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Edited Transcript of CRAD B.ST earnings conference call or presentation 31-Jan-20 10:00am GMT

Full Year 2019 C-Rad AB Earnings Call

Feb 7, 2020 (Thomson StreetEvents) -- Edited Transcript of C-Rad AB earnings conference call or presentation Friday, January 31, 2020 at 10:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Therése Björklund

C-Rad AB (publ) - CFO

* Tim Thurn

C-Rad AB (publ) - CEO & President

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Presentation

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Tim Thurn, C-Rad AB (publ) - CEO & President [1]

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Welcome, everyone, to C-RAD's presentation of our report for the results of the fiscal year 2019, but especially focus, of course, on the first quarter.

Like always, we'll start with a few administrative announcements. Everyone is put on mute. The webcast will be recorded, and the recording will be made accessible in the Investors section on the C-RAD website later during today.

Let's get started with a short introduction. Today's webcast is presented to you by Therése Björklund, our CFO; and me, Tim Thurn, the CEO. First, I'm going to guide you through the results of our sales activities, followed by commenting on our key events during and after the reporting period. Therése will walk you through the financial analysis before we have the Q&A session. (Operator Instructions)

So we are finishing the quarter with a record order intake and an all-time high in the order backlog. Order intake in most -- in our most important business segment, positioning products and the services has been growing. The sales of positioning products went up by 19%, and services even 61% year-over-year. Effective October 1, C-RAD terminated the distribution agreement to the Dosimetry products here in Scandinavia. Therefore, there was no order intake for the distribution products.

Order intake for the HIT lasers was not as strong as in the previous year. This is mainly related to lower order intake from China and India.

Sales of our service and positioning products grew to SEK 25 million and SEK 59 million, respectively, a very healthy development. Rapid adoption of our service contract shows the confidence our customers have in C-RAD as a partner.

In 2019, there were fewer large projects than in the previous year, but we succeeded to win 2 projects in Belgium with a total SEK 26 million for Sentinel 4DCT and Catalyst as well as service contract. This was a great success for C-RAD. Orders of this magnitude have a significant impact on the order intake in 1 quarter and affect the volatility that we see in order intake, but also on revenue.

So overall, in the fourth quarter, we saw a mixed picture in the group. If we look at the order intake by region, a strong order intake in -- especially America and also EMEA went up again with 16% growth, whereas America basically doubled compared to last year. The APAC region showed a decline of 30%. This was primarily related to lower order intake from the Japanese market.

During 2019, C-RAD continued to strengthen its position in the market. We still see and expect the market to grow, and it is clear that our technology and our solutions start to become standard of care.

Looking at the order booking over the past 3 years, we see the usual seasonality pattern with a strong second half and a somewhat weaker beginning of each year. So this is related to -- due to the majority of our customers having the budget cycle aligned to the calendar year, exactly the same pattern we saw also in 2019.

However, what was a bit different compared to earlier years, in 2019, we started with slow order intake for the positioning products, whereas in the second quarter, there was even a decline. However, we see also that over the last 6 months, in the second half of the year, the order intake for the positioning product picked up again. And both in the third quarter, we showed 18% and 19% in the fourth quarter. Our assessment is that this is a consequence of the acquisition and the newly formed alliances between different market players.

C-RAD announced its cooperation with Elekta in July. And we see that in the second half of the year, order intake for the positioning products started to grow again.

Consolidated revenues weakened by 12% due to a decline of 34% in the EMEA region. The drop in EMEA was explained by lower order intake in the first half of the year and that the book-and-bill period has somewhat increased from 6 to 8 months. This affects, of course, the revenue and the result, but it's important to look at the development of the order intake, which continues to be positive.

We remain confident about our market opportunity and are convinced that C-RAD is in a good position to outgrow the market. We have a fantastic team, excited customers and great products that allow us to enable our customers to implement high-precision radiation therapy to the benefit of their patients.

Let me come to the key events. I'd like to start with the opening of an office -- C-RAD office in Shanghai. The office will allow us both to host our growing local organization, our employees, but also to invite customers to present C-RAD and our technology in our own facilities. The aim here is to provide training and to make sure that the systems are used in the best way by our clients to ensure highest precision and to eventually have better treatment results for the patients. This goes hand-in-hand with the comfort and safety of the patient, which is our top priority as it will lead to a healthier patient after the treatment.

During the fourth quarter, I implemented a change also in the group management team and brought the team -- the team responsible for their respective sales regions into the management team. C-RAD appointed Brian -- this was now in January. C-RAD appointed Brian Loar as President for North America and brought therewith a new President for our North American business into the organization and also in the management team. Brian recently held a position as Vice President of Sales for North America for Varian Medical Systems, for Varian, the Linac manufacturer. And Brian has around 20 years or a bit more than 20 years' experience in our industry. And in this position, he will have -- for C-RAD, he will have the responsibility for the entire business, also the sales activities, also the application and service business and our installations. C-RAD has a huge opportunity to develop our business in North America, both through our partnership and our direct sales, and Brian will lead this effort for C-RAD.

Effective March 1, Henrik Bergentoft will join C-RAD, and he will take over the position as CFO; and therewith be the successor of Therése who is serving right now as an interim CFO. Therése will stay within C-RAD in another position within the Finance Department.

Then I would like to comment on the large project from Belgium. Basically, it's covering in total 4 sites in Antwerp and Liège. In general terms, 2019, we saw fewer large projects than in the previous year. But the point that we ordered, the success that we had with this large project in Belgium with a total order intake of SEK 26 million is very important for us. The project includes Sentinel 4DCT and the Catalyst HD and also a multiyear service contract. Implementation, meaning development -- sorry, implementation in terms of delivery and installation will start already in the first quarter.

Then I would like to comment on the GEMini. The GEMini is not making the progress at the speed what we expected. And also, there is the timing to release a product and scale up sales is uncertain. At the same time, we see a huge opportunity with our positioning products. Therefore, we decided to write-down the activated development efforts related to GEMini, and for now, focus the organization on our -- the development of our positioning products. The ongoing project with the Chinese customer continues, and we will also continue to support the efforts there.

Therése will come back on the financial effects of this decision in her section.

And therewith, I hand over to Therése, and she will guide you through the financial results.

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Therése Björklund, C-Rad AB (publ) - CFO [2]

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Thank you. We will start to look at the income statement for the fourth quarter of 2019.

As Tim already mentioned, revenues for the quarter amounted to SEK 51 million, representing a 12% decrease to the same quarter 2018. Revenues in Americas doubled compared to last year where we had a decrease in the EMEA region. Other external expenses amounted to SEK 14 million, representing an increase of SEK 0.4 million compared to 2018. Adjusted for IFRS effect, the OpEx would have been SEK 15 million. The difference from last year is in large related to increased expenses for consultants within R&D that is also being activated in the projects of new product development.

Other personnel expenses increased by SEK 0.3 million compared to the same period in 2018 and amounted to SEK 16.9 million. The increase is due to a higher number of personnel, also primarily within R&D and related activities.

EBITDA adjusted for IFRS 16 effects was SEK 0.5 million compared to SEK 5.9 million in the fourth quarter last year. This is not a result that we are content with. We normally see a pattern of slightly higher cost in the last quarter of the year. And this year, the revenue did not follow the same pattern. This is a consequence of the weaker order intake in the first half of the year, alongside a somewhat higher period between order and delivery. It is important to confirm that the underlying business is still growing. We are reporting a record high order backlog by the end of this year. There is a volatility in the deliveries based on how the customer sites are ready for receipts and installation.

On the cost side, we will continue to carefully monitor the cost development and ensure cost control.

During the fourth quarter, we also made a write-down of the GEMini project. All remaining intangible assets in the project amounting to SEK 10.9 million has been written off together with the stock of products of SEK 0.7 million.

Other operating income and expenses amounted to minus SEK 1.2 million for the fourth quarter compared to SEK 0.1 million in 2018. We have exposure to both USD and euro in the balance sheet, primarily in the accounts receivables. These items are evaluated on the balance sheet day and in line with the significant decrease in the exchange rates for both USD and euro in the very end of the year. We have an exchange rate loss of minus SEK 1.3 million for the fourth quarter.

For the full year, exchange rate differences amounts to SEK 0.8 million. However, out of this amount, SEK 0.6 million is not yet realized, meaning that this may change as the balance sheet items are settled. In January, we can see that the exchange rates are balanced up again.

The gross profit margin was 60% in the quarter, unchanged from the same quarter 2018. We are continually focusing on improving our supply chain and to reduce the cost of goods sold for our products. This has been one of the focus areas in the development of the new Catalyst+ platform where we expect to see a noticeable positive effect on the production cost going forward. The gross profit differs between our product categories and is expected to differ between the quarters, depending on the product mix of delivered system.

During the fourth quarter, the lost deliveries related to the IBA distribution agreement we made where we have a significantly lower gross profit asset distributor.

We continue to report all-time high order stock each quarter, in line with growing order intake. This continued in the fourth quarter where we also had a somewhat lower delivery rate. Total value of the order backlog by December 31 was SEK 267.1 million compared to SEK 194 million last year, which is an increase of 38%. Both backlog for products and for service contracts shows a positive development year-over-year. SEK 19.4 million of the order book for the service contracts is estimated to be recognized as revenue within the coming 12 months, which can be compared to SEK 17.4 million in the last 12 months. The service contracts normally cover appeared between 3 and 5 years, and revenue recognition is distributed over the period. Service contracts are either sold together with the product at the new installation or as an add-on already installed product, and it comes into effect after the end of the warranty period of the product.

Total cash flow for the fourth quarter was minus SEK 0.1 million compared to SEK 1.4 million in 2018. Cash flow from investing activities related to the activation amounted to minus SEK 3.0 million compared to minus SEK 1.4 million, showing increased investments primarily related to the different development projects within the positioning segments.

Cash flow from financing amounted to minus SEK 5.7 million compared to plus SEK 5.4 million in 2018 where we have now decreased the usage of the invoice discounting solution during the quarter. The using of this kind of financing is dependent on when the deliveries are made and invoice sent, and it can differ substantially between the quarters, depending on how the delivery flow is.

Total available funds by the end of the quarter amounted to SEK 36.8 million compared to SEK 21.4 million in 2018.

When this presentation with a look at the trend in order intake and revenues and operating profit. For the sake of comparability, we are now using the operating profit before items affecting comparability as the one-off write-down of the GEMini project is not the part of the regular ongoing business.

Operating profit before IAC for the quarter amounted to minus SEK 0.5 million compared to SEK 3.3 million in the same quarter last year. And for the full year 2019, it amounts to SEK 0.2 million compared to SEK 0.8 million in 2018. Going forward, we should remember that we are exposed to volatility in both order intake and revenue over the quarters, which we also saw in this quarter. One single large order can have a substantial effect on an individual quarter, both on order intake, on revenue and also on operating profit.

I would also like to take the opportunity to remind you of our upcoming financial calendar. We will publish the report for the first quarter of 2020 on May 8 when we also have scheduled the Annual General Meeting. The report for the second quarter will be presented on July 31. For the third quarter, we will release the report on October 22 and then end the year with the report for the full year or the fourth quarter on January 28, 2021.

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Tim Thurn, C-Rad AB (publ) - CEO & President [3]

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Thank you, Therése. So now there's a possibility to ask questions. (Operator Instructions)

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Questions and Answers

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Tim Thurn, C-Rad AB (publ) - CEO & President [1]

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So the first question is coming in. How should we see the Mevion agreement? Is C-RAD included in recent new orders presented from Mevion?

So I think what we announced was interfacing -- an agreement about the interfacing and then the implementation in Maastricht. So this kind of interface and this deep level of integration is, first of all, very beneficial for the customer in order to support a smooth workflow. And this kind -- this level of integration has only been done with C-RAD to the Mevion device. So that doesn't mean automatically that all the projects where Mevion is implemented or expected to be implemented also will be offered together with the C-RAD solution. However, also in the fourth quarter, we got another order for a system that will ultimately be installed on the Mevion device in North America. So it is not automatically sold through Mevion. So they're still a corporation, but the advantage is simply the -- or the added value is the high level of integration that we can present as of both Mevion and C-RAD can present to the customer.

Then the next question is related to, has the pending lawsuit anything to do with the delay and the write-down in GEMini? The answer is no. That has absolutely nothing to do with that.

Do you see an increased competition on the market for your products recently? And any changed behavior, for example, from Varian and order intake?

We don't see that much coming up from Varian at this stage. The solution -- the Varian solution is available, is offered to customers. We do believe that C-RAD has a very strong product, a very good product and are, therefore, not afraid of any competitive situations. At the same time, we are also very much working on the customer directly. So we create the interest for our products on the customer. And I think we are in a good position to convince the customer or to show and present the benefits of the C-RAD solution so that the customer, even in a situation where a new Linac is purchased, a new Varian Linac is purchased that they can argue for the C-RAD solution.

The next question is related to the distribution agreement with Elekta. If we have received the first order?

The answer is that we have not received an order through this agreement. We have, of course, received orders from Elekta, but not through this agreement. But in line with our earlier communication, the expectation is that in the beginning of this year, we will see the first effects of this cooperation agreement.

So the next question is related to our expectation in terms of larger projects in 2020 than previous year.

I can't comment in detail, of course. I would, however, like to emphasize that this is a bit always depending on projects being available. It is less an issue of C-RAD succeeding or not in the project, so there's nothing -- has nothing changed. But it is simply not always these kind of large projects out there in the market. And therefore, it's very predictable. I think we can say that we are overall confident about the future. We do have a solid pipeline, the smaller projects, but also these larger projects.

So the next question is, are we happy with the growth in 1.5 years? You mentioned wait and see, do you know when the growth and profit will be better?

So of course, I mean I'm not content. I'm not pleased with the result in the fourth quarter. I mean we need to acknowledge that this is not a very good result on -- especially on the revenue and then also if you look to the net result. However, I think what is important is to be assessed clearly what the root cause is for this. And I think we saw the effect in the beginning of the year on the order intake side, especially for the positioning products, which is probably really the most important segment, because everything else basically follows as the service contract follows the [pace] of the positioning product. So we saw this dip in the beginning of the year, which was certainly not positive. But the lower revenue in the fourth quarter is a direct consequence from the lower order intake in the first half. I mean we have -- typically, we have a book-and-bill period of 6 months, and that is exactly what we see reflected here as well.

I think it's important to look at the order intake, as I said earlier. I think the interest in our product continues to grow. There is a strong interest for the C-RAD solution on the market, and I feel like we are well positioned on the market in order to capitalize on opportunities.

Next question, how long are the warranty times for the product? And it depends now a little bit on the market, but typically between 1 and 2 years.

Then there's a question to the exchange rate. I think I would like to refer to Therése on that question.

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Therése Björklund, C-Rad AB (publ) - CFO [2]

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Yes. So the question is what was the full year sales growth FX adjusted? What was the market growth for positioning products in the same period?

So I can answer on the first one. It is basically the same, as we said for -- after the Q3 report. So around 3%.

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Tim Thurn, C-Rad AB (publ) - CEO & President [3]

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Thank you. Regarding the weak development in EMEA, excluding Belgium order, do you have any comments about what's going on here? Orders seem to be down some -- sorry, it was a problem to see the question. Do you have any comments about what's going on here? Orders seem to be down some 50% year-over-year in Q4.

I think we can't just exclude certain orders. Of course, the Belgium order is a huge order, and therewith has a very positive effect, and that's exactly the volatility that we are referring to. But I think what we need to take into consideration as well is that we had large orders also during 2018. So if we really want to compare the years, then we need to take this into consideration.

I think if we look at the region overall, there's still a huge growth potential. Overall, I think there are certain markets where perhaps the opportunities are not as strong. And I would like to name here Scandinavia, for example, where we are already in a very good position, but they are simply -- during last year, 2019, there were simply not that many projects out there. And that has, of course, a direct impact, and there's little what we can do about it. I think what is important for us is that we defend or even extend our position on the market. And I think there, we are in a good position.

Can you say how many systems were delivered in 2019? I can't answer this question right now. I don't have this number available.

Orders in North America seem to develop very well. Are there any orders from Elekta within these numbers? Otherwise, when can we expect to see Elekta generating orders?

So our expectation is that we see the first effect on the order intake side in the beginning of this year from the Elekta agreement. I think the underlying driver for the U.S. market, first of all, it's, of course, a huge market with a huge opportunity. The underlying driver is the development in terms of the reimbursement system, which basically incentivize clinics to do certain treatment techniques to invest in technology to support stereotactic treatments. And for those applications, C-RAD is an essential component or our technology is an essential component. And that is one of the drivers behind the development that we see in North America.

So the next question is, could you please provide some color to the number of employees going forward? So -- well, I mean I think we are in a good position. Of course, we want to grow as we go. However, there are no huge investments planned on the personnel side. I think we are in a good position. We have a very strong team. We are present in the fast important markets, and that's really where are -- where we want to continue our efforts with the existing team.

So underlying costs were almost flat, excluding depreciation and capitalized development fund, will there be an increase next year with the senior management layer?

So regarding the management team, this is not a new employees that -- except for the Chief Operating Officer that we reported earlier in 2019, that was a new position. Otherwise, all the people were already in the organization. It was more restructuring of the management team to take those people into the management team directly.

So then there's a question related to Varian's offer, if they are also including C-RAD in the offer to the customer. I'm referring to my earlier comment, and maybe I can amend a little bit. Yes, first of all, the answer is yes to this question. Of course, they do. Our approach is to create the interest at the customer, and I think our expectation is not that Varian will actively promote the C-RAD solution. However, in situations where the customer has interest in the C-RAD solution based on the sales work that our team did, Varian is still including the product into their offer. So that has basically not changed, and that was the same situation over the past years.

So the next question is related to the -- sometimes it's a little bit difficult to read the questions. So what is the actual problem, this GEMini? How do you address them? Should this project at all be taken into account when evaluating C-RAD going forward?

So I think when we started the cooperation with our Chinese partners in Linac -- local Linac vendor, GEMini or the imaging device is part of the overall Linac. And in order to progress this project, there's, of course, the need and also the Linac is developing as well as expected, and we see that there are some delays that things take longer than expected. And therefore, it has nothing directly to do with the C-RAD system. However, we are affected by that.

Regarding the evaluation, and I think that is really what's in line with our earlier communication. The focus in the organization that has nothing to do with the write-down now, but the focus in the organization since long time has been on the positioning product. That is a huge piece of our current and also in the midterm of our business.

Then there's a question regarding the production cost of the new Catalyst System. If you can quantify them. No, we are not giving any indication yet.

So which market has the greatest potential in the next 12 months? So I think the North American market is a very important market from the size and the potential in the market. I think also that, as I indicated earlier, that the changes in the reimbursement system have a positive impact on C-RAD or the sales of our activities. Also, with the partnership that we have agreed upon, I'm very much seeing the potential in North America.

So just a short second. Now there are a number of questions that -- we are going through the questions. There are a number of questions that have been raised already earlier. So could you elaborate a bit more on the Catalyst+? What is the difference, and how it will affect the gross margin?

So the Catalyst+ is basically a new hardware platform, mainly hardware, but also software. It is still a camera system in line with what we have offered before. But from a performance perspective and also from a clinical application perspective, it has a much broader scope than the previous system. And then from a cost perspective, as we mentioned earlier, we are expecting the cost for the system to go down compared to the current Catalyst System and that has, of course, a positive impact. Perhaps I should also mention that we continue to offer the Catalyst System. So we are in the process of -- or in a process to do the transition, and the transition will depend on -- and the timing of the transition will depend on the regulatory clearance in the different markets. So therefore, it will not be like a date from when on we are only offering Catalyst+. There will be a transition over the next months and actually years.

So then there's another question. Okay. A question related to the Coronavirus, if we are affected by that now. We are not affected by that at the moment.

So okay. So then there's one last question here. If you can comment a bit on Per-Arne's role within C-RAD? Yes, I mean Per-Arne joined C-RAD as a member of the Board and as the Chairman of the Audit Committee since December last year.

Okay. I see that there are no further questions. So I would like to thank everyone for taking the time to listen to us. And then I wish everyone a nice weekend soon. Thank you very much. Bye-bye.