Sectra AB

STO:SECT B

Earnings Call Transcript 2022-Q1

[Helena Pettersson, Chief Investor Relations Officer]

Welcome to Sectra's financial report presentation with CEO, Torbjörn Kronander and our CFO, Mats Franzén CEO. My name is Helena Pettersson, Investor Relations Officer at Sectra, and I will be moderator of the Q&A session today. This is the first time we do a report presentation in this way. And if you can switch over -- I can switch slide and -- but as you can see, the agenda is the same as before. I will just give you some brief instructions before we start the presentations. [Operator Instructions] Management will address the questions after their presentations. [Operator Instructions] And with that, I leave the word to Torbjörn Kronander.

[Torbjörn Kronander, President, CEO & Director]

All right. Thank you very much. And I will begin, and then Mats will come in a little bit later. Sectra creates value for customers who then share a part of that value with us. In Imaging IT, which is our biggest business area, and that is mainly managing, communicating, presenting medical images. We started with radiology. We're increasingly doing more and more ologies, so these different image types. We are til to date, the only company who can do all medical imaging in one single system, which is important to hospitals because they don't want a lot of different IT systems when they can avoid it. Then we also have an operation in Secure Communications, which is where Sectra started, Sectra's TETRA secure transmission. And that is mainly very high level encryption. I'll come back to that. And data security -- and then we have business innovation in 2 areas: orthopedics and preoperative planning for orthopedic procedures and postoperative follow-up, and we have educational, which is -- facilitates Medical Education by -- we started by replacing cadavers and dissections, but we're increasingly doing entire programs for medical teaching and education over the web. Q1 highlights. We had a very strong Q1 unusual for us because normally, Q1 is weak. Our net sales rose by 35% and profit per share rose by 331%, and order bookings actually decreased by 35%. But we are very volatile between quarters. That uptick in profit and downtick in order bookings shouldn't be taken to seriously because the variation between quarters are normally very large, et cetera. And in the COVID situation, it's been larger than normal. So we say very clearly, we don't expect this very large increase in Q1 to affect the whole year. Our financial targets are, from the left here is equity to asset ratio, the stability, we deal with products and deliveries who are mission-critical for our customers, may they be government for security or large hospitals who depend completing on the imaging systems. It's very dangerous for them to trade with the customer or vendors that are not financially stable. They want us to be around. So we have stability equity to assets ratio, a target of 30% or above. We are well above that at currently 59.6%. Our second priority target is profitability and operating margin. The target there is 15%. While COVID has decreased travel a lot and international exhibitions as well has been very much decreased, we're way above the 15%. That is not a place we want to stay. We want to invest that money for future growth again. But right now, we -- that is what came out of the COVID situation. We will increase cost again as soon as international travel and -- or traveling in general can begin. And then we have a third goal which is growth in EBIT per share over 5 years period that should be above 50%. Right now, we are at 161.3% growth. So all the financial targets are fulfilled. We do have seasonal effects. And as I said before, the pandemic has increased these. Travel and marketing costs will increase after pandemic, but we do not believe it will go back to historic levels. Both the customers and vendors have learned a lot from the pandemic, and we are more effective now than we used to be. But it will come back, B.ut how far, we don't know yet, depends a lot what customers demand. In Secure Communications, we are participating in Vinnova, which is a Swedish fund for research and development. It's more and more clear, especially the -- after the pipeline was attacked in the U.S., the U.S. East Coast for gas. That society as we built it is extremely sensitive to cybercrime. And therefore, more and more authorities and sompanies start products, and we are participating in sustainable energy product with cybercrime knowledge and products in that large project, which is a governmental project in Sweden. We also note that we have inadequate margins in communications, and this cannot go on for long. But COVID has impacted Secure Communications a lot, mainly because a lot of those discussions cannot be done over Teams. So the sales discussions and the deliveries actually of our high-end products must be done in person. They are done by courier and we have to go there to discuss with customers. And we cannot travel. This is impossible. It's not safe enough to do these over Teams or Zoom or any other media like that. But we hope for a rebound when COVID gradually decreases. The financial performance implementation is that the sales were SEK 38.5 million, a little up. Profits were down. So that's SEK 0.1 million -- or profits was up actually, SEK 0.1 million, just barely profitable, and operating margin is 0.3%, which, of course, is not where we wanted to be or tend to have it to be long term. Growth initiatives in Secure Communications is mobile secure workplaces. That's a very important part in the COVID situation. More and more people have been working from home, but they want to have the same cybersecurity as if they were in the office. This demand special products, special services and high-level security, and we see a growth area in that space. We do have a lot of -- as I said before, societies and governments are becoming gradually aware of how important is that critical infrastructure is not attacked over the Internet. And that is another area where we work a lot. And we deliver the highest possible security levels for secure mobile voice and network systems. So it's a mobile, very high level of security, up to the secret and top secret levels and also for high speeding network encryption devices. We can do very high speed links over secret and top secret communication levels. In Business Innovation, we have made both orthopedics and education to independent legal entities, but we still include in the Business Innovation segment as reported together. We had a strong negative impact from pandemic effects, especially in orthopedics because more or less all elective procedures, which is planned operations and, for instance, a replacement of hip is a planned operation, most of these were canceled for a long time. That, of course, affects the plan, you don't need to plan if you don't do the operations. Now this, however, has tied up. These operations still need to be done, but we had a large negative effect during the pandemic. Sales were SEK 12.3 million. Operating profit was a loss of SEK 1.5 million. It's better than in last summer. But it's, of course, not where we tend -- where we want to have this long term. Growth initiatives in Business Innovation. In Medical Education, we have seen that while medical students have been trained from home. It's -- again, they want a service that they actually can teach, for instance, anatomy from home. And that was the large project, especially with the University La Sapienza in Rome, where we taught those students from remote, even though they had locked down in Rome. This has been an immense success, and we see increasing demand also for doing this type of training, education when the lockdown is over. New areas within orthopedics is that we have before -- historically, we've been working with 3 operative planning and that is planning what prosthesis should go into which person. But we see a very large interest in actually see if these prosthesis are moving or not. Because if prosthesis moves in comparison to the body, it has to be redone. And an version of that system, the Implant motion -- Movement Analysis is actually when you use it for medical studies. So for instance, a prosthesis company want to see if a prosthesis movement down over time, we call it CTMA, Computer Tomography Micro motion Analysis. So we can identify very, very fine motion. We just require from authorities to approve a prosthesis for clinical use. In research, we mainly focus on AI for medical applications. And we also look into future application areas that might be of interest, neighboring to what we already do. Q1 highlights. In our largest area, Imaging IT Solutions, we had a large growth in the U.S. A couple of years back, we said that we don't focus on U.S. This has worked very well, and we now exceeded SEK 0.5 billion in rolling 12 month sales in the U.S., which is today our largest market. Several top U.S. health care providers use our solutions for radiology and increasingly, also other diagnostic imaging area as digital pathology and cardiology. We have also a special app store, as we can call it. But for AI vendors, we tend to do everything ourselves. And AI has a lot of different vendors out there, and we open up a marketplace for them within our workstations, and we expanded that workstation, that market with digital pathology. Before, we only have radiology in that area. We -- Imaging IT did very, very well. The sales went up to SEK 362 million in the quarter from SEK 260 million, and the operating profit went up to almost SEK 100 million from SEK 35.7 million, and the operating margin went up to 27%. Growth initiatives in Imaging IT Solutions are new markets. We work with new markets all the time. We're looking into expansions where we are not already. We don't want to be global. We don't want to sell to the entire planet. We want to be in a number of direct markets or indirect markets, but we want to grow a large market share where we are. We don't want to be small in a lot of places. That's very difficult to keep customer happiness up in that situation. It's also more difficult to get profitable, but we're expanding in new markets after a while. We also concentrat in Enterprise Imaging, where we in one single back-end system can have radiology, pathology, integrated diagnostics for -- in combined pathology and radiology, especially for oncology purposes and cardiology in the very same system. This saves a lot of time, workforce and money for our customers. And we are the only vendor to date to have that installed where we have all these ologies with different images in the same system. We're also focusing even more in the U.S. It is the world's largest medical device market. We do top customer satisfaction. And we have a small but growing market share. So it's a place where we can grow and have good prospects for growth for a long time to come. Financial development, I will give the word to Mats.

[Mats Franzén, Chief Financial Officer]

Thank you, Torbjörn. So as we have said before, the order bookings is a quite significant downturn compared with last year, the 2 previous years before that. On the other hand, we didn't reach SEK 300 million. Now the book-to-bill is obviously below 1 in this quarter. So we're down from 1.6 at fiscal year-end to 1.4 now approximately. About EUR 220 million in reduction comes to 70% from 2 areas, Secure Communications and the U.K. within Imaging IT. So the difference is not all over the line, but in a few big markets. If we had a third one being North America, then we cover 90% of the difference. Strong sales, some headwind, about 3 percentage points weighted. I checked that compared with last quarter, but not a significant impact really compared with what we have seen in historical periods. And as we said about this earlier than we had expected deployment in the U.S., 2 bigger deployments that -- one was expected in August and another 1 November was in the U.S., which you can see on the geographical spread where we have. With the exception of the Netherlands, we see contributions in most -- in all our major markets, but the U.S. clearly is ahead of the curve in terms of this quarter. But as we have said before, this is not something that changed the view of the full year, as we can see it from where we're standing at least. And a big surprise, no, not really. This time, it was actually Imaging IT who actually contributed to more or less the whole growth in the quarter. And as I said, geographically in the U.S., primarily. And that also goes for the earnings since this is 2 -- these 2 deployments was revenue recognized to a large extent in the first quarter, we see a nice uptick. Again, a temporal one, that was supposed to be spread throughout Q2 and Q3, to quite a significant extent. Something went wrong. [Technical Difficulty]

[Torbjörn Kronander, President, CEO & Director]

We have a Team's problem, obviously, networking problem. We apologize for this. It seems we have a problem with the network here.

[Mats Franzén, Chief Financial Officer]

Okay.

[Torbjörn Kronander, President, CEO & Director]

Sorry for that guys.

[Mats Franzén, Chief Financial Officer]

Apologize for that. Yes. So here where we left off. The final commentary is actually on the cash flow. As you can see, we have sluggish cash generation in this first quarter. Actually, it's -- I would say it's the comparative year with a -- was extremely strong with a high conversion rate from strong invoicing in the fourth quarter, quite sluggish business in the first quarter, which meant that we could convert the, let's say, the year-end receivables to a larger extent that we could now because this quarter, we have had strong invoicing in the end of the quarter, also somewhat higher investments, some SEK 18 million short of -- compared with SEK 30 million in the comparative quarter. So with that, I leave the word back to you, Toby.

[Torbjörn Kronander, President, CEO & Director]

Thank you for that. And sorry about that little interruption. It was something in Teams that went wrong. And what are we going to do forward. We will continue our kind of focus on high customer satisfaction. We believe that is the only long-term sustainable way to grow business. But in order to create higher customer satisfaction, you need happy employees. It will not work. We want -- in a fast market, you also need a very good and strong company culture. We working a lot with that. And we want to continue to grow profitably. And of course, we want to skate to where the puck is going to be. So we want to be where the market goes 5 years from now or so. So when that hits, we'll be there ready. And we have done very well in that historically. Pathology is a good example. We started that 8 years ago, and we now see that we are in a very good position worldwide when this market finally takes pace -- gets some speed. In customer satisfaction, of course, last year, we won 8 -- or 5 Best in KLAS awards, which is a U.S. customers survey today company, and we're very proud of that in the most important area for ourselves, which is large hospitals in the U.S., PACS for large hospitals, we won it for the eighth year in a row. And that is a very important part. It shows other potential customers that we are keeping our promises. We are doing a good delivery, and our previous customers happy with what we do. And we normally say that doing -- success in business is quite easy. Just live and act, The Golden Rule. And we're trying to teach our people and get this in the company culture. If company behaves as we want it to be behave to, we'll be okay. And that goes through what we kind of try to do with the customers and internally at the company, a very interesting rule is present in all religions known to man in one version or the other. We also see that the recurring revenue has -- is increasing now. We are beginning to publish this in a way that we have not done before in our reports. We are moving gradually, fairly slowly yet, but gradually with pay for usage for our services. We are selling software as a service instead of software as a license. Now this is not a fast transition. We have to comply with customer wishes. But we will gradually go over to more and more recurring revenue. The interesting thing is that this is perceived as value -- improved value for both customers and vendors. And as you might know, most of the world in software is going over to these kind of models. We have the Sectra One subscription that was presented last year on one of these meetings. It could play a very important rule, you -- a role in this transition, and it's well thought out. And a customer can subscribe and then you can use any of our services. You can use it from radiology, pathology, cardiology, orthopedics or whatever you like. Transition will be gradual, however, as I said, but it has been somewhat accelerated by pandemic effects, especially in the U.S. Schedule and pack is going to be. Skate to where the puck is going to be. This is Wayne Gretzky, who is known to be the best hockey player for many years in a row, and he was interviewed and asked how can you be so good in hockey, you're not very good in anything? He said, I'll skate to where the puck is going to be, not where it is. And that is a matter we've had at Sectra for many years. We want to see what are the major trends in society. So we can be at a certain place, with certain products when that needs kind of blossom up. Productivity of health care is at core of society's needs. There is no way we can continue the cost increases in health care as a percentage of GDP. It has to be controlled. And we do product at facilities that will consolidate all medical imaging, so you don't need many systems, and we can do remote pathology, for instance, which is a very important thing, pathology, because it's so specialized. It improve workflows and interactions, you can speed things up, not compromising quality as well. And you can also use AI to gain efficiencies in some areas. That AI would replace radiologists or pathologists, that is science-fiction, still, but it can make them more effective. There is a quote that we use from Curtis Langlotz at Stanford University in the U.S. that says that, AI we will not replace radiologists, but the radiologists who use AI will replace the radiologists who do not. Secure mobile workplaces. As I said before, during the pandemic, we've seen a huge increase in working from home and people still need to be as safe as on their network and the office. Secure communication channels. Society is increasingly threatened by cybersecurity, cybercrime and you need to communicate safely between different offices and different entities. And we have some completely new areas that we look into as well, Implant Moment Analysis. That's a huge market. Unnecessary revisions, that is reoperations and putting in new prothesis are both dangerous and very, very costly. Can we increase or decrease the number of those by more accurate measurements. It's a huge game for society and for individuals. And also digitized pathology imaging that is still just in its very infancy and we will see a large growth in that area in years forward. We have been very open to how we prioritize things with shareholders. We say that if you have happy customers, happy employees, that -- and the happy employees can make customers happy. And they can. A good position in growing markets. It's easy to grow in markets that grow. A reasonable perseverance and reasonable cost control, then shareholders will be happy. But it has to come in that order. That is why we have customer satisfaction as such an important goal for ourselves. We have also added some proposals to the Annual General Meeting that will be held by mail last -- next week. We are proposing a split. Our share value is -- share cost is -- share price is quite high. We are proposing a split. 1 share is divided into 5. And the share redemption program will be kept at 90 -- SEK 0.9 per share in the new shares, which is equivalent to SEK 450 in the old shares. And we have proposed that we will also introduce a long-term performance-based incentive programs. And that is important. We have been historically been using convertible debentures. That doesn't work in all countries, and it has been increasingly difficult to administer. So we are proposing a matching shares program. And you can read more about that in the notes with the annual meeting. We believe that will be very good to incentivize and keep employees. The upcoming financial reports on the AGM next week is when -- the AGM is September 14, we only do postal voting. That will be entirely a virtual meeting, and then we have a 6-month report, December 10 this year. This was the first time we did it in this way. It's a test for our side. Please let us know what you think of this kind -- way of presenting things. Send an email to [e-mail], what do you think. We can modify it. W can go back to the old or we can keep this and go forward, based on your feedback. [Operator Instructions]And I'll introduce Helena to come on and tell us -- what questions, if any, came in, open up.

[Helena Pettersson, Chief Investor Relations Officer]

Yes. And I will start with leaving the word to Karl Norén at Daske Bank.

[Karl Norén, Analyst]

So I have -- my first question is relating to the access to the hospitals. Obviously, I mean, you could install more than anticipated in the first quarter, and you still have a quite solid order book to say the least. So I wonder how the installation environment is developing now in the upcoming quarters? Just to get a sense of how the how the 2 earlier deployments in the U.S. will impact the upcoming sales figures.

[Torbjörn Kronander, President, CEO & Director]

Well, we have -- as I said, that was in 3 kind of planned installs. But it's very difficult to say how this works in different countries. It's completely -- even inside the United States. Southern U.S., some states have very poor vaccination rates, while in other states, the vaccination rates are very high. So it's very local. We see Denmark. Denmark is releasing all restrictions on COVID very soon next week, I think, while Australia is locking down completely. So it's very different in different countries. It's difficult to say. We don't see any major impact different from what we have seen today.

[Karl Norén, Analyst]

Okay. And another question, I think one of your competitors was quite positive in their quarterly results some weeks ago on the number of potential upcoming deals that looked quite strong. And they saw several replacement and upgrade opportunities from these larger legacy PACS providers in the U.S. Can you comment on anything on how your pipeline is looking? And are you still convinced that you should be able to grow your market share in the U.S. with around 2.5% points per annum?

[Torbjörn Kronander, President, CEO & Director]

I wouldn't -- we don't give that number. We think there's a good position for us to continue to grow. And we have some very unique strengths, not the least in that we can handle all images in one system, which is very appreciated by the large institutions. So we look forward with -- to the future with a good faith in that we will continue to perform.

[Karl Norén, Analyst]

Okay. And just the last question on the Business Innovation side. Could you please tell us a bit more regarding the commercialization of the Implant Movement Analysis, how that is progressing? And how large you estimate the market to be? And are there any plans to separate this area out of Business Innovations anytime soon?

[Torbjörn Kronander, President, CEO & Director]

Right now, we're doing a lot of clinical trials, and it's kind of a test phase. This product technology was from the beginning, developed at Karolinska Institute of Stockholm and then we took over to go with the commercial part of it. But there's a huge interest, and there might be a very large impact from it. But right now, with clinical phase and studies, and it looks very promising, but they are mainly going on. And it's a slow market, but -- it's also a slow market in but a slow market out as well. So it looks good, but it mainly is a very early phase of that development.

[Helena Pettersson, Chief Investor Relations Officer]

Thank you, Karl. Then we move over to questions from the audience online. And I will start with some questions from Kristofer Liljeberg, analyst at Carnegie. And the first one is would it be possible to quantify how much early deliveries contributed to sales?

[Mats Franzén, Chief Financial Officer]

Yes, we can do that. It's SEK 34 million.

[Helena Pettersson, Chief Investor Relations Officer]

Okay. And the next question is, when you say strong Q1 will not affect full year, does it mean margin will be closer to 15% for full year? Or will cost continue remain below normal?

[Torbjörn Kronander, President, CEO & Director]

As I said in the presentation, costs will remain below normal. But if we will go down all the way to 15%, we simply do not know. We have also to invest in the growth. We have to get new people and new people will need new more and need training, they are not very productive from a bottom line standpoint. So yes, we will continue to grow. Our target is above 15%. Will we go down to 15% during the full year, we will see. But I don't think so for this year.

[Helena Pettersson, Chief Investor Relations Officer]

And the next question is approximately how large part of sales comes from Enterprise Imaging contracts?

[Torbjörn Kronander, President, CEO & Director]

Is that new contracts? Or? Well, all of the sales comes from contracts as we presented the recurring revenue. A part of that is old service subscriptions. Part of that is actually new subscriptions, but they are quite a few. And the remaining 43% is more or less new contracts.

[Helena Pettersson, Chief Investor Relations Officer]

And then we have another question from another participant online. What is the outlook and strategy for Sectra Imaging IT Solutions for Southeast Asia, China and other emerging markets?

[Torbjörn Kronander, President, CEO & Director]

Good questions. We have done quite a lot of analysis in these markets. We are growing into Korea with digital pathology. It's an area with very high penetration of local actors in radiology. But pathology was an opening for us, and that's very good because we can get the bridge with pathology. And then we can follow-up with radiology and other functionality. We have not done anything in China. We are a little concerned about the IP situation and the general business situation in China. We are investigating and looking into other markets as well. But in Korea, we're already going along, and we're looking to others.

[Helena Pettersson, Chief Investor Relations Officer]

Okay. That's all the questions I have online. But before I leave, I will ask you, Karl, if you have any further questions?

[Karl Norén, Analyst]

Yes, I can take one more, if I may. It will be around Secure Communications, Torbjörn. And if you could speak a little bit more about the critical infrastructure side and how that side is progressing?

[Torbjörn Kronander, President, CEO & Director]

It's progressing slow. The need is not changed. We lose almost no business. But the speed of the sales are slow. And one of the reason is, of course, COVID. A lot of these companies have shut down completely. They do not take visits. They don't want to talk to one during the pandemic. So it has slowed it down even further. And -- but it's still a huge need. It's still going forward, but not at the speed we would have wished for.

[Karl Norén, Analyst]

Okay. But would you expect it to come out stronger after the pandemic?

[Torbjörn Kronander, President, CEO & Director]

Well, it has to be solved. These situations has to be solved. Society is very vulnerable to cyberattacks, and we see every time something really ugly happens somewhere in the world, we see an increased interest. And the pipeline on the East Coast in the U.S., the natural gas pipeline was something that really woke people up. Of course, it threaten the energy consumption for half of the U.S. And there is other such incidents that come up. So the need is there. It is perhaps even bigger than before, but it's a very, very slow market.

[Helena Pettersson, Chief Investor Relations Officer]

And Kristofer Liljeberg has clarified his question regarding the part of sales from Enterprise Imaging. What he means is Enterprise deals versus traditional PACS-only deals?

[Torbjörn Kronander, President, CEO & Director]

Okay. That I understand.The Enterprise part is increasing. It's very different in different countries. But the general market size of old radiology legacy PACS systems is decreasing. And the Enterprise is increasing. How much exactly it is, it's difficult to say. But we think it would be more or less all of it long term because hospitals do not want so many different IT systems.

[Helena Pettersson, Chief Investor Relations Officer]

Okay. Thank you. No further questions.

[Torbjörn Kronander, President, CEO & Director]

All right. Thank you very much. Again, we encourage you to come with feedback on this. We apologize with the little interruption there based on that we lost the Team's collection for a while. And I hope to see you again, both at the AGM, if you come there, or listen to that, but then in December. Thank you very much and for and goodbye from us.