Sectra AB

STO:SECT B

Earnings Call Transcript 2019-Q1

[Operator]

Ladies and gentlemen, welcome to Sectra Q1 report 2018. Today, I'm pleased to present CEO Torbjörn Kronander. [Operator Instructions] Speakers, please begin.

[Torbjörn Kronander, President, CEO & Director]

Hello. This is Torbjörn Kronander; and Mats Franzén, our CFO, from Linköping. I will begin the report.Next slide, a summary of the quarter. We can say imaging IT led the way, but all areas showed growth. But the lead in this quarter was clearly the growth in imaging IT. Special focus and happy customers in the U.S. resulted in good order intake.And then next slide, please. Highlights from Q1. Next slide. All financial targets for the group are fulfilled. Our priority and #1 target is stability. Equity/assets ratio should be above 30%. We are at 51.1%. Profitability and operating margin should be above 15%. We have no target to drive that. As far as possible, we want it to be above 15%. And then the third target, which is our main target if the first two are fulfilled, is growth in EBIT per share over 5 years and that should be above 50%. We are currently at 145.3%.Next slide, order bookings for the group. The increase in Q1 compared with the corresponding quarter in the preceding was attributable to imaging IT. So that's -- some words disappeared there, but that should be attributable to imaging IT. Geographically, the increase in order bookings Q1 was mainly attributable to operations in Australia, Sweden and the U.S. And we had -- we want to point out that we have substantial variation between quarters as some orders may at times be very large and be prolonged over many years into the future.Next slide, Imaging IT Solutions, our main business unit in this slide. We got several orders from the U.S.: Sanford Health, which is a chain of clinics -- growing chain of clinics mainly in the Dakotas but growing into the surrounding states as well; Texas Scottish Rite for children in Dallas, a very renowned hospital for treatment of pediatric orthopedic conditions; and Memorial Hermann Health System in the U.S., which was a cloud-based solution for radiation dose monitoring to DoseTrack. So that is not our normal business, our PACS business. This is an additional operation that we've done within imaging IT.Next slide. We also announced that we entered into proof of concept with New South Wales Health in Australia. And the proof of concept will -- according to the customer here, if we succeed in proof of concept, we will go into negotiations for the whole state -- or for the major shareholder state, but that is still not completely -- completed.Next slide. We also completed a unique nationwide telepathology solution in the Netherlands, which means in the Netherlands old customers can communicate with all other laboratories for pathology and do remote consulting. We also won a digital pathology deal in Portugal. In Portugal, we have a very large market share in radiology PACS. And this is for the first extension of our radiology PACS into also pathology in Portugal.Next slide, local and global presence. We are -- have direct sales currently in 19 countries. France medical and Finland security were established in 2015 and 2016. Canada was split up from DS, from which we sold in Canada before, as its own operation in 2016/2017. We do, above that, have partner sales in selected market and business units. We have customers in more than 60 countries and the major amount of countries outside of our direct sales in other countries is through education business unit, with the sales from partners' orders exclusively. And our largest market share, we can find in Scandinavia, United States, the U.K. and the Netherlands.Next slide, Secure Communications. Next slide. We had good growth in communications. We've also taken initiatives to further increase the growth in communications. We have our critical -- cybersecurity for critical infrastructure product area, which is growing substantially but from a small start. So I mean we don't see any impact of that on the overall figures yet, but the growth is very healthy. We want to strengthen the offering in the kind of conventional Secure Communications segment that we are investing in that as well. And we want to go into new geographic areas in both critical infrastructure and the basic conventional business.We do increase the focus of critical infrastructure area, but that will be charged to operating area's earnings during the fiscal year. So we will see that on the bottom line of the business area.Next slide, a little about critical infrastructure. We have a substantial interest in this area, more and more with increased tensions in the world and the increased cybersecurity or cyber war. Of course, the critical infrastructure of countries is a prime target for attacks both from a military standpoint but also from a potential terrorist standpoint. And these are all controlled by IT today, and we have solutions to help out with this where we monitor these long term in a recurring revenue model. We have several customers now fully operational in our SOC. And the growth strategy is to focus on the energy sector and expand into new geographic markets based on solid references in Scandinavia where we now have close to the solid reference in -- especially in Sweden.Next slide, Imaging IT Solutions. We have a sales and operating profit line Imaging IT Solutions and continued trust and extended agreements with existing customers. Not -- a small portion of our sales is actually extending customer -- early customers who buy more assistance from us and also who grow by consolidation into other -- buying other hospitals. We have -- we do see improved growth, and we have investments in future growth areas and new geographic areas also in imaging IT. And the first 2, 3, 4 years where we open a new country definitely is [ loss-y for that country ] before we can reach a reasonable market share.Next slide. In the United States, which we have informed the market, is a focus areas of ourselves. And we have a very high customer satisfaction ratio in the U.S., but we have a low relative market share. We also have seen several orders, as I mentioned before, that strengthen our market position in the U.S.Next slide, Business Innovation.Next Slide. In Business Innovation, we have future growth projects. And they are accounted for in the above square, the Business Innovation projects, which is medical education, software tools for orthopedic surgery and research. Then we have 2 of these seeds for the future. As I mentioned before, one is Secure Communications, which is IT security for critical infrastructure. And one in imaging IT, which is digital pathology, which also has a very healthy growth right now.Next slide, Business Innovation. We have new areas within orthopedics. We have before -- or previously over the years, we have been mainly concentrating on preoperative planning. If you want to do, for instance, replace a hip in people, you need to plan which hip of a very large amount of candidates for which individual should fit in these patients. But over the last years, we have added postoperative analysis, an implant movement analysis. And this has been met with very high interest by the market, though it has not resulted in substantial sales yet, but it looks promising.Medical Education. We are moving the Medical Education from previously we have mainly sold our visualization terminals, which is a visualization table for teaching of medical students. We are moving that into we have the terminal's [ classic ] content provision. So we sell as a recurring revenue. We can actually subscribe to interesting cases from the cloud. Most of our sales in this area now is the recurring model and less than -- lessening amount is from only the tables. This actually corresponds well into our efforts to move more and more revenue into recurring revenue.We also do a lot of research. And in research, next slide, we concentrate currently on AI, machine learning. Machine learning will affect a very large amount of our society, and health care will be in -- primary benefactor of the new developments in machine learning in the future. It's a core focus area for Sectra. And we -- our intent is not to replace physicians. We do think there might come automatic machine tele assistance for actually replacing a few tasks by doctors in the very distant future. That would not be in the foreseeable future, but we can make the physicians much more effective or efficient by adding to student base the machine learning. We have an approach of opening up our solutions to other vendors as well. We do not think we can do everything in-house and that can differentiates us from other PACS centers who want to sell all these themselves. We are more of the Apple approach where we think app houses could do -- some of these apps, we will do ourselves. Some, we will get from other companies. And as I said before, AI, machine learning will permeate most business units in the future.And according to KLAS. KLAS is the research institute for customer satisfaction in the U.S. We have been mentioned. We topped a list of vendors ranked for our ability to set, to deliver on expectations. There's a lot of hype in these areas, and as usual, we do not want to promise more than we can deliver, which we have been recognized for.Next slide, customer financing, where our main income in this area is multiyear imaging IT contracts in the U.K. The main -- the bulk of our customers' financing is that imaging IT does an internal sale into a customer financing arms. And then with these kind of our work for many years in the U.K. This, on the other hand, means that we are significantly exposed to the British pound. And with the latest situation in Brexit, this, of course, has affected our results, the future earnings there.Next slides, highlights after the period, Imaging IT Solutions. We signed an agreement. We were very happy for getting the trust of Stanford University hospital in the United States. This is one of the most famous hospitals in the world, and that they trust us is, has become known by the market immediately. It adds to the trust-building references we need to have in order to grow in the U.S.Next slide. We also see increasing benefits from having cybersecurity in the same company as medical IT. We received a Cyber Essentials national cybersecurity certification in the U.K. And it can be mentioned that U.K. is especially sensitive to cybersecurity in health care due to the various attacks they had last year.Next slide. I leave the word to Mats Franzén, our CFO, for the financial figures.

[Mats Franzén, Chief Financial Officer]

Thank you, Torbjörn, and next slide, please. If we see on the general picture, we can see that the order intake is up close to 26%. And the net sales also shows double-digit growth, also currency neutral. As you all know, we have had a weaker Swedish kronor over the last few months and that partly inflates the whole income statement obviously. As for the underlying performance in terms of sales, the United States and Sweden primarily were the drivers in the revenue growth.Also even if it didn't give us any material traction in operating profit, the profit after financial items did significantly increase compared with last first quarter, about SEK 43 million compared to SEK 29 million, giving us a profit margin of 14% compared with 11% last year.Next slide, please. As previously mentioned, the U.S. and the Netherlands in our own direct channels and the partner sales in Italy and Finland were in it, which is the main driver for the top growth performance is lying in that just short of SEK 20 million number to the left in the waterfall diagram. And as for the group eliminations, that mainly the accrued -- the revenue over time from the contracts in financial -- the customer service projects in the U.K. with the NHS. That gives good recurring effects and revenue stability over time.Next slide, please. Looking at sales development by geography rather than segment, as we do on this slide, we can see there that at least in absolute number it's a fairly even distribution over time, although the underlying markets obviously differ quite significantly. As for the rest of the world, there's also some good traction in Australia and Iberia in direct channels and as well as in partners, as mentioned previously. Interesting also to see that Sweden is growing at that number considering the size and the saturation in that market.Okay, next slide, please. As for the operation earnings trend, the main contributors obviously comes from the ImIT operations. And although we had an increase in consultancy and personnel costs for this period and also connected to the growth initiatives, we still have some good traction in ImIT. Also, the costs side is also situated in other areas, the other operations, which is the group central functions and supporting this type of growth initiatives.Okay, next and final slide for this section, please. The cash flow of -- the change in working capital, which this slide presents, is somewhat down compared with the corresponding period. And as we have said, several major customer contracts tie up in capital during the installation and start-up phase. And investment was just short of SEK 5 million compared with about SEK 11 million in the last comparing quarter. However, we should also acknowledge that in addition to cash tied up direct in investments, it's also tied up in working capital and also in the running cost base. That also impacts the profitability in the short term. However, that is aiming at meaning that we have strengthened the future growth prospects hopefully, as have been the strategy for some time.And ending the quarter, we do have a slight upwards hike in terms of cash available, SEK 292 million, which is up SEK 10 million from year-end and up from SEK 278 million for the corresponding period last year.So that was, in brief, the financial overview. Torbjörn?

[Torbjörn Kronander, President, CEO & Director]

Next slide on the Sectra's way forward, briefly here.Next slide. Our top priority is again customer satisfaction. By having a good customer satisfaction, we had -- we put the platform in place to grow, for future growth. And we have now been rated #1 in customer satisfaction in large PACS in the U.S. 5 years in a row. And we, of course, do not know this will happen again, but we hope. We -- our aim is to make it.Next slide. We like quotes in the company. And it can never be forgotten that the main profit in business comes from repeat customers, customers that boast about the project and service and that brings friends with them. This is an old quote, but it should not, never be forgotten.Next slide. Basic philosophy in this area is if you have happy customers, happy employees, reasonable cost control and good, long-term strategies, that it's almost impossible that shareholders will not be happy. This is the prioritization we work after when we strive to increase the value of the company.Next slide, major focus activities.Next slide again. The overall major focus is maintain high customer satisfaction, as I said. We should grow fast, but we should not grow so fast that we lose quality and customer satisfaction, which is very easy to do if you grow too fast. We should reach our financial targets, of course. The growth in EBIT per share is the ultimate financial goal. The first 2 goal for equity-to-asset ratio and margin are what we'd call [ hygiene ] goals. They should be where they are and not fall below that. But we want to grow the company's profit long term.We want to prioritize large market shares in a few geographies instead of being small in many. It's better for quality. It's better for profits. And target is #1 or #2 in markets where we are present. Of the markets where we have been for some time, we are #1 or #2 in most of them. We are not that in Germany and we are definitely not #1 or #2 in the U.S. yet, but of course, we would like to be that. And the growth in U.S.A. is prioritized because of our customer satisfaction and strong currency right now. That cannot be taken in -- too much into account, but of course, it contributes. And a large opportunity to grow because we have a fairly small market share in the U.S. right now. And we want to open new markets after careful consideration, as we did with Canada and France and Finland over the last 3 years.Next slide. In medical, the main focus is also customer satisfaction, outcomes divided by cost. All of health care in the Western world is under pressure, also United States, which was not the case 3 or 4 or 5 years ago. We need to increase efficiency of health care, and that is our business, and help our customers with that. Integrate diagnostics, we believe a lot diagnostics had previously been siloed. Radiology has been siloed from pathology, especially in cancer. We believe these will move and merge together in the future. And we are investing a lot in that area right now, also with digital pathology coming very nicely into that combination.Enterprise health care IT. And customers are -- hospitals are consolidating. And one of the main reasons for that is to get more effective, more efficient IT solutions. They want to have system that span over many hospitals or even many regions or even countries in some cases. And we are good at that. One of our strengths is actually to be able to have a system that scales from a single workstation up to a country without having forklifts, upgrades in between. And then, of course, machine learning to help our customers to become more efficient and increasingly cybersecurity. We have a reputation now of being the best medical IT company in imaging when it comes to cybersecurity. We want to keep that reputation.Next slide, cybersecurity. Also there, customer satisfaction. It's very easy to build a very safe and secure system that is unusable for a customer. That is not a good way to go. We want to have very high-level security system that is hardly noticeable for the customer. They should not see. Top-of-the-line security. We are not playing around in the field of uncertified or unclassified security projects. We want to be on what is formally certified as SECRET, TOP SECRET or RESTRICTED levels. Critical infrastructure, where I mentioned that before, a rapidly growing area where the need is high in many, many countries. And we want to begin to grow internationally in cybersecurity, which we have not done previously in any strong amounts. We are strong in a few countries in Europe but not outside of these countries and we want to increase that growth.Next slide, being a shareholder in Sectra.Next slide. We -- the proposal from the board to the general assembly meeting here is to keep our current dividend structure, but we do that through a redemption process as we have done before, keep that level of SEK 4.50. And as you saw from our cash flow reported from months before, we are well fit to pay that dividend this year.Next slide, why should you invest in Sectra? We do have high customer satisfaction. We have a strong brand in markets where trust is critical. A brand has different values in different markets, but in our markets trust is critical. If our medical IT system stops, the hospital stops. That is a strong barrier of entrance, but it's also makes a good protection for the vendors in the market against "3 guys in a garage" operations. Saying likewise in high-level security, you don't buy that from someone you don't trust.We are profitable. We have a strong cash flow and a solid balance sheet. And we have substantial and we have an increasing recurring revenue, which, of course, gives a good protection for the future. We are positioned in niche markets with substantial underlying growth. We prefer to work in markets where the market is growing. Growth for the company is much easier then. Management owns shares. All management here are substantial shareholders in the company. I myself is the largest, together with Jan-Olof Brüer.Yet with this solid underlying financial strength, we have sustainable investments in R&D with exciting future opportunities, which each one can become a very large business if things go right, but of course, this is a bet for the future and you cannot say that for sure. But it's good prospects if it goes well.Next slide, upcoming financial reports and shareholder meeting of 2018. This Thursday, we have our annual general meeting here in Linköping. December 7, we have our 6-month interim report. March 6 next year, 9-month interim report. And May 28, 2019, we have our year-end report.Next slide. I would like to remind you that your feedback is important for us. We want these conferences and presentation to be effective and worth listening to, so please tell us what you think of them and give us suggestions, and we'll try to improve them for the future.Next slide and then I give you -- open it up for questions. I also remind you that you can do e-mail questions and send them to us in the e-mail below, [e-mail].

[Operator]

[Operator Instructions] We do have a question. The first question comes from the line of Hans Mähler from Nordea Markets.

[Hans Mähler, Director of Healthcare]

Hans Mähler here. First, a question on the organic performance, so currency-adjusted performance for the divisions. I guess, with the significant movements in currencies over the summer, I guess it would be helpful to see organic performance on sales for the respective business areas and maybe an organic number for order growth as well. Is that something you can provide? And secondly, also if you look on the profitability for Secure Communication and Business Innovation, both these areas broke a rather good, positive trend there. Was it something exceptional on the earnings lines for those 2 segments in the quarter?

[Mats Franzén, Chief Financial Officer]

Well, as to the sales and profitability by currency line, we'll presently, hence your question, do not present that and I guess we will have to digest that before getting back on you instead of sort of giving you an answer on top of my head here. But I can really see the reason for you asking. When it comes to the currency exposures, it's, I would say, larger in ImIT as they have a more sort of diverse geographical spread of the sales rather than for communications. I think I forgot the second part of your question related to communication. Could you please repeat that, Hans?

[Hans Mähler, Director of Healthcare]

My second question was more in terms of profitability both for Secure Communication but also for Business Innovation. Was a rather significant change in profitability for both areas going into Q1 if we look sequentially. If you have any one-offs items. Or what is the explanation for that?

[Mats Franzén, Chief Financial Officer]

Yes, I will say, [ one larger them being ], that they aren't that large. So the volatility in terms of when and what customers are booked into revenue and when costs are different sort of over the P&L investments in growth initiatives, that significantly impacts that, but it's nothing one single item I would single out for further comment, I think, at this point.

[Hans Mähler, Director of Healthcare]

So it's just volume dependent.

[Mats Franzén, Chief Financial Officer]

I would say that's the major impact, yes.

[Torbjörn Kronander, President, CEO & Director]

Yes.

[Operator]

At the moment, we do not have any further questions. [Operator Instructions] Thank you. At the moment, we do not have any further questions. Speakers, please continue.

[Torbjörn Kronander, President, CEO & Director]

Okay, we have some e-mail questions that have come in, and Helena here will read those.

[Helena Pettersson, Chief Investor Relations Officer]

The first question is you commented, speaking about the way forward, about open new markets. Can you say something where Sectra should grow further in the future?

[Torbjörn Kronander, President, CEO & Director]

We are always investigating about this and we need to as it takes a long time before we can build the trust in a local market to really get momentum. Typically that's 3 to 5 to 6 years we have to look ahead. And right now we're looking into several markets, but of course, it would be interesting to look into Asia where we are almost nonexisting today. But we will not move until we think we can grow, with high probability grow into a #1 or #2 company in a local market.

[Helena Pettersson, Chief Investor Relations Officer]

The next question is regarding Secure Communications. Can you comment on the growth in critical infrastructure for the U.S.?

[Torbjörn Kronander, President, CEO & Director]

Critical infrastructure is growing very well and very healthy growth there. We are -- all the acquisitions or the purchases that have been done in this area over the last years, in Sweden where we concentrate our efforts right now. We have a complete dominant market share and, by far, leading this segment. Now this growth comes from a very small start, so there's no overall impact in it yet. But it's still sort of like we'll say it will be a remarkable business within a few years.

[Helena Pettersson, Chief Investor Relations Officer]

And then we have one more question right now and it's do you see any changes in recurring revenue levels.

[Torbjörn Kronander, President, CEO & Director]

Not significant. It's slowly growing over time. We have, of course, efforts in communications and in education to increase that share in those areas. It is increasing, but overall in imaging IT, which is our main business, it's about steady, I will say, right now.

[Helena Pettersson, Chief Investor Relations Officer]

No further.

[Torbjörn Kronander, President, CEO & Director]

No further questions. Then we are done. Thank you very much for listening in. And those of you who are shareholders are, of course, most welcome to come to Linköping this coming Thursday. Thank you very much, and goodbye.

[Operator]

Thank you. This now concludes the conference call. Thank you all for attending. You may now disconnect your lines.