Buried deep within Elekta's Q2 earnings transcript lies a clue to a potential growth explosion that most analysts seem to have missed. While everyone is fixated on the short-term hiccup in Chinese orders, there's a subtle shift in Elekta's strategy that could unleash a torrent of revenue growth, potentially exceeding their stated 7% CAGR target and pushing them towards the coveted double-digit territory.

The key lies in Elekta's renewed focus on converting their massive order backlog into actual installations and revenue. While they've consistently maintained a book-to-bill ratio above 1, indicating strong order intake, their backlog has grown to a staggering SEK 46 billion – a figure that dwarfs their annual revenue. This backlog represents a goldmine of future revenue, waiting to be unlocked.

Elekta's management has made it crystal clear that their top priority is to accelerate the conversion of this backlog. They understand that customers are eager to receive their products and services, and delaying installations only hurts both parties. This shift in focus, coupled with ongoing improvements in their supply chain, sets the stage for a potential surge in revenue in the coming quarters.

Let's Crunch the Numbers

If we assume Elekta maintains its current pace of installations and converts approximately SEK 10 billion of its backlog each quarter, that alone translates into a 25% revenue growth rate. This is, of course, a simplified calculation and doesn't account for potential fluctuations in order intake. However, it highlights the sheer magnitude of the untapped revenue potential within Elekta's backlog.

"Untapped Revenue Potential (Hypothetical)"

Reference: Based on calculations from Elekta's Q2 2024 earnings transcript. See Transcript

China: A Temporary Setback or a Strategic Opportunity?

This focus on backlog conversion is particularly significant in light of the temporary slowdown in Chinese orders. While China has been a major growth driver for Elekta, accounting for roughly 10% of their revenue, the ongoing anti-corruption campaign in the healthcare sector has impacted order volumes across the industry.

However, this temporary setback creates an opportunity for Elekta to demonstrate the resilience of their business model. By prioritizing backlog conversion, they can offset the impact of reduced Chinese orders and maintain a healthy revenue growth trajectory, even exceeding their 7% target in the process.

The MR-Linac Market: Elekta Poised for Dominance

There's another crucial factor at play: Elekta's leading position in the MR-linac market with their groundbreaking Unity system. The recent exit of ViewRay, their primary competitor in this space, creates a massive opportunity for Elekta to solidify their dominance. Many ViewRay customers are now actively exploring alternative MR-linac solutions, and Elekta is perfectly positioned to capitalize on this shift.

While Elekta's management has refrained from disclosing specific Unity order and installation figures for competitive reasons, they've hinted at a strong and accelerating demand, particularly in the United States. The ViewRay exit, coupled with the growing clinical evidence and improving reimbursement landscape for MR-linac technology, creates a compelling growth story for Unity.

A Bullish Outlook: Elekta on the Cusp of Unlocking Its Potential

The combination of these factors paints a bullish picture for Elekta's future. While short-term uncertainties remain, particularly around China, their strategic shift towards backlog conversion, coupled with their market-leading position in the MR-linac space, positions them for a potential growth explosion in the coming years. Investors looking for a medtech company with a strong underlying demand, a massive backlog of future revenue, and a game-changing technology should take note: Elekta may be on the cusp of unlocking its true growth potential.

Visualizing Elekta's Order Backlog

This graph illustrates the growth of Elekta's order backlog over the past few quarters. The substantial backlog suggests a strong future revenue pipeline for the company.

Elekta Q2 2024 Earnings Conference Call Transcript

Elekta AB (OTCPK:EKTAF) Q2 2024 Earnings Conference Call November 30, 2023 4:00 AM ET

Company Participants

Cecilia Ketels - Head, IR

Gustaf Salford - President & CEO

Tobias Hagglov - CFO

Conference Call Participants

Mattias Vadsten - SEB

Oliver Reinberg - Kepler Cheuvreux

Kristofer Liljeberg - Carnegie

Hassan Al-Wakeel - Barclays

Rickard Anderkrans - Handelsbanken

Lisa Clive - Bernstein

Veronika Dubajova - Citi

Robert Davies - Morgan Stanley

Cecilia Ketels

Good morning, everyone, and warm welcome to the presentation of Elekta's Second Quarter 2023-'24. My name is Cecilia Ketels, and I'm Head of Investor Relations at Elekta. With me here in Stockholm, I have Gustaf Salford, Elekta's President and CEO; and our CFO, Tobias Hagglov, who will be presenting the results.

Today's agenda starts off with Gustaf presenting some highlights of the developments, then Tobias will give you details on the financials and the presentation ends with Gustaf's view on Elekta's outlook. And after the presentation, there will, as usual, be time for your questions.

But before we start, I want to remind you that some of the information discussed on this call contains forward-looking statements. They can include projections regarding revenue, operating result, cash flow as well as product and product development. And these statements involve risks and uncertainties that may cause actual results to differ materially from those set forth in the statements.

And with that said, I hand over to you, Gustaf.

Gustaf Salford

Thank you, Cecilia, and good morning, everyone, and thank you for attending our call. And we are really happy to announce that we continued to deliver on our strategy, ACCESS 2025 in Q2. We drove significant improvement and generated the fourth consecutive quarter with revenue growth and expanded EBIT margin.

Order growth came back, supported by large deals in both India and Ukraine, and cash flow improved. And if we now turn to our key components of the ACCESS 2025 strategy. We continue to strengthen our market-leading Brachy portfolio with acquisition of Xoft, which accelerates innovation for brachytherapy in Elekta portfolio. And during the quarter, we have also successfully driven adoption by expanding radiation therapy in both mature and emerging markets. Our latest Leksell Gamma Knife, Elekta Esprit has celebrated great success during the quarter, many times reaffirming very long-time customer companionship.

And in China, we have evolved our partnership with Sinopharm alongside already established partnerships within the cancer care ecosystem to reach a larger proportion of the Chinese hospitals and patients.

And if we go to the order development during the second quarter, we had an overall positive order trend and it's a sign of the large underlying demand for cancer treatment capacity. And this is, of course, after several years of underinvestment in many, many markets. The book-to-bill ratio was 1.05 and the order backlog amounted to SEK 46 billion, and we continued to pursue a faster conversion rate.

Americas grew with 9% with a strong growth in Latin America. The growth in EMEA was driven by double-digit growth in Europe. The Netherlands continued the strong momentum and Italy, drove the European development. And we also saw a large deal to modernize and expand the installed base of radiotherapy in Ukraine.

However, the growth in Europe was partly offset by lower orders in the Middle East and Africa. APAC, excluding China, had a very strong double-digit growth rates driven by greater demand in India, Australia and Japan. The weak order development in China is linked to the ongoing anticorruption campaign in the health care sector, and it's temporarily impacting order volumes across the industry, and we expect Chinese order volumes to recover during Q4.

And this recovery is supported by strong outlook for the Chinese market with the recent launch of the five-year investment plan. Our Elekta Unity receiving A class license and the joint venture with Sinopharm is proceeding according to plan. And also the latest Leksell Gamma Knife Elekta pre was launched in China during 2023. And we also will see that development going forward.

If we then zoom in a bit on some of the key deals and orders during the quarter, you will see here that, as I mentioned earlier, that we saw a strong deal in the Americas, the Panama and it's really offering hope to cancer patients with its -- the deal we have with a comprehensive portfolio to also take a leading role in the Central American region.

And during the quarter, we also signed a significant $40 million order from one of India's largest and most advanced corporate healthcare groups, Krishna Institute of Medical Science, or KIMs, in Hyderabad. And the combination is really a solutions includes Elekta's full suite of hardware and software.

In October, we won a public tender to deliver several harmony linear accelerators to help meet the demand for cancer care treatments with modern radiation therapy devices in Ukraine. And the first of these linear accelerators are expected to begin treating cancer patients in 2024. And the Harmony systems, they will be placed in half of Ukraine's provinces as well as the National Cancer Institute.

And if we now turn to revenue, we saw that Q2 was the fourth consecutive quarter of good revenue growth. Revenue grew with 10%, supported by strong solutions revenue of 15%. And I think we have really shown the flexibility and resilience in our supply chain, and we are now in a very good place to continue to drive revenue growth and working capital improvements.

And we're also addressing the continued impact that we saw quite a lot of in Q2 from inflation with price increases and new product launches across our portfolio. All regions contributed to the strong growth with double-digit growth rates in both EMEA and APAC. EMEA showed strong growth both in Europe and the Middle East and Africa, and the installations in Europe were driven by recent large tenders in Italy and Spain, but also in the U.K.

Most markets in APAC showed good growth in installations, China, India, Thailand. And in the Americas, revenue was stable in North America with good growth in Latin America. So at the end of the quarter, Elekta had an installed base of approximately 7,250 devices.

And now to a couple of words around Xoft because in October, Elekta acquired a Xoft business and by acquiring the technology together with transfer employees, we have really strengthened our position as the world leader in brachytherapy solutions.

The Xoft system is FDA cleared and CE marked for the treatment of cancer anywhere in the body using a miniatures, x-ray source to deliver precise concentrated dose of radiation directly to the tumor site.

The Xoft system has an installed base of more than 100 systems and through Elekta's network, the Xoft technology will now be able to reach many, many more patients. This addition to our Brachy portfolio will enable more flexible and mobile treatments, expanding cancer care to new areas with strong demand.

And then finally, a few words about the annual ASTRO conference in the U.S. And we can see that our present at ASTRO in 2023 here in San Diego turned out to be very successful with customer engagement significantly higher than the last year's as well as an increased amount of overall users and record high attendance at their own customer event.

Apart from launching our Elekta One Software Suite, the main attention at ASTRO was aimed at the important clinical breakthroughs of Elekta Unity's comprehensive motion management that has featured by several thought leaders across Europe and the U.S.

And these milestones mark the next phase of the Unity journey where clinicians are able to take the MR linac technology to the next level of precision and adaptive treatments. And this will be a key trigger for new Unity orders. And now over to you, Tobias, for a bit of a closer look at the financials here in Q2.

Tobias Hagglov

Thank you, Gustaf, and good morning, everyone. I will start with the Q2 financials then. Our revenues continue to grow nicely in this quarter by 10% in constant exchange rates, supported by, as you heard from Gustaf, double-digit growth in EMEA and APAC, while the Americas turned to growth in the quarter.

We could benefit from a healthy growth and mature as well as in emerging markets. Profitability continued to grow strongly in this quarter by 370 basis points despite the lower gross margin than last year.

Adjusted earnings per share grew by 70% in the quarter compared to last year. If we look at the financial development in more detail, we can see that ForEx exchange rates had a positive impact on net sales of six percentage points, a negative impact on gross margin of 40 basis points, while contributing positively by 180 basis points to our EBIT margin.

Then look at the operational drivers to our gross margin. We benefited from the high sales growth, combined with successful cost reduction. The relatively higher growth of solutions led to an unfavorable mix in the quarter.

And finally, we experienced inflationary pressure from materials and salaries. Moving down to our EBIT margin. We see further benefit from improved operational productivity while growing strongly.

Then looking into our expenses and cost currency and adjusted for items affecting comparability. All in all, despite the salary inflation, the operating expenses decreased by 1% year-over-year, driven by cost reductions.

Selling expenses increased by 4% year-over-year as we invested in more revenue-generating activities. Administrative expenses declined year-over-year following the cost reduction initiatives. And finally, net R&D expenses declined 6% year-over-year, driven by lower gross R&D.

We remain our focus on our innovation pipeline. As mentioned previously, we are targeting personalized precision through offering adaptive on CT linacs and superior image quality. Elevated productivity, targeting 50% cost reduction per treatment and integrated informatics and decision support. Gross R&D continued to decline on a rolling 12-month basis and ended at 12% of net sales in the quarter.

Moving over to the balance sheet. Net working capital as a share of sales ended at minus 3% in the quarter, which was lower than end of Q2 in the two previous years. Higher customer advances was generated by increased shipments and order intake. Accrued income remained high due to larger shares of installations in Southern Europe, where billing terms are longer. And our inventories are on a relative high level to secure future installations.

Cash flow after continuous investment was more than SEK 600 million better than Q2 last year. This was primarily driven by higher earnings, but also a slight reduction of working capital. Following the improved cash flow in the quarter, we ended the quarter in line with our target to be above 70% cash conversion.

Over to you, Gustaf.

Gustaf Salford

Thank you, Tobias. And now we turn to the outlook section. And the outlook until '24/'25 is the same. It is more than 7% CAGR on net sales. It is a continued EBIT margin expansion that we have shown in the previous quarters. And it's also a dividend policy of more than 50% of annual net profit. All of this is in our focus on driving shareholder value in the coming quarters and years.

So, if we then look at the outlook into next quarter, we see that we have a revenue growth and EBIT margin expansion is also expected to continue, however, at a bit slower pace, the comparisons are a bit more challenging in the next quarter. We also see continued inflation pressuring in Q3, and we also see that the long-term market trends is really supporting growth and investment in high-end radiotherapy equipment and margin expansion. So if I then turn to the summary of Q2.

We see a very strong order growth, excluding China. We have shown the fourth consecutive quarter with revenue growth and expanded EBIT margin. We have been driving improved working capital and cash flow. We see great momentum with market-leading product portfolio, and I highlight would be Unity and Elekta ONE. And we've also acquired attractive expansion into brachytherapy using a miniaturized x-ray source with Xoft.

Cecilia Ketels

And with that, thank you, Gustaf. We will continue with Q&A session. So please, operator, can you open up for the first person in line.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Mattias Vadsten at SEB. Please go ahead.

Mattias Vadsten

Good morning, everyone, and warm welcome to the presentation of Elekta's Second Quarter 2023-'24. My name is Cecilia Ketels, and I'm Head of Investor Relations at Elekta. With me here in Stockholm, I have Gustaf Salford, Elekta's President and CEO; and our CFO, Tobias Hagglov, who will be presenting the results.

Today's agenda starts off with Gustaf presenting some highlights of the developments, then Tobias will give you details on the financials and the presentation ends with Gustaf's view on Elekta's outlook. And after the presentation, there will, as usual, be time for your questions.

But before we start, I want to remind you that some of the information discussed on this call contains forward-looking statements. They can include projections regarding revenue, operating result, cash flow as well as product and product development. And these statements involve risks and uncertainties that may cause actual results to differ materially from those set forth in the statements.

And with that said, I hand over to you, Gustaf.

Gustaf Salford

Thank you, Cecilia, and good morning, everyone, and thank you for attending our call. And we are really happy to announce that we continued to deliver on our strategy, ACCESS 2025 in Q2. We drove significant improvement and generated the fourth consecutive quarter with revenue growth and expanded EBIT margin.

Order growth came back, supported by large deals in both India and Ukraine, and cash flow improved. And if we now turn to our key components of the ACCESS 2025 strategy. We continue to strengthen our market-leading Brachy portfolio with acquisition of Xoft, which accelerates innovation for brachytherapy in Elekta portfolio. And during the quarter, we have also successfully driven adoption by expanding radiation therapy in both mature and emerging markets. Our latest Leksell Gamma Knife, Elekta Esprit has celebrated great success during the quarter, many times reaffirming very long-time customer companionship.

And in China, we have evolved our partnership with Sinopharm alongside already established partnerships within the cancer care ecosystem to reach a larger proportion of the Chinese hospitals and patients.

And if we go to the order development during the second quarter, we had an overall positive order trend and it's a sign of the large underlying demand for cancer treatment capacity. And this is, of course, after several years of underinvestment in many, many markets. The book-to-bill ratio was 1.05 and the order backlog amounted to SEK 46 billion, and we continued to pursue a faster conversion rate.

Americas grew with 9% with a strong growth in Latin America. The growth in EMEA was driven by double-digit growth in Europe. The Netherlands continued the strong momentum and Italy, drove the European development. And we also saw a large deal to modernize and expand the installed base of radiotherapy in Ukraine.

However, the growth in Europe was partly offset by lower orders in the Middle East and Africa. APAC, excluding China, had a very strong double-digit growth rates driven by greater demand in India, Australia and Japan. The weak order development in China is linked to the ongoing anticorruption campaign in the health care sector, and it's temporarily impacting order volumes across the industry, and we expect Chinese order volumes to recover during Q4.

And this recovery is supported by strong outlook for the Chinese market with the recent launch of the five-year investment plan. Our Elekta Unity receiving A class license and the joint venture with Sinopharm is proceeding according to plan. And also the latest Leksell Gamma Knife Elekta pre was launched in China during 2023. And we also will see that development going forward.

If we then zoom in a bit on some of the key deals and orders during the quarter, you will see here that, as I mentioned earlier, that we saw a strong deal in the Americas, the Panama and it's really offering hope to cancer patients with its -- the deal we have with a comprehensive portfolio to also take a leading role in the Central American region.

And during the quarter, we also signed a significant $40 million order from one of India's largest and most advanced corporate healthcare groups, Krishna Institute of Medical Science, or KIMs, in Hyderabad. And the combination is really a solutions includes Elekta's full suite of hardware and software.

In October, we won a public tender to deliver several harmony linear accelerators to help meet the demand for cancer care treatments with modern radiation therapy devices in Ukraine. And the first of these linear accelerators are expected to begin treating cancer patients in 2024. And the Harmony systems, they will be placed in half of Ukraine's provinces as well as the National Cancer Institute.

And if we now turn to revenue, we saw that Q2 was the fourth consecutive quarter of good revenue growth. Revenue grew with 10%, supported by strong solutions revenue of 15%. And I think we have really shown the flexibility and resilience in our supply chain, and we are now in a very good place to continue to drive revenue growth and working capital improvements.

And we're also addressing the continued impact that we saw quite a lot of in Q2 from inflation with price increases and new product launches across our portfolio. All regions contributed to the strong growth with double-digit growth rates in both EMEA and APAC. EMEA showed strong growth both in Europe and the Middle East and Africa, and the installations in Europe were driven by recent large tenders in Italy and Spain, but also in the U.K.

Most markets in APAC showed good growth in installations, China, India, Thailand. And in the Americas, revenue was stable in North America with good growth in Latin America. So at the end of the quarter, Elekta had an installed base of approximately 7,250 devices.

And now to a couple of words around Xoft because in October, Elekta acquired a Xoft business and by acquiring the technology together with transfer employees, we have really strengthened our position as the world leader in brachytherapy solutions.

The Xoft system is FDA cleared and CE marked for the treatment of cancer anywhere in the body using a miniatures, x-ray source to deliver precise concentrated dose of radiation directly to the tumor site.

The Xoft system has an installed base of more than 100 systems and through Elekta's network, the Xoft technology will now be able to reach many, many more patients. This addition to our Brachy portfolio will enable more flexible and mobile treatments, expanding cancer care to new areas with strong demand.

And then finally, a few words about the annual ASTRO conference in the U.S. And we can see that our present at ASTRO in 2023 here in San Diego turned out to be very successful with customer engagement significantly higher than the last year's as well as an increased amount of overall users and record high attendance at their own customer event.

Apart from launching our Elekta One Software Suite, the main attention at ASTRO was aimed at the important clinical breakthroughs of Elekta Unity's comprehensive motion management that has featured by several thought leaders across Europe and the U.S.

And these milestones mark the next phase of the Unity journey where clinicians are able to take the MR linac technology to the next level of precision and adaptive treatments. And this will be a key trigger for new Unity orders. And now over to you, Tobias, for a bit of a closer look at the financials here in Q2.

Tobias Hagglov

Thank you, Gustaf, and good morning, everyone. I will start with the Q2 financials then. Our revenues continue to grow nicely in this quarter by 10% in constant exchange rates, supported by, as you heard from Gustaf, double-digit growth in EMEA and APAC, while the Americas turned to growth in the quarter.

We could benefit from a healthy growth and mature as well as in emerging markets. Profitability continued to grow strongly in this quarter by 370 basis points despite the lower gross margin than last year.

Adjusted earnings per share grew by 70% in the quarter compared to last year. If we look at the financial development in more detail, we can see that ForEx exchange rates had a positive impact on net sales of six percentage points, a negative impact on gross margin of 40 basis points, while contributing positively by 180 basis points to our EBIT margin.

Then look at the operational drivers to our gross margin. We benefited from the high sales growth, combined with successful cost reduction. The relatively higher growth of solutions led to an unfavorable mix in the quarter.

And finally, we experienced inflationary pressure from materials and salaries. Moving down to our EBIT margin. We see further benefit from improved operational productivity while growing strongly.

Then looking into our expenses and cost currency and adjusted for items affecting comparability. All in all, despite the salary inflation, the operating expenses decreased by 1% year-over-year, driven by cost reductions.

Selling expenses increased by 4% year-over-year as we invested in more revenue-generating activities. Administrative expenses declined year-over-year following the cost reduction initiatives. And finally, net R&D expenses declined 6% year-over-year, driven by lower gross R&D.

We remain our focus on our innovation pipeline. As mentioned previously, we are targeting personalized precision through offering adaptive on CT linacs and superior image quality. Elevated productivity, targeting 50% cost reduction per treatment and integrated informatics and decision support. Gross R&D continued to decline on a rolling 12-month basis and ended at 12% of net sales in the quarter.

Moving over to the balance sheet. Net working capital as a share of sales ended at minus 3% in the quarter, which was lower than end of Q2 in the two previous years. Higher customer advances was generated by increased shipments and order intake. Accrued income remained high due to larger shares of installations in Southern Europe, where billing terms are longer. And our inventories are on a relative high level to secure future installations.

Cash flow after continuous investment was more than SEK 600 million better than Q2 last year. This was primarily driven by higher earnings, but also a slight reduction of working capital. Following the improved cash flow in the quarter, we ended the quarter in line with our target to be above 70% cash conversion.

Over to you, Gustaf.

Gustaf Salford

Thank you, Tobias. And now we turn to the outlook section. And the outlook until '24/'25 is the same. It is more than 7% CAGR on net sales. It is a continued EBIT margin expansion that we have shown in the previous quarters. And it's also a dividend policy of more than 50% of annual net profit. All of this is in our focus on driving shareholder value in the coming quarters and years.

So, if we then look at the outlook into next quarter, we see that we have a revenue growth and EBIT margin expansion is also expected to continue, however, at a bit slower pace, the comparisons are a bit more challenging in the next quarter. We also see continued inflation pressuring in Q3, and we also see that the long-term market trends is really supporting growth and investment in high-end radiotherapy equipment and margin expansion. So if I then turn to the summary of Q2.

We see a very strong order growth, excluding China. We have shown the fourth consecutive quarter with revenue growth and expanded EBIT margin. We have been driving improved working capital and cash flow. We see great momentum with market-leading product portfolio, and I highlight would be Unity and Elekta ONE. And we've also acquired attractive expansion into brachytherapy using a miniaturized x-ray source with Xoft.

Cecilia Ketels

And with that, thank you, Gustaf. We will continue with Q&A session. So please, operator, can you open up for the first person in line.