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Edited Transcript of SECT.ST earnings conference call or presentation 29-Nov-19 9:00am GMT

Q2 2020 Sectra AB Earnings Call

Linkoping Nov 30, 2019 (Thomson StreetEvents) -- Edited Transcript of SECTRA AB earnings conference call or presentation Friday, November 29, 2019 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Mats Franzén

Sectra AB (publ) - CFO

* Torbjörn Kronander

Sectra AB (publ) - President, CEO & Director

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Conference Call Participants

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* Kristofer Liljeberg-Svensson

Carnegie Investment Bank AB, Research Division - Head of Health Care & Financial Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the Sectra Q2 2019/2020. Today, I'm pleased to present CEO, Torbjörn Kronander. (Operator Instructions) Torbjörn, please begin.

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Torbjörn Kronander, Sectra AB (publ) - President, CEO & Director [2]

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All right. Good morning, everyone, and welcome to Sectra's Q2 report for '19/'20.

And we go on with the next slide, highlights and trends. The financial targets for the group, next slide. We have stability under control despite getting a redemption program here equivalent to dividends. The first and highest priority target is in place. Second target is profitability. We are just above our threshold of 15% despite heavy investments in the first 2 quarters as we have said in the -- beforehand. And so growth, EBIT per share should grow by 50% over a 5-year period. We are right now below that target at 37.3%.

Next slide. So we can ask why is that growth target not fulfilled. And the main reason is that we had a very large order intake in the last fiscal year, the end of last fiscal year and also in new regions. And among others, we got a large order for a new software in Australia, and we had to build resource enable to gain -- to deliver that. That is in investment, and we cannot activate all that cost so a lot ends up on the bottom line.

This will gradually, as we have said now for several quarters, we have said that this will be the case for Q1 and Q2 this year. So it should come then as no surprise. It will gradually move into both increased revenues and margin. After a while, we take a lot of these products in the operation during the second year -- part of this year. We have no reason to question this goal, and we will keep it as is. And of course, those should be met.

Next slide. Order bookings for the group. As we said, we are still having a very good order intake for the last 12 months. Also, the quarter was good relative to last quarter -- or the same quarter last year. The first quarter was a bit of a disappointment, but it should be noted that, with increasing order volumes, we had several orders of above -- ways above SEK 100 million now. The variation between quarters in order intake has increased substantially. It was large from the beginning, but it has also increased.

Next slide. Sectra is positioned in and we have direct sales in 19 countries now. In France, medical, and Finland in security, we established in 2015, 2016. Canada in medical, we established in 2016 and 2017, that year. These new markets are developing as they should. Of course, it takes time to establish itself in a growth market or a trust market that we operate in. Our systems has to work. They cannot fail. And people have to trust us. There is normally a long process before we get profitable in a new country, but it comes along as planned. Then we sell through partners in other markets all over the world. And we have customers in more than 60 countries today. And the largest markets today is United States, Canada, U.K. and the Netherlands.

Next slide. A little about Secure Communications on some security operations.

Next slide. We have got an approval by the Dutch national security agency to use up to and including SECRET level of our most advanced mobile SECRET phone. Now this is quantum -- quantum-secure, it's quantum-safe, which means it will withstand attacks from the new quantum computers, which is a very important thing for the future and especially so in the SECRET sector.

Next slide. Trends in cybersecurity, we see that we are expanding our secure mobile communications offering moving towers, mobile workplaces, not only mobile telephones, and mobile workplaces are environments we can do your entire office but doing it remote. That takes a little different demand on the encryption and also demands good VPN. That I will come back to.

We have growth in critical infrastructure. We started that 3 or 4 years back. We are now monitoring several critical infrastructure in energy sector both in electricity and outside electricity, but all in the energy sector. And the initiatives is, of course, continued growth in critical infrastructure and starting selling. We have started sales in neighboring countries, Finland and Norway. We have no return revenue from those areas yet, but we have that in Sweden. Mobile secure ecosystems, as I said before, and we also do new geographic areas, as I said before.

Next slide. In order to provide the mobile workplaces, you need a virtual product network offering that we haven't had. Therefore, we acquired a company called Columbitech and all the assets of Columbitech, including the shares in their American or the U.S. subsidiary. We -- that has now been integrated into Secure Communications and means we have a world-leading VPN on a level 4 technical level in those stack, which is very important for mobile operations. It also adds United States and especially then police departments in the United States to our Secure Communications offerings.

Next slide. Imaging IT Solutions, our biggest area.

Next slide. We have had very good successes in the Netherlands where we are now clear market leaders. We have new orders from the University Medical Center in Groningen, Ziekenhuis Gelderse Vallei and also Maastricht University Medical Center, which means that we now have the majority of Dutch university hospitals as our customers.

Next slide. We have also had good order income from the U.S., which is in accordance with our special focus on the U.S. in the last years. Grady Memorial Hospital. That is a large chain. It's the fifth-largest public health system in the United States. And we also got Marshfield Clinic Health System. And these are multihospital systems. They are not small individual hospitals anymore. Typically, they are long contracts over a long time with many hospitals.

Next slide. Trend in the United States. It is, as we have said over several years, a special focus area for us. It's the world's largest market. We top the customer satisfaction in large hospitals in the United States in our segment. We have a small market share. That means -- and it's growing, but it means we have large opportunity of growth. While we, in several of our old markets, have completely dominant market shares and then the option for growth is limited. We have also had recent orders from luminary customers strengthen our market positions in the United States. And we now have key reference in the West Coast and the East Coast and the South and the Central United States, which is very important for us.

Next slide. Trending in Imaging IT Solutions overall. We are adding new customers, but we're also extending and increasing contracts with existing customers, both continuing or prolonging their agreements with us, staying as our customers. But also, for instance, radiology customers increase their business with Sectra by adding, for instance, cardiology or pathology into radiology offering, which means we can sell more to installed base, which is a very good thing for both customers and us. We have strengthened our delivery capacity by investment in the Q1 and Q2. As we said before, we have increased our staff. That means we now can grow and deliver the orders we have received. We still have a focus in the United States, and we are going into digital pathology and integrated diagnostics as well. We are selling cardiology as an option to our radiology package in the United States. And we have several new markets and new states. We have also, as I will mention later, filed a digital application for FDA in the United States, which I show on the next slide.

Digital pathology is the next wave in digitalization of hospitals. We -- Sectra is uniquely positioned in the largest market -- largest penetration market right now, which is Sweden, where we have a dominant market share to grow from.

Next slide. It's large synergies for radiology, we are currently the only vendor who has 1 platform, 1 single system, for both cardiology, radiology and pathology imaging. This means that a hospital can, instead of buying 3 different systems, buy 1 system and solving their entire needs of image -- digital image handling, which, of course, is good in an environment where hospitals are increasingly concerned about having several thousand IT vendors. They want to consolidate the vendors side, and we're well positioned in that area.

In related to pathology, Sweden is, as I said before, world-leading, and we have an absolutely dominant market share in Sweden. And this is a good platform to grow out from. We have a continuous stream of foreign customers, potential customers coming to Sweden and see what we do here.

We have also received nationwide for telepathology solution in the Netherlands where they can share microscope images between all the Dutch labs, and we see increasing sales in the U.K. And as I said before, we have FDA application filed in the United States now.

And next slide. Together with Leica Biosystems, which is the market-leading and already approved scanner for digital pathology, with our general open systems approach to the tech side or the IT system and their excellent scanner, we have a very competitive offering for the United States. And United States is currently lagging in digital pathology, mainly because the -- FDA reasons. But when it opens up, we hope to be able to sell quite a large volume of digital pathology in the United States.

Next slide. Financial figures, and then I'll leave the word to our CFO, Mats Franzén.

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Mats Franzén, Sectra AB (publ) - CFO [3]

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Thank you very much, Torbjörn. And I will go to the next slide, trend in order bookings. The order intake was fairly good, I could say. But as you all know, it's a volatile number by default. Net sales up just above 14%, but still in the double-digit areas when adjusting for currency and the weaker Swedish krona. On the rates, you see on the PowerPoint, those of you who can do that, that 7.6%, a weaker krona, especially in relation to the U.S. dollars, just short of 3% for euro and pound sterling. And that's balanced. That's -- sorry, that's the average rates we referred to when comparing with the corresponding period last year.

Next slide, please. The total growth you see here in the revenue, in sales is in total SEK 86 million, whereas SEK 17 million of those are from the effect of a weaker Swedish krona. And the largest impact, where this come from, is in the U.S. that's short of SEK 33 million out of those SEK 86 million that comprises a growth of 24% in the U.S. So in the nominal terms, 38% of the growth on the top line in sales comes from the U.S.

Next slide, please. Looking into the -- on sales in the different segments, not surprisingly, imaging IT, due to its dominant size in the group, contributes the most. There is, though, a growth of 12% in imaging IT, whereas strongest for the 6-months period is Secure Communications, growing with some 41% compared with the corresponding period last year. And Business Innovation comes in on second, just above 19% in growth compared with last year. So all our operating parts or segments are showing growth on top line.

Next slide, please. As we also outlined in the report and as Torbjörn touched on briefly, we do have a heavy cost base in the first half of the year to accommodate the rollout of projects and where we find good people we hire them. It's not that easy to match exactly when things in deployments start and when you find the right people to do that. So I think we have done the right thing. If we find the right people, we take them on board. And we will see the effects, the positive effects of that in the second half of the financial year.

So that's pretty much it. Then you can see that Business Innovation had a good run in terms of sales development as well in this period, in terms of the revenue side of things, although that's a small part of the group that does not contribute that much.

Next slide, please. So the -- this, as we also said in previous reports, means that cash is tied up a bit more than we have seen in previous periods, as you can see on the graph. We had a stronger performance, slightly stronger performance than we expected in the second quarter, but it didn't clearly compensate for the weakness in the first quarter. So looking at the 6-months period, we had a slightly lower cash inflow from operations than corresponding period last year, but the closing balance on cash is pretty much the same as last year, around SEK 190 million.

So next slide, please, and then I'll leave the word back to you, Torbjörn.

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Torbjörn Kronander, Sectra AB (publ) - President, CEO & Director [4]

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All right. Thank you. A little about our way forward. We are positioned in growing markets. We are positioned in markets where the society environment or society dynamics enforces growth. Both cybersecurity and health care, especially for elderly people, will have to grow. And by being positioned there, we at least have a good position. And if we behave well, we should grow with the market.

Next slide. We also have the highest customer satisfaction in the most important segments in the most important market, which is the large hospitals in United States. We see a tremendous consolidation in the United States between the health care providers. They are now buying, consolidating the health care market. And being strong in this environment means that we can grasp opportunity when it comes and people trust us. And customer satisfaction remains our prime target. Without it, you cannot do good business long term.

Next slide, a new thing. In order to be very good with customers, you need good employees and employees that stay. And we've just been awarded to be the third-best employer in Sweden all over. And that is done by anonymous votes by employees. And of course, that is a very good thing for recruiting as we would -- as most IT companies today are limited in growth by the good people we can take on board. So this was a good news. And we are very happy about it. We're also well mentioned in the U.S. equivalent that is called Glassdoor. If you read into Glassdoor, you'll see that we are very positively mentioned from our employees.

Next slide. And as we have the philosophy with shareholders, if you have happy customers, happy employees, you have reached some perseverance, you don't give up too fast, and you have a balance sheet to support that longevity. And you have reasonable cost control. And then if you have good position in growing markets, then shareholders will be happy. It's almost impossible to avoid it, but it has to come in that order. And now we have an external proof for many of those. And we think we are in for a good future for our shareholders also in the future.

Next slide. And then we come to being a shareholder in Sectra. Why should you own shares in Sectra? So as I said, high customer satisfaction, high employee satisfaction, a strong brand name in markets where trust is critical. If our cybersecurity systems fail, we risk nations. And if our systems in hospitals fail, the whole radiology departments has to shut down and the hospital has to shut down. In that area, a trustworthy brand is very, very important, and we have that brand. So the brand Sectra stands for trust, and it's very valuable for us.

We have a profitable and -- we are profitable and we have a strong cash flow and a solid balance sheet. We have substantial increasing recurring revenue. And we also, for the next year, we announced in the quarterly report that we will increasingly go over sales -- Software-as-a-Service model in the United States, starting in the United States. We will do the rest of the world after a while. And that means there will be a little change in the cash flow going forward. The cash flow will be more spread out forwards, but we will recognize a lot of that revenue upfront anyway.

Position in niche markets with substantial underlying growth. All management here own shares, or the top management own shares, I would say. And we have -- we can afford sustainable investment in R&D with exciting future opportunities. And pathology is such an example where we invested long term, but we now have a very strong position worldwide in pathology, but that research was done 5 to 7 years back.

Next slide. We have our upcoming general meeting and financial report and Capital Markets Days. March 4, we will have a 9-month interim report and presentation. And that would be telephone as now. June 3 will be an on-site in Operaterrassen in Stockholm or some other location because they're rebuilding Operaterrassen at this time. So but it -- we will come back with exact location on that. It will be June 3 in Stockholm. And then we have our annual meeting. That will be in September 8 in Linköping in Sweden.

Please remember your feedback is important. Plus, please let us know what you think about these reports, and we try to modify and improve them after a while. And you can fill that URL and you get a questionnaire of what you think about the reports.

Then we open up to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Kristofer Liljeberg from Carnegie.

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Kristofer Liljeberg-Svensson, Carnegie Investment Bank AB, Research Division - Head of Health Care & Financial Analyst [2]

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Could you maybe spend some time on explaining better why moving into a service payment model will not impact the sales much versus selling through licenses?

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Torbjörn Kronander, Sectra AB (publ) - President, CEO & Director [3]

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Mats?

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Mats Franzén, Sectra AB (publ) - CFO [4]

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Yes, Kristofer. The primary driver, I would say, or the key issue there is that the customer gives a firm commitment, what was in the U.K. contract called a breakage clause, which means -- and we obviously have that in many cases where customers do commit for a number of years, which means that the performance obligations of the license in this instance is actually delivered to the customer. That was actually what would not hold for scrutiny in the U.K. contracts where you, as you are aware, had to reverse that accounting in the year-end accounts.

So the deployment phase and the generic license is then effectively delivered as from a revenue recognition point of view, whereas the payment installments will be, on the -- from the customer end, a subscription, which means that won't be a deferral on the cash flow, that it is a subscription nevertheless. So that's very short about this very technical area. The Q&A supporting document is 651 pages, so this is clearly not easy to explain in a few words.

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Kristofer Liljeberg-Svensson, Carnegie Investment Bank AB, Research Division - Head of Health Care & Financial Analyst [5]

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But is it something that customers require? Because otherwise, I don't see the point really because you will have an operating profit that doesn't match with the cash flows, so you will build up a lot of receivables then, I guess.

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Torbjörn Kronander, Sectra AB (publ) - President, CEO & Director [6]

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And I can comment upon that. You are correct. But we do see this as a general trend. And in all software areas, most companies are going over to this model, as you know very well from Microsoft and Office 365, et cetera. And we need to follow that. It has been, in general, very good for companies moving over to this model long term. But you're right that you will have a discrepancy of the revenue recognition and the cash flow that will come gradually over the years. But the important thing that, when customers sign up, they will sign up for an initial guaranteed period where they will commit to pay. And that period, we will take up as revenue upfront.

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Kristofer Liljeberg-Svensson, Carnegie Investment Bank AB, Research Division - Head of Health Care & Financial Analyst [7]

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Okay. The other question I have was regarding your repeated comment here that margins will improve in the second half of the year. Is this mainly from accelerating sales growth or lower cost or maybe a combination of them both?

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Torbjörn Kronander, Sectra AB (publ) - President, CEO & Director [8]

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Well, sales is quite slow. I mean the recognition of a sale at Sectra is quite slow, especially imaging IT. The products about take half a year to a year long typically. So what we see now is that we begin to get income for the very large order intake that we did in the spring. Now -- and that means that we actually get money from these products, and that will start during the second half year, as we've said now for 3 quarters.

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Mats Franzén, Sectra AB (publ) - CFO [9]

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And so yes, I would say that, filling in there, that it's primarily a revenue-driven margin expansion we are pushing. I wouldn't say that we look forward to any significant downturns in cost base as is.

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Torbjörn Kronander, Sectra AB (publ) - President, CEO & Director [10]

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No. That's correct.

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Operator [11]

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(Operator Instructions) And as there are no further questions, I'll hand it back to the speakers.

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Torbjörn Kronander, Sectra AB (publ) - President, CEO & Director [12]

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Okay. Thank you very much. Do we have any e-mail questions?

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Unidentified Company Representative, [13]

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No further questions.

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Torbjörn Kronander, Sectra AB (publ) - President, CEO & Director [14]

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We have had no further questions. And that means we'll conclude the presentation, and we thank you for your attention. And we look forward to see you or hear you -- from you the next time. Goodbye.

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Mats Franzén, Sectra AB (publ) - CFO [15]

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Goodbye.

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Operator [16]

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