Sectra AB
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Earnings Call Transcript

Earnings Call Transcript
2021-Q1

from 0
Operator

Ladies and gentlemen, welcome to the Sectra Q1 Report. [Operator Instructions] Today, I am pleased to present CEO, Torbjörn Kronander; and CFO, Mats Franzén. Please begin your meeting.

T
Torbjörn Kronander
President, CEO & Director

All right. Thank you very much. So this is Torbjörn Kronander. And we will start the presentation. And I will say in the next slide when you have next slide. Also, please note that you can e-mail questions to us. And you can also come in with questions at the very end of the presentation. So I will start.Next slide. The value we create for customers, et cetera. We have a short recap of what we do at the company. Imaging IT is mainly taking care of images in hospitals, parallel to the electronic medical record systems, images are handled in huge numbers in modern health care. And we take care of those. We start with [indiscernible], which is still the largest part. And also introducing cardiology and pathology. And we are unique in the world that we have all of those images in the very same system. We have Secure Communications, which is our encrypting business area that was a regional sector, Sectra [indiscernible] secure transmission. We are seeing very high end, especially mobile security solutions on the level where governments and authorities can cost them on the secret -- and the security level of the secret is the highest possible level. And then we have a greenhouse of things that might become a big or a little greenhouse of things that do not really fit into the other areas, so we call that Business Innovation. In that we have Research, we have Orthopedics and we have Medical Education. Next slide. We work with increased productivity and quality in medical imaging and patient care. Productivity is key in the new area of demographics and increasing number of people who are not perfectly healthy. We are also increasing cybersecurity in society. We are a little more than 800 employees in 14 countries currently and we also do a lot of research that contribute to healthier and safer society in long term.Next slide, highlights from our Q1. We had a very strong growth in order bookings and cash flow, which is interesting. This is despite the COVID-19 situation that affects most of the world. Currently, we have an increase of 2.5x in order bookings for this quarter and we have a good cash flow per share for the quarter. Normally Q1 is slow on cash flow.The order bookings, though, we should point out that we have huge variations between quarters. And if you go too much extrapolation based on this, individual orders might be, in some cases, very, very large and the spread out over long time into the future.Next slide, our 3 financial targets are all fulfilled. And these are in order of priority. Stability, we count that equity to assets ratio that should be above 30%. This is critical. We sell equipment and systems that are absolutely vital for our customers. They cannot buy back from customers, these are not viable and stable financially. So trust is important and then financial stability is, of course, also important for shareholders. So we have 58.1% equity to asset ratio.Second priority is profitability. We see this more as a hygiene factor. We had low lack of IDs and possibles to grow. But we should at least do a good business doing it. And we should -- we don't want to get too low in profitability. So we say target is 15%. And if we go above 15%, we should invest that money in growth in that, but we should be above 15%, and we're currently 18%, [ counting the year back ]. And then growth of profits, which is our prime target, even though it's priority 3, this is where we should invest that profit in that we do not simply count as profit. And we have there an EBIT per share growth target over a 5- year period of 50% increased EBIT per share, per -- every 5-year period. We are currently more than double of that at 102.3%. So everything is okay for this financial targets.Next slide. We should also point out that variation between quarters has increased further. It will decrease long-term when we go into our new financial model. But we now have very large orders coming in from very large enterprises. And when these go live, we recognize a softer part of them, which means the variation between quarters can be very, very large. And we should point out also for the future that looking on these historical variations might not be a perfect way of predicting us because the variation will probably increase in the COVID-19 situation. And because we are also delayed by customers not allowing us to come for installations and that delays everything. And we don't know exactly how this will turn out as no one knows when COVID-19 is going to end, when it finally will end. But right now, we don't know when.Next slide. As for COVID-19 impact, that is a very hot topic all over the world right now. In healthcare IT, we see that exhibitions and travels are canceled. Of course, exhibitions is short-term, a gain because they cost money and [indiscernible] to them cost money. But long term, it will impact future sales. We meet our new customers on these exhibitions and it will might affect us long term.And now our order, from first point of contact until we finally get the order is a long time. It might be 1 to 2 years. So this might impact us in the future.We also delayed in deliveries, as I mentioned before, due to restrictions for business and financial [indiscernible] hospitals for the large go-live, we need to have people on-site. We can do smaller go-lives and upgrades, et cetera, remote completely. But for the large clients, we need to go to the hospitals. And several hospitals especially in the U.S., have simply banned all visits from external company during COVID-19. It's easing up a little bit now, but we still see restrictions in place in many places.We also see that elective procedures are on hold, and that has a large impact on, especially the privately operated hospitals. Not the least in the U.S. Elective surgery, elective procedures is where most of this hospital make the bulk of their revenues and profits. And especially if you have reconfigured hospital to be COVID-19 hospital and then those patients doesn't even come. Of course, these financials of the hospitals are deeply into the rig. And that has an impact on us, not the least, I would say, especially in the orthopedics business innovation area. So it is completely -- or business is almost completely stopped in many, many countries.On the upside, we see telediagnosis. Also doctors want to work from home. And not the least in pathology, this has been more or less impossible without digitization. So we've seen increase in demand in pathology due to that -- also pathologist who would like to work from home. But we also see for other areas as well where communication and home work has increased.We also see that post-COVID-19 patient imaging volumes may overwhelm hospitals long term and that will drive demand for efficiency. I mean, if you have a slow IT system and many of the incumbent systems are very slow, and cumbersome to work with, and then, of course, that drives a need to replace these systems for faster systems operate.In the cybersecurity market, we see also the exhibition and travel canceled with the same impact as we have to IT. And we also -- but we see on the upside, increased amount of cybersecurity and mobile crypto solutions, mobile workplaces, not the least. People working from home want to be secure, and we see that cybercrime has increased during COVID-19. And of course, you want to sit at home, but be as sales as in the office, and then you need new equipment. So we see an increase in demand.Next slide, highlights in Secure Communications. We have seen increased order bookings. We also signed a framework agreement with EU authorities for our encryption systems, which is very good because then we can sell all of the EU without procurement. And we can also note that we still not -- do not have adequate margins in communications, but we have done a lot of growth initiatives there. So that explains that this went up.Next slide. Our growth initiatives in Secure Communications is especially mobile secure workplaces. People want to be able to move, people want to sit at home and people need that to be as safe and secure as if they were working in the office. This puts completely new demands on both systems and encryption links to the office from homes. We see critical infrastructure and society's vulnerable. We see increasing demand for protecting electricity networks and distribution and also production, and also other energy sources. And we also do high-speed network encryption systems for very high-speed and very secured network encryption, that demand is increasing.Next slide. Highlights in Business Innovation. First, I would say that we had a strong negative impact from COVID-19, especially in Business Innovation. And not the least, in Orthopedics. But we see also remote medical training. We had a very interesting collaboration with a few universities where all the medical students are at home. And they are actually teaching them remote using our training systems, which before was only a virtual dissection table, but now also is available on iPads and things like that. And that has taken a huge leap forward. And in Orthopedics, we see Implant Motion Analysis, which is a way of diagnosing if prosthesis is stuck a lot. And that also had a hit by COVID-19, but we see underlying growth in that business being very healthy.Next slide, the trend in business innovation Sectra Implant Motion Analysis, of course, as I mentioned before, we also have -- can use of more or less the same technology for research and then, I mean, clinical studies based on -- for prosthesis. The clinical research or studies for prosthesis is fixed or not, has been very complex, and we have simplified that a lot. So we also sell to these implant manufacturers for their studies. We call that CTMA, Computer Tomography Micro motion Analysis. The Medical Education, as I said before, we see cloud-based content subscriptions and not the least for all the students of large university.And in research, we have a large focus for AI for medical application.Next slide, Imaging IT Solutions. We have increased order bookings, primarily in our largest markets. We have good trajectories not the least in the U.S. We are also expanding our customer base in the U.S. and other markets, U.S. being the strongest. And we've also seen that our largest orders to date, which was New South Wales in Australia is now operation with the first hospital, which is a very good thing that we are now live in the first of these. First part of this very large installation.Next slide. The growth initiatives and Imaging IT Solutions. We have new markets, direct and indirect. And the newest countries for the start of direct sites at France and Canada. And well entering into new markets very slowly, their trust base such as us. You have to create references, and then we have to spread the word around. But we have excellent new references both in France and in Canada for this.In Enterprise Imaging, which is kind of what we say, is taking now, not only radiology, but all the imaging for an enterprise. We see digital pathology, where we received our FDA approval in spring, and we've seen an increased demand for that, not the least because of the COVID-19 situation, as I said before. We also see an increasing demand for cardiology combined with radiology imaging systems. We are focusing on the U.S., especially that's the world's largest market. We topped customer satisfaction. And we have a small, but growing market share that spells opportunity for us, so we are concentrating and focusing on the United States.Next slide, I leave the word to Mats Franzén, our CFO, to inform about the [indiscernible].

M
Mats Franzén
Chief Financial Officer

Thank you, Torbjörn. So please go to the next slide. We see that -- as we had touched on previously that the order bookings and the net sales have a bit of a diverse trajectory right now with a very strong order intake, and it's concentrated to the, let's say, the big 3 geographies being the U.S., Sweden and the U.K. and as for net sales, we saw a contraction also adjusting for currencies. The currency situation, we are not finding ourselves in is actually, I guess, the big difference from mature financial external standpoint really. This is the first quarter for 2 years. We have got 8 consecutive quarters reported that the Swedish krona has grown weaker actually against our main 3 currencies, the U.S. dollar, the euro and the British pound sterling. But now it's reversed in all 3 of those, which I guess comes as no surprise for anyone.Next slide, please. And the pandemic effects to the size it can be discerned is mainly focused to the U.S. as has been previously touched upon as well. We've been -- not cancellation, I would say, primarily, but rather delays as it now stands. That also goes for some hardware refreshes that also has been postponed. I'll come to that later on, but we do see some interesting other movements in terms of cash flow that's actually gone the other way around. We do mitigate this quite significantly with -- and in the short term, it's a gain. The trade fairs and the travels reduced significantly way significantly. But in the long run, that's obviously not sustainable, I would think, even if we go to more of a remote-based perhaps environment, but that's yet to be seen. And deployment for new customers are more, I would say, exposed to COVID disruptions. So that's for that.Next slide, please. So the sales trend, we saw a strong order intake. As we said, both for Imaging IT and Secure Communications. And as for imaging IT, it didn't only refer to the Enterprise Imaging or the PACS or the picture archiving and communication system generally, but also in cardiology and pathology. And as Torbjörn mentioned that one important milestone was that we had 2 out of the 11 health care organization being operational in Australia and New South Wales, which is good to know that this is up and running now. That order was signed in 2019, and it's a 13-year duration on that one. So there aren't that big effect in the short term, obviously. And the Business Innovation performance, you can see that it comprise -- it's the business incubator. The Orthopedics and Education previously touched upon. And aside from the generics of being quite a small operation with the volatility that comes with that, we also found ourselves in the product shift in both of these business lines. And on top of that, we had the COVID challenges with a headwind as it now stands.So with that, please go to next slide. The earnings trend, it's -- the net effect doesn't seem that big, but it's an inflow of business and a delay. So business in Imaging IT in the short term then on top of that, we had the strongest Swedish krona, which tips the scale in the first quarter, I would say, on an aggregated level.Communication had a significant portion of project-based development revenue, which inherently has lower margins until entering the delivery phase, and that puts the burden on the profit levels in the short term. And as we also write in the report that we do see some slower growth than expected for critical infrastructure as it now stands. And we -- our assessment is that it's due to COVID-related shift in customer priorities in some cases, at least. And so that's about that. That's the group eliminations. One -- you might wonder how can you make money on group elimination. Well, this is a delta from last year where we had made provisions in -- for bad debts according to IFRS 9. And we are fortunate not to had to do this quarter, I think we have a healthy situation in terms of the accounts receivables, which also, I think the cash flow supports as a conclusion.Next slide, please, for the final -- for the finally. We did see a quite spectacular shift in terms of Q1 cash flow performance. I wouldn't make too much of that in terms of extrapolation, but you have, sometimes, to celebrate the small victories. We also have lower investment compared with last year. And in combination, I would say, with an internal -- increased internal focus on cash flow for pandemic uncertainties. It's a good thing to have a good, strong liquidity situation given the uncertainties that we're now seeing in the market.So with that, next slide, and back to you, Torbjörn.

T
Torbjörn Kronander
President, CEO & Director

All right. And then I'll come back a little about our way forward. Next slide. Our focus forward is high customer satisfaction continue to that. That's been a successful path. It's a long-term strategy that pays back to shareholders and employees over a long time. Also employees and culture that high customer satisfaction is impossible to obtain unless you have half the employees, and you have a good culture in the employee and in the staff for delivering that quarter to end-user customers. Profitable growth, we want to grow, but we want to grow in a profitable fashion. We could probably grow or we could grow faster if we took profitability down even further, but we won't. We want to be profitable and grow. That's the reason why we have that 15% target for margin. And then we want to say we stake to where the puck is going to be. I'll come back to that in just a moment.In our business, it's a very fast-moving field in IT, in informatics, in cybersecurity as well as in medical informatics. And when we do investment today, we need to invest for how the world will look 4 to 6 years ahead of us. And we need to be good in predicting that playing field. And we have historically been very good at that prediction, which is not the least, the digital pathology in the same system as we were the only shows, we started that investment 8 years ago and we were spot on. Today, we do have competition in pathology, but there is no other company currently who does pathology and radiology in the same system, which is, of course, it's a huge money saver for us [indiscernible] if they get both of these sold in one single system.Next slide. We will continue our efforts to have happy customers. As last year, we won best-in-class with the U.S. study. We came top on U.S. large hospitals, which is, of course, our prime target market, but we also won the small hospital market in U.S., which is very nice, but it's not a focus market, but it shows what the attitude employees can have because we serve all customers equally well. In Canada, we won best-in-class for the first year and of course, that's nice because that's a new market and a new growth market for us.Next slide, skate to where the puck is going to be. As I said, productivity and health care is at core of society's needs. And I think we will see even more of it now after COVID-19 because all of those hicks that needed to be replaced, they are still there. And the productivity -- production of health care with the demand will be very large when COVID-19 is over. And of course, the activity then becomes even more important, add to that the demographic situation all over the world. So either we can consolidate all in medical imaging for a large hospital into one single system, which we are unique in. So far, of course, other companies will come there, but we were ahead of everyone. We do have huge amount of improving workflows and interaction. People want to consult. People want to work from home, and we have systems for that as well.And then we use AI. We have several employees or quite a few actually, that's used their [indiscernible] and exclusively working on AI to drive efficiencies. We don't believe you can replace physicians or [indiscernible], not in any overseeable time, but you can make them more effective by using AI wisely.We also see a huge demand in the security area of secure mobile workplaces, as I said before, and the main reason, of course, people own more mobile now. And people who have now learned to work from home, and they want to be safe, as safe as in the office, but sitting at home. And that will increase the amount of mobile workplaces. And also secure communication channels, both between enterprises and buildings and authorities, but also from home to the office. And we have some completely new areas, Implant Motion Analysis, as I said, for Orthopedics is a very interesting area. A lot of unnecessary operations are done in Orthopedics, with placing an implant. Both a very expensive and also [indiscernible] operation to do unless it's absolutely needed, and we can determine if that is needed or not. And we can decide, but only limiting digitization of hospitals that are just in its infancy yet. Only Sweden and a few other countries have now a large market share of pathology being digital. And we are #1 in the most digitized country in the world, which is Sweden currently.Next slide. We also see that we will increase recurring revenue. Pay per usage has been improving in all different areas of IT to improve value for both customers and vendors. Customers want to pay in that way. They don't want to pay if things doesn't work, and they don't want to have a large capital investments if they can avoid it. And that has actually increased now with COVID-19 because liquidity, of course, of the hospitals are reduced. And for vendors, of course, it provides a very long flow of cash.The new business model, Sectra One that we presented at the last report will play a very important role in Sectra's future. And as we -- still that adoption would be quite slow. Especially as we've seen now increasing number of customers being interested. It will not impact this year financials. The lead times are too long, but we see that a very important part of Sectra in our future going forward. And the transition to the new payment model, of course, as I said, will be over 7 years. But COVID-19 has indeed accelerated it, especially in the U.S.Next slide, how do we handle the pandemic? We have important -- our customers do a very, very important job. They keep people healthy. They keep the hospitals operational. They keep society working when society needs it the most. Our job is to give them the tools and provide the tools that work. So making customers okay, support and servicing is key, most important in these times. And of course, in order to do that, we need healthy and well employees and we will also emphasize on that one. And then we need financial stability to be able to continue to do this. So we are quite conservative in our way of handling finances.Next slide, Philosophy, shareholders. As I've shown before, our strong belief is that if you have happy customers, happy employees, a good position in markets that grow, and indeed, ideally a market that has to grow as both health care, especially in the demographic situation, but also cybersecurity, the market must grow by external force, to have good position in these and reasonable cost control. You shouldn't use your shareholders money in unnecessary things, then shareholders will be happy long term. I think we have proven that over the years.Next slide. This kind of concludes our presentation. Please feel free to come back to with questions. The next reports and annual meeting. The annual meeting will be next Tuesday in Linkoping, but it will be virtual this time. We have a few people here, but we will be send this over the network as well. And November 27, we have a 6-month reported Q2 presentation, March 12, and we have a 9-month reported presentation.Please also remember that we consider your feedback on this meeting, the presentation will be modified based on the feedback we get. Please fill in this link. What do you think? We will try to make them even better in the future. And with that, I'd like to open up for questions, and give the word back to the moderator.

Operator

[Operator Instructions]And our first question comes from the line of Carolina Elvind of Danske Bank.

C
Carolina Elvind
Analyst

So just 2 questions from me. The first one regarding orders. So you have just released many orders here over the past months and also for Imaging IT area, and this translated into a strong order intake in the quarter. I understand that orders are volatile between quarters, but what do you think is the main driver behind the increased order intake? Because one would expect the hospitals to have a lower CapEx budget as a result of the pandemic but the demand for your products is very large, and you're getting large orders. So if you just could talk a bit about how you think about this?

T
Torbjörn Kronander
President, CEO & Director

It's difficult to say, as I said, individual orders are very large. I think these are investment decisions made a long time ago, and many of these customers have -- I wouldn't call them -- IT systems are not adequate for today's workloads, and they need to replace them because it slows them down. They are not growing with the demand and they need to replace them. So I think we see a trend of where the [indiscernible] system they had before it's all replacement today, except for pathology, and that is still not a huge chunk of the order intake. We see this is mainly due to the incumbents, the old systems are not keeping up, and they need to replace them. And then with the large orders, it kind of -- it goes into clusters like this.

C
Carolina Elvind
Analyst

Okay. So the pandemic [ stood us ] up digitalization?

T
Torbjörn Kronander
President, CEO & Director

I would say it doesn't affect it very much. It has affected a little negative, but not substantially. We have seen a few customers in the U.S. who have actually postponed all types for purchasing a system to the future. In normal times, probably the order intake would have been even a little bigger, but it has not affected significantly.

C
Carolina Elvind
Analyst

Okay. And just one more on installations. So you say you had some challenges during the quarter. Could you elaborate a bit on how those challenges were in the beginning of the quarter versus the end of the quarter? So I understand stability [indiscernible], but just to get the sense on how that changed with time now?

T
Torbjörn Kronander
President, CEO & Director

It's all over the quarter. I wouldn't say there's a big difference at the beginning and the end. I mean, if a hospital has more or less shut down all visits, and they have, and the U.S. is quite severely affected by COVID-19, not much more than we see here in Sweden, at least. So we don't -- we see reducing effects now and the disease is decreasing. But in substantial parts of the U.S., it's still very active, and we've seen a big difference on the end to beginning -- from the beginning to the end of the quarter. People -- if we can't go to the large hospitals, it's very difficult to do large go-lives.

Operator

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

K
Kristofer Liljeberg-Svensson

I have a few questions. Maybe I'll take them one by one. First one, coming back to orders. I'm also a bit surprised, positively surprised by the strong orders in the quarter. But you also mentioned that these were planned or the investment decisions were made a long time ago. How do you see the risk for orders slowing now in the next coming quarters due to the pandemic and -- or hospital budgets being capped, et cetera?

T
Torbjörn Kronander
President, CEO & Director

What we do see is a shift towards our new financial model. People still need to replace the systems, but they prefer now to pay as they go. And the volatility of their business, of course, is increased. They don't know how far this will go on. And if they pay per procedure, it's better for them. So we see a shift that was faster than anticipated to the software-as-a-service model or a pay-as-a-go model. Now this will affect our cash flow when these orders come in, but we think we will get a sum of these orders anyways now. We don't know the impact. It depends a lot on the different hospitals, and we see huge differences. Some hospitals have turned very defensive and do not want to do anything. And some hospitals simply say, we have to invest because this will go over. And when it goes over, we have so much to do that we need to be highly, highly, highly productive. So they have increased efforts during the installation. And it's -- now our business is difficult to create normally, but the volatility has increased for the order intake as well. We don't know to be frank. But we think it will be okay, but we'll see a faster shift to the new financial model than we anticipated.

K
Kristofer Liljeberg-Svensson

Okay. And then when it comes to sales in the quarter, down almost 8% organically. May be difficult, but is it possible to quantify how much of this lower sales is COVID related, i.e., that you couldn't do installations that would otherwise have taken place and how much is just the normal variations between quarters?

T
Torbjörn Kronander
President, CEO & Director

We normally have a lower Q1, as you know, that's a seasonal variation. But we have had an impact definitely in this quarter based on COVID-19, and also the currency. I mean, if the currency had been the same, we would have been about at par with the last year same quarter despite COVID-19. So COVID-19 has had an impact, definitely. So we know that we would have gone live with several installations that we have -- we couldn't do simply in wait, hold mode until we can come there and go live with the hospitals.

K
Kristofer Liljeberg-Svensson

And do you see this situation continue now in the second quarter so that we should expect a lower than normal second quarter as well?

T
Torbjörn Kronander
President, CEO & Director

I would say that the it's very difficult to predict. I think we will see the quarters go up and down in a way we have not seen before and even before we were up and down. It might be that it goes up in an individual quarter, breaking the seasonal variation we typically have and goes down in the quarter, we normally are good. It's so much fluctuations and so much differences that it's very, very difficult to say. We see -- and it's also very different, different areas. I mean, the U.S., we have a huge impact. In Europe, not so much, actually, despite that Europe has been locked down and so on. So -- but in the U.S., especially, it's even more difficult to predict the normal. And we -- you might see a contra variation in quarters compared to a normal year going forward.

K
Kristofer Liljeberg-Svensson

So second quarter could then be even stronger than normal, if you're lucky?

T
Torbjörn Kronander
President, CEO & Director

Well, provided that luck. We're very happy because -- now I would say that it could be counter normal and it could also be normal. We -- actually, very honestly, we don't really know. It depends. Some of the go-lives are very near in time, but we need to come into the hospitals, otherwise, we can't do it.

K
Kristofer Liljeberg-Svensson

Okay. And final question relates to operating cost. Of course, a lot of temporary savings, as you highlighted, does this mean we should expect operating costs to remain at this same level in the second quarter? Or are there some seasonality playing a role here and also maybe traveling or picking up a little bit again?

M
Mats Franzén
Chief Financial Officer

No, I think we should expect these numbers to come in lower than on a, let's say, a regular basis, a regular year, definitely. But I wouldn't make too much of seasonality. So I wouldn't expect them to be on the same extreme low level as we have had. And in the longer run, that's detrimental to the business, I would say. So we hope this will increase counterintuitively because that means we could get out to the customers. But we won't be back to normal in Q2. On cost base, no.

K
Kristofer Liljeberg-Svensson

Okay. Just maybe a final one on the cash flow or the working capital release. I guess this is partly due to that sales were down, helping account receivables?

M
Mats Franzén
Chief Financial Officer

Yes, you could say that it's -- from a mechanical point of view, you get -- you don't fill up with new receivable to the same extent. And in some cases, customers have actually been eager to pay up on front to make sure we are on a go and not get stalled in -- or that they would get their funding cuts.

Operator

[Operator Instructions] And there aren't -- currently no further questions from the audio. I will now hand back to the speakers.

T
Torbjörn Kronander
President, CEO & Director

All right. And we have received no e-mail questions either. So I will say that this concludes the presentation and thank you very much for listening. And please, as I said before, give us feedback on the presentation and the format, and we'll listen and modify it going forward. Thank you very much, and goodbye.

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