yes. Yes. There will be...

[Kristofer Liljeberg-Svensson, analyst]

The larger amount...

[Bjorn Hardemark, executive]

Yes. Yes, there will be.

[Johan Löf, executive]

Then I think the third question was about when the support revenue -- the support stream that we -- about EUR 1 million. And that will start after this second delivery.

[Bjorn Hardemark, executive]

Yes, we expect it to start next year, and it's then the combined support for RayStation, RayCare and RayCommand for Austria.

[Kristofer Liljeberg-Svensson, analyst]

Okay. I'm talking about support revenues or service revenues. I noticed that they were down versus the first quarter. So can you explain the reason for that? I noticed it was a pretty big increase sequentially in the first quarter. So maybe there were some extra payments included there.

[Bjorn Hardemark, executive]

Yes. So there are some fluctuations, although in reality, the stream of support is quite constant and smooth over time. You can see some fluctuations in the number because sometimes the information about support gets booked retroactively and then for some larger sites, adding a year or so of retractive support into 1 quarter causes some fluctuations. But there's no real underlying cause for the small ups and downs that you see in the support revenues.

[Johan Löf, executive]

Overall, they increase about 10% year-by-year.

[Kristofer Liljeberg-Svensson, analyst]

Okay. Another question about administrative costs in the quarter. Back in Q1, you said -- because we asked you then why they increased so much sequentially, so there were some extra costs for changing the CFO. However, now they have remained at the same level as in the first quarter, you could explain the reason for that.

[Johan Löf, executive]

Yes, we still have quite a few consultants actually at the finance department. Now we have recruited a new CFO that we are extremely happy with, and he will start in November. And we have started to recruit permanent positions for all positions in the finance department. But of course, that will take some time. But our -- in the end, we will have 0 consultants in the finance department.

So that's one thing that have sort of offset the other positive impact of the cost-saving program. But as you noted also, we have a very good balance now with amortization and capitalization. And that changed compared to -- has changed, well, unfavorably in one perspective compared to a year ago.

[Kristofer Liljeberg-Svensson, analyst]

Add on, administrative costs, they are up like SEK 10 million per quarter in the last 2 quarters. So what would you say is a more normalized level going forward for that line in the P&L?

[Johan Löf, executive]

Yes, it's hard to say right here and now. But of course, we will -- we continue to strive towards lowering that. I can't say a specific number right now for that.

[Bjorn Hardemark, executive]

No, we have -- I mean, we have some impact of the rent, of course, for our new office in that number and also the cost for auditing and consultants that we hope with some midterm perspective will go down, but we can expect that, that will take some time.

[Kristofer Liljeberg-Svensson, analyst]

Okay. And just a final one. If you could say anything about the sales outlook for the second half of the year considering since the recovery has taken a bit longer than what you expected a quarter ago?

[Johan Löf, executive]

I mean if we exclude the quarter-to-quarter fluctuations, I would say, it looks very good. There are -- we have a very nice pipeline and really good opportunities that -- and so many more -- much more activities in the market now that we didn't have before. So -- and then -- so I think you will start to see this rather soon actually, that things are -- we are quite optimistic for the future, I would say. You will start to see things happening in a not-too-distant future.

And as we say in the report, we will go back to growth this year, that's our plan.

[Operator]

[Operator Instructions] There are no more questions at this time.

[Unknown]

There are no written questions either. So I suppose that we can then say thank you then and conclude the session. And we look forward to continue talking to you if not before, then when we present the report for the third quarter, and that's on the 17th of November. So thank you very much for your participation, and goodbye.

[Johan Löf, executive]

Thank you, and goodbye.

[Unknown]

Thank you.

[Operator]

Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call. Thank you for participating in the conference. You may now disconnect your lines. Goodbye.