In a recent earnings call, Elekta (EKTAB), a leading provider of precision radiation therapy solutions, reported a full-year net sales increase of 5% despite a 2% decline in the fourth quarter. The company's adjusted EBIT margin rose to 11.8% for the full year but faced a drop in Q4, attributed to inflation and increased operating expenses.
Elekta's President and CEO, Gustaf Salford, expressed dissatisfaction with the Q4 results and outlined a strategic focus on cost reduction and leveraging new product launches.
The order backlog remained strong, and a dividend of SEK2.40 per share was proposed, reflecting confidence in the company's financial health. Elekta's outlook for the first half of fiscal year 2024-2025 is cautious, with expectations of improved sales and profitability in the latter half due to new product launches and productivity measures.
Key Takeaways
- Elekta's full-year net sales grew by 5%, with an adjusted EBIT margin of 11.8%.
- Q4 saw a 2% decline in net sales and a decrease in adjusted EBIT margin to 13%.
- The company's order backlog is robust at over SEK44 billion.
- Elekta launched the Elekta Evo and acquired intellectual property for the Pinnacle treatment planning system.
- The Board proposed a dividend of SEK2.40 per share.
- Elekta expects a weaker first half in fiscal year 2024-2025 but anticipates growth in the second half.
- The company plans to achieve mid-single-digit net sales growth for the full year with an improved EBIT margin.
Company Outlook
- Elekta anticipates a challenging first half for fiscal year 2024-2025, with a stronger performance expected in the latter half.
- The company is targeting mid-single-digit net sales growth for the full year.
- Elekta's strategy includes driving growth through product launches and regulatory approvals.
- Future EBIT margin goals are set at 14% and higher post-2024-2025.
Bearish Highlights
- Q4 net sales decreased by 2%, and adjusted EBIT margin dropped from the previous year.
- The company's performance in mature markets like Europe and the US was impacted by lower installations.
- Elekta faces challenging market conditions and tough comparables in Europe and China.
Bullish Highlights
- Elekta's order backlog remains strong, indicating continued demand for its products.
- The company's strategic partnership with GE Healthcare and IP acquisition from Philips are seen as positive developments.
- Elekta's new product launches, such as Elekta Evo, are expected to contribute to future growth.
Misses
- The adjusted EBIT margin in Q4 fell due to inflation and higher operating expenses.
- Gross margin was impacted by inflationary pressure and supply chain disruptions.
Q&A Highlights
- Elekta's management discussed strategies to improve gross margin, including launching new products and software.
- The company is working on productivity and cost reduction initiatives to mitigate the impact of cost increases and inflation.
- Elekta did not provide a specific timeline for achieving a 14% EBIT margin but aims for this target in the periods after 2024-2025.
In summary, Elekta is navigating a mixed financial landscape with strategic initiatives aimed at driving future growth and profitability. The company's strong order backlog and focus on new product launches, coupled with cost reduction efforts, position it to potentially improve its financial performance in the latter half of fiscal year 2024-2025.
Full transcript - None (EKTAF) Q4 2024:
Peter Nyquist: Hi, and good morning, everyone. My name is Peter Nyquist, and I'm the Head, Investor Relations here at Elekta, and I've just completed my first quarter here at Elekta. And with me here in the studio in Stockholm, I have Gustaf Salford, Elekta's President and CEO; and our CFO, Tobias Hagglov, who will today present the results. Today's agenda starts with Gustaf presenting some highlights in the development during the quarter as well as some of the strategic achievements we have done throughout the year as well as the quarter. Then, Tobias will give you more details on the financials, and Gustaf will end the presentation with Elekta's view on the outlook. After the presentation, there will be, as usual, time for questions as well as answers. But before we start, I want to remind you that some of the information discussed on this call contains forward-looking statements. These can include predictions regarding revenues, operating result, cash flow, as well as products and product development. These statements involve risks and uncertainties that may cause actual results to differ materially from those set forth in the statements. With that said, I would like to hand over the word to you, Gustaf.
Gustaf Salford: Thank you, Peter; and good morning, everyone, and thank you for attending our call. I will now focus on the key takeaways for the full year. When we look at the full year, you saw that net sales increased by 5% with growth in all regions, which is strong considering the challenges we have had in some markets, like China, where anti-corruption campaigns has impacted order intake as well as sales significantly. The adjusted EBIT margin increased by 150 basis points to 11.8% and we did delivered an adjusted EBIT of over SEK2.1 billion. We have strengthened our product portfolio by launching the market leading Elekta Evo, an AI-powered CT-adaptive and highly versatile linac. And together with our comprehensive software suite Elekta ONE, this linac will be able to drive both increased personalization and higher productivity for our customers. We delivered a strong operating cash flow of the continuous investments of SEK850 million, more than double compared to last year. And a strong cash flow is the proof point of an efficient business model and going forward we will continue our activities to structurally improve working capital. The Board proposed a dividend of SEK2.40 per share for fiscal year 2023-2024 and underlying support of Elekta's strong financial position. And if we now look into the key takeaways for the fourth quarter, we saw that the market conditions in the quarter were challenging, reflected by a weaker than normal sales development. The quarter showed a decline in net sales by 2%, mainly driven by lower installations, particularly in mature markets like Europe and the U.S. The adjusted gross margin amounted to 36.6%, driven by an unfavorable market mix and inflation pressure on material and salary costs. The adjusted EBIT margin amounted to 13%, down from last year due to inflation and higher operating expenses, mainly related to the recent product launches. The order intake in the fourth quarter declined by 1%, mainly due to lower market activity in Europe, while APAC showed double-digit growth, mainly driven by China, where several Unity orders were signed in the quarter. Order intake in China continues to be impacted by the ongoing anti-corruption campaign. However, gradual improvements have been seen towards the end of the quarter. Looking at the order backlog, it is still on a robust level, amounting to over SEK44 billion and the book-to-bill ratio was strong with 1.28 in the fourth quarter. Rolling 12 months' book-to-bill ratio was 1.09, a platform for future growth. During the quarter, we announced the strategic partnership with GE's Healthcare's MIM Software, strengthening and complementing our software suite Elekta ONE. And with addition of our acquisitions of Philips intellectual property for the treatment planning system Pinnacle, we are now very well positioned as the leading provider in software solutions and we are reaffirming our vendor agnostic commitment. I am not satisfied with outcome in Q4. While a challenging market and increased spending driven by product launches partly explained part of this performance, we will improve profitability going forward and this will involve reducing our cost of goods sold and operating expenses. And also, we must leverage and we will leverage our recent product launches to enhance our financial results. And now over to our strategy, ACCESS 2025, that will deliver -- continue to deliver on -- in Q4. And if you look at the key components here on the slide, I wanted to give you some highlights from the quarter and of course in the area of accelerate innovation with customer utilization in mind, we did this continued acceleration by launching Elekta Evo, a new CT-adaptive, highly versatile linac, and I'll come back to that. In the areas of driving partner integration across the cancer care ecosystem, we have deepened the partnership and collaboration with MIM Software, that's owned by GE Healthcare, by providing the best-in-class software solutions to our linac's portfolio. And when it comes to driving adoption across the globe, we have continued our journey, convert the former US centers to our MR-Linac program with Elekta Unity and we see good potential going forward in this journey. And now to something I'm very, very proud of that we have launched in the quarter at ESTRO, for example, is that with these recent launches of the new CT linac Evo and the treatment planning software Elekta ONE planning, we have truly accelerated innovation in the market and the radiation therapy field. And we have the leading and most comprehensive portfolio in the industry that you can see on this slide with our MR-Linac Unity, our image guided Brachy Studio, our Elekta Evo, as well as the Elekta Harmony, our Elekta ONE software suite, and of course the Leksell Gamma Knife Esprit. And looking across this portfolio, we can now proudly say that we will enable online adaptive treatments in all our products lines, neuro, brachy and linac solutions. Where Unity has a unique MR imaging and comprehensive motion management technology, the Elekta Evo now complements our linac portfolio with a high versatility in terms of personalization as well as productivity. And no matter the incidence or the clinical need, we have the comprehensive offering to match our customers' needs, and we will leverage these products to drive our growth and financial performance going forward. And if we look a bit closer at our latest addition to the portfolio, Elekta Evo, that was launched at ESTRO with great customer feedback. It comes fully ready for online adapted treatments, or it can also easily be upgraded over time for the customer preferences. It has best-in-class image quality due to the AI enhanced Iris technology and it leverages our new treatment planning system Elekta ONE planning, powered by MIM. This new software offers AI driven out to contouring, faster dose calculation and planning, and is vendor agnostic to ensure it supports not only Elekta devices but also other products in the market. Elekta Evo gives us a unique position in the marketplace. It is an adaptive CT linac with a versatility only comparable to other C-arm linacs and the adaptivity that allows for either online adaptive from the start or an upgrade from offline to online over time. And depending on the customer preference, furthermore, our installed base of Versa HDs, including those in our order backlog, are now upgradable to online adaptive linacs, thanks to the Evo technology. And this adaptivity, offered by Evo, together with the standalone planning software, both provide great leverage to our existing installed base and provide new avenues for margin accretive growth. And for Elekta Unity, we saw a lot of positive market momentum in the quarter. Our customers are continuously realizing workflow efficiencies in the clinics with a recent example in Australia, where they treated 20 patients in one day fully, what we call adapt to shape. And we see that adoption is increasing across the globe. For example, another Unity transition in Italy and strong recent momentum in India. And at the recent MR-Linac Consortium Meeting at ESTRO, more than 100 abstracts were showcased, further underscoring the clinical benefits of our Unity. And of course one of the key focus areas in ACCESS 2025, which lies in the heart of everything we do, is to contribute to a world where everyone has access to the best cancer care. And I am very happy to be able to communicate that we now have provided radiation therapy access to 260 million people in underserved markets, well on track to reach our target of 300 million people until fiscal year 2024-2025. And this not only mean that we provide best-in-class solutions to people worldwide, it also means that we extend our footprint and will be able to continue deliver profitable growth as our installed base continues to grow. And we will continue this journey during fiscal year 2024-2025, and we will reach our targets. Now, over to the financials and Tobias.
Tobias Hagglov: Thank you, Gustaf; and good morning, everyone. We will start with a full year overview. During full year 2023-2024, we delivered a 5% net sales growth in constant exchange rates with revenue growth from all regions. China grew despite challenging marketing -- market conditions with the ongoing anti-corruption campaign. This is a sign of our strong position in China and we continue to gain market shares. We continue to increase our service business with a 6% growth year-over-year, while our solutions business grew with 4%. Adjusted gross margin amounted to 37.5%. An unfavorable market mix and inflation pressure was offset by leveraging revenue growth combined with cost control. The adjusted EBIT margin expanded to 11.8%, an increase by 150 basis points compared to last year. The increase derives from higher sales as well as further leverage on our operating expenses, where our focus on cost control has paid off. The EPS grew by 38% compared to last year. If you then continue with the development during the fourth quarter, net sales decreased by 2% in constant exchange rates. This was driven by slower market activity in Europe and challenging market conditions in the US. We grew sales in APAC despite negative impact from the anti-corruption campaign in China. As we are stating in the outlook, we expect the first-half of 2024-2025 to be weaker due to challenging market conditions. This will be particularly evident in our mature markets. Adjusted gross margin amounted to 36.6%, a decrease by 120 basis points compared to last year and 30 basis points sequentially. The market mix in the quarter had a negative impact on the margin as emerging markets show strong growth. We have also seen continued inflationary pressure waiting on the gross margin. The adjusted EBIT margin amounted to 13%, a decrease by 320 basis points compared to last year. The decrease is mainly driven by the lower gross margin and higher operating expenses related to recent product launches. In order to mitigate the impact from mentioned cost increases and inflation, we will intensify our activities by focusing on reducing COGS in our operating expenses. We expect cost savings to amount to half our previous program initiated during fiscal year 2022-2023. The majority will be visible in OpEx with a gradual impact, which will, in particular, improving EBIT during the second half of current year. More details will be given when we report our Q1 earnings. Then looking more in detail into our expenses in constant currency and adjusted for items affecting comparability. All in all, expenses increased by 12% year-over-year, mainly driven by product launch related costs. Sequentially, OpEx increased by 8%. During the fourth quarter, selling expenses increased by 5% year-over-year, driven by selective investments in customer activities and commercialization or product launches. Administrative expenses, excluding non-recurring items increased by 7%. Selective investments in IT was made in the quarter. Net R&D expenses increased by 20% year-over-year due to higher gross R&D and amortization costs following our product launches. We remain focused on our innovation pipeline. During the fourth quarter, we launched Elekta Evo, a CT-adaptive linac, as well as new software features, strengthening our Elekta ONE software suite. R&D is the ultimate way for us to improve our profitability by launching market leading product solutions. It is key for us to continue delivering new innovations to improve our margins, particularly the gross margin. In the quarter, gross R&D increased sequentially by 30 basis points to 12.2% of net sales on a rolling 12-month basis, driven by higher growth spend. Net R&D increased by 30 basis points sequentially to 7.7% on net sales on a rolling 12-month basis, mainly driven by higher growth spend and amortization cost following the aforementioned product launches. Cash flow after continuous investments amounted to SEK872 million in the quarter, resulting in an increased cash flow by almost SEK500 million for the full-year. Cash conversion amounted to 77%, well above our target of 70%. Net working capital as a share of sales ended at minus 10% in the quarter, a significant improvement versus Q4 previous year. The improvements compared to last year were mainly driven by lower accounts receivables and that accrued income has come down due to strong collections from projects in Southern Europe with longer billing terms. We've also had higher prepaid income deriving from the U.S. and China. And as Gustaf mentioned, the Board suggests a dividend per share of SEK2.4, the same absolute level as last year. This represents a payout ratio of 70% of the net income, and, as Gustaf said, underlying Elekta's strong financial position. With that, I hand over to you, Gustaf.
Gustaf Salford: Thank you, Tobias. And I would like to end today's call with our outlook for the first half of the fiscal year -- fiscal year 2024-2025, as well as for the full-year. We expect the first half of 2024-2025 to be weaker due to challenging market conditions and tougher comparables in Europe and in China. And during the second-half of the year, we expect sales and profitability to pick up from new product launches as well as productivity measures. Net sales for Elekta is expected to grow by mid-single-digit for the full-year of 2024-2025 with an improved EBIT margin. We are experiencing strong customer interest and -- in our industry leading offering. And beyond 2024-2025, we will drive for an EBIT margin expansion to 14% and higher, and we will continue to drive access to the best cancer care and creating shareholder value. Thank you.
Peter Nyquist: Thank you, Gustaf. So, now, we follow up with a Q&A session. But before that, I would like to draw the attention to some dates for the financial calendars. We are, as you probably see on this slide, changing the date for our Q1 numbers. We're supposed to present on the -- on September 5, but the new date now is August 28th, just so you can have that in your calendar. With that, I would like to hand over to the operator, so we can start with the Q&A session. So please, operator.
Operator: We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Erik Cassel with Danske Bank. Please go ahead.
Gustaf Salford: Hi, Erik.
Erik Cassel: Hello. Hi. Good morning, everyone. So, three questions for me, and I'll start with the first one. How sticky are the inflation effects in service? I mean, do you need to renew the contracts to offset inflation, and then implying that that could take several years to execute on? Or is it more short-term?
Gustaf Salford: We start with that question. Hi, Erik. It's Gustaf here. So, we saw inflation impacting the salary levels of our service engineers. For example, some of the spare parts on the material cost as well. We have offset some of that effect with CPI clauses in our impacts. But you're correct that impact we have here in the last quarter. Looking ahead, we will continue and have continued to bring CPI clauses to our backlog and our service contracts. And we will work with productivity on the service business across Elekta. So, we will drive for higher, you say, gross margins on the service business going forward as well. And the CPI clauses will kick into a larger extent. But -- and when we also drive the installed base globally and have that increase, we will see that the service contracts kicking in the years after. And we also have seen that our service revenue growth is growing faster than installed base. So it's really about productivity, it is about CPI clause increases, and it is about installed base growth. And that is what we'll drive in the next year. Okay?
Erik Cassel: Okay. Thank you. And next one. Considering that EBIT came in 22% below the Q4 guide, which was given during this quarter, it makes -- it seems like the visibility currently is quite poor. So, I mean, what sort of visibility do you actually have that you will see the improvements that you guide for into 2025?
Gustaf Salford: So, we're not pleased with this quarter, Erik. I said it in a call and I think the EBIT margin were lower than what we expected. It came in, especially in some mature markets like Europe and to some extent U.S. as well, lower than expected. I think, we have a clear view. Given a clear view of the first half and the second half what we see currently, I think the transparency has increased with China now coming out from the anti-corruption investigations. And I think I'm optimistic on that. And I also see that we have better transparencies in markets like Europe and in U.S. So, I'm expecting the transparency to increase quarter-by-quarter going forward as well into the next year. But again, we're not pleased with the last quarter absolutely.
Peter Nyquist: And you had a last question as well, Erik? Over to you.
Erik Cassel: Yes. Just a quick last one.
Peter Nyquist: Yes.
Erik Cassel: I don't know whether it's best for Gustaf or Tobias to answer this, but I'll ask it and you decide. I mean, you say on Slide 15 that you'll address inflation pressure by cost cutting again in COGS and OpEx. But if we are to see the sort of volume growth and better pricing, as you said previously, I mean, why is there a need to accelerate cost cutting further and implicitly slim the organization again? Does that really rhyme with the sort of sales and volume growth that you're guiding for?
Gustaf Salford: Yes. Erik, I think you'll get both of us on this question. I'll kick off and then Tobias will add. But yes, I think we work a lot with productivity across all our processes. That's absolutely vital going forward. And we see a lot of automation, digitalization, we start to see AI impacting our cost base as well in a positive way. So productivity is key both for gross margin expansion and EBIT margin expansion. But we are also ring fencing key areas of investment and that could be, for example, software rollout that is so vital for the great products we now have and to drive software growth going forward. So we will have areas that we invest in, but there will be many areas that will drive productivity into the next year.
Tobias Hagglov: Yes. Hi, Erik. And I can just echo what Gustaf was saying. I mean, here we are on a journey driving a profitable growth. We will continue to do that and to actually drive our productivity as a part of that equation. And yes, so when -- and when we do that, that will be a combination of actually driving out cost, while we also selectively invest in areas where we see that we get leverage and paid off from that. So it's a matter of taking command over the P&L and the financial performance moving forward.
Peter Nyquist: Thank you, Tobias. And thank you, Erik.
Erik Cassel: Okay. All right. Thank you.
Peter Nyquist: We'll -- operator, so we'll move to the next question, please.
Operator: Our next question comes from Kristofer Liljeberg with Carnegie. Please go ahead.
Kristofer Liljeberg: Yes. Thank you. Two questions for me. The first one coming back to your visibility. And if you could explain why you think visibility is better now than three months ago? I agree that there's a difficult year-over-year comparison, of course, particularly in the first quarter, maybe also in the second quarter; but after you reported Q3, it sounded like that you had the positive or expected a positive momentum for installations also in the first part of the new fiscal year. So, that's my first question. And then the second question relates to gross margin and what you could say to convince us that it would eventually improve again. Now you're talking about reducing COGS again, but that's something I've said for what is it, two to three years and nothing happens with the gross margin, you've talked about price increases started to impact positively. We haven't seen that either. So, I think, more explanation here is needed. Thank you.
Gustaf Salford: Yes. And it's warranted as well, Kristofer. So, if we look at that, we start with a transparency or visibility question into the first half of next year, and we then go to gross margin. It's two great questions for this quarter, of course. And on the visibility side, I say again that for the first half we had quite strong performance. Last year was 8%, 10% revenue growth. It really came from installation of the European projects that we got in the Spanish and Italian tenders. So, the big EU recovery programs after COVID, that drove good revenue in those two quarters. And then of course China, we had good installation volumes in the beginning of that year. So that was two effects that we don't get into this year. That's, I would say, the main reason why we say it will be a weaker first half. At the same time, we will then drive for the product launches that we will get regulatory approvals for us on more during the summer, so we can start to sell more and get the orders in the autumn and then install them in the spring. I would say, that's kind of a logic for next year's and the transparency we have. And we have a great interest on the orders for products like Elekta ONE and Elekta Evo to drive that. And then I think it has been helpful with getting better visibility on the China installation plans and also how we see the order intake coming in. But of course there's a lot of geopolitical turmoil around the world that we mitigate and manage to the best of our abilities and that's something we always do as Elekta. But this is the best visibility we have at the moment. If you look at the gross margin.
Kristofer Liljeberg: Yes. But could I ask…
Gustaf Salford: Yes.
Kristofer Liljeberg: Could I…
Gustaf Salford: Please.
Kristofer Liljeberg: …follow up there?
Gustaf Salford: Yes.
Kristofer Liljeberg: Sure. Correct me now if I'm wrong, but if I remember correctly, after third quarter, you were quite upbeat about what the installation -- you were quite upbeat about the installations for -- also in Q1 last year. I think you phrased it earlier, also the first part of the new fiscal year. So, what is it that has changed? Because you should have known about the difficult comparison.
Gustaf Salford: Of course, the difficult comparison were known, but I think if you look at the CapEx medtechs market or kind of those company being reported, we've seen a more challenging market conditions overall, I think, for medtech CapEx in the last quarter. We see some of that effect in the next two quarters. Then we have the comparison effect for -- as we said with China, with Europe. However, what I would say specific for Elekta is all the product launches we've now done in the Q4 that we will roll out and also have a good opportunity on the MR-Linac side and the gamma knife side and the brachy side to drive that growth that's more in our own control, so to say. So I think it's been a bit weaker overall medtech CapEx market, Kristofer, compared to two quarters ago.
Kristofer Liljeberg: Yes. Thank you. How confident could we be about installing the new product launches already this fiscal year? Isn't there a risk that that will slip into the next fiscal year instead given that you seems to be dependent here on the second half being very strong?
Gustaf Salford: What I mentioned one of the investment areas we've had in last year, and we'll have in the first half as well, will be kind of installers of our software technology as well as for the new Evo as well as the Unity area. So, that's an investment areas we've taken a decision to continue to drive and that is what will drive our installations and therefore revenue. So, that's how we're driving that growth. And if we -- can I turn to the gross margins, Kristofer, or?
Kristofer Liljeberg: Yes. Thank you. Sorry.
Gustaf Salford: So, I think, for Elekta -- and as we say, we will take the gross margin back to pre-COVID levels. It has taken longer than we wanted and expected. I think the inflationary pressure has been larger and longer than we expected, say a year ago. So, that's one driver. And then we have had a bit of supply chain turmoils as well during the last couple of quarters, that also impacted. So, for Elekta, and I can assure you, it's the highest priority myself and Tobias are having, is to drive gross margin improvement over the next quarters and years in order to get back to pre-COVID levels and also get to an EBIT margin of 14% and higher. That will come from procurement activities and material cost productivity initiatives on the service and installation side, as well as good cost control on our OpEx. So, we have a very clear plan and we will deliver on it into next year.
Peter Nyquist: Thanks, Gustaf. And thanks, Kristofer, for those questions. We will move to next question, operator.
Operator: Our next question comes from Mattias Vadsten with SEB. Please go ahead.
Gustaf Salford: Hi, Mattias.
Mattias Vadsten: Hi. Thanks. I will limit myself to two questions. I mean, you've commented quite a bit here on the previous questions on sales going into the first half of next year. But could you maybe quantify a little bit what kind of sort of decline we are looking at to start the year perhaps in the first quarter? And then perhaps also comment a little bit on the orders' dynamics year-over-year in H1 as well? That's the first one.
Gustaf Salford: Yes. I will start with it. And Tobias will add. So, if we start with the market expectation on the order side, it's not, as you know, as if we guide for. But if you look into the first -- first quarter, we will not see a lot of orders for our new product integrations or implementations or launches, that will come later in the year. So, we'll see the market also on the order side to be a bit weaker in the first quarter and the first half, I would say, to them pick up in the second half. On the revenue side, of course, service will always grow with installed base and higher. We are a bit more optimistic on the Americas side, but we see these challenging conditions, as we mentioned many times here in the call, in Europe and China, but that will then kick -- improve in the second quarter and onwards. That's what we can see on the installation side.
Tobias Hagglov: Yes. And then I can just echo that. So it is very much about, I mean, the comparables in Europe. We have China, where we're seeing the orders picking up and -- but we have an impact here from the order intake throughout this year. You will see a decline here into the beginning of this year in Q1, and that is following these impacts.
Mattias Vadsten: Thanks so much for that. The next question is on the gross margin. If you could try to explain a little bit more on the negative market mix, maybe single out a few installations and markets in particular, and then comment a little bit on this development, because 9% growth in service should really help the gross margin for Elekta, in my opinion, given the solutions coming down this much? And then maybe going forward, I mean, in terms of the market mix, do you expect that to remain weak, let's say, going into Q1 and Q2, to drive gross margins down year-over-year? Or am I misunderstanding anything there? That's my second question.
Tobias Hagglov: No, but I think you're on it here. I mean, we do expect a weaker start of next financial year here. And that is coming, as you say, from lower activities in our mature markets, which also had an impact here in Q4. I would say though that there are good reasons to actually see that sequential improvement into next fiscal year, both looking at the revenue development, the gross margin development, and the EBIT margin development. Partly of that is due to the market dynamics, but it's also a matter of the very positive feedback and outcome from the new product launches that we launched here. That will take some time before it move into revenues and therefore we also talk about the second half of the year 2024-2025. But that is also the rationale why you actually start with a softer start here in terms of both the revenue gross margin and EBIT margin. In terms of the gross margin, Q1 last year you also had certain impact here from the both at that point of time, a very strong market mix and a positive impact from the inventory revaluation here as well. So that I think that you should take into consideration. But for the full year, we aim at what just Gustaf said, mid-single-digit growth, a gross margin expansion and EBIT margin expansion. So, we will continue the year now here on profitable growth and that we are fully determined to do.
Gustaf Salford: And on the service margin, I think you're right, gross margin, that you should expect with good service growth the higher gross margin, because it's a higher gross margin segment compared to solutions. But we had a lot of inflation impact on salaries and higher material costs as well, that we will expect to reduce going forward and get the productivity on the service expenses. That is a very, very important part of the gross margin journey, and that is new product launches. And this is to answer both, I think, Kristofer's and Mattias's question that the best way to raise gross margins in this industry is to launch new products, and it's also to launch new software. So, when you see Elekta Evo being then installed as well as software to be installed, Elekta Esprit to be installed, Elekta Unity to be installed, Elekta Studio to be installed, that's when you see the gross margin improvements. So, product launches, new innovations that will get to higher prices and thereby a grow -- growing gross margin as well. That's the key thing. But we are taking responsibility and also working a lot with our productivity as well as cost reductions across our P&L.
Peter Nyquist: Thanks.
Mattias Vadsten: Thank you very much.
Peter Nyquist: Thanks, Mattias. We will move to the next question, please, operator.
Operator: Our next question comes from Rickard Anderkrans with Handelsbanken. Please go ahead.
Gustaf Salford: Hi, Rickard.
Rickard Anderkrans: Hi. Thank you for taking my question. Sorry for the sound quality. So, when you say 14% and above EBIT margin, sort of, beyond 2024-2025 year, do you mean you will reach 14% or plus in 2025-2026 fiscal year? Is it an undefined horizon, just any year beyond 2024-2025 fiscal?
Gustaf Salford: Hi Rickard. No, we haven't put a specific date on reaching that, but we're saying we'll get to 14% and higher in the periods after 2024-2025. So, we haven't put a specific date. You're correct.
Rickard Anderkrans: Okay. So, we should not expect it for 2025-2026 then?
Gustaf Salford: That's not what I'm saying, I'm just saying that we haven't put a specific date on it.
Rickard Anderkrans: Okay. A question on the Chinese stimulus, trade-in stimulus program that's in the making. So, have you seen any signals of increased activity there or -- and when do you expect to see a pickup in order activity following this program? Thank you.
Gustaf Salford: Yes. Thank you. We see positive on the stimulus packages now in China post anti-corruption period of, say, 12 months. We expect -- we saw the orders coming back in Q4 and that's one of the highlights in this report. From China, we also saw Unity orders being signed with Elekta. So that was very positive. And going forward, I expect, and that's my experience with China, that often both -- when things stop, when they start, that goes quite quickly. So, talking to our Chinese organization. I'm positive on the year, but I cannot say exactly what month or quarter we'll see the bigger improvement, but gradual improvement throughout the year. Big demand for our products and Elekta has a very strong position in the Chinese market.
Peter Nyquist: Thanks, Gustaf. And thanks Rickard for those questions. Please next question, operator.
Operator: Our next question comes from Veronika Dubajova with Citi. Please go ahead.
Gustaf Salford: Hi, Veronika.
Veronika Dubajova: Hi, guys. Good morning. And hope you can hear me. Just a very quick one. Just curious on your description of the competitive environment and the demand environment. Listening to the other folks in the market, they have actually noted better CapEx dynamics, not more. So, I'd love to understand what you think is different for radiation oncology that is explaining the slowdown in the market dynamics that you've explained? Thank you.
Gustaf Salford: Thank you, Veronika. Looking at the CapEx medtechs that I know many of you do, in the last quarter, you have seen lower revenue growth numbers, close to zero or a couple of percent up that I think what you've seen in our space, if you say that's radiotherapy and imaging. So I think that was lower compared to the last five quarters, so to say. So, a bit of a slowdown. I think the industry is kind of positive on the need for our products and the installation going forward that that will open up. But, I think, I've seen from other industry parties that they're a bit cautious on the next couple of quarters and also a bit on China as well in the medtech CapEx environment. That's what I see. But if you take 12 or 18 months' perspective, I think we share the industry's positivity on driving growth and revenue growth and margin expansion.
Peter Nyquist: Great. Hi, Veronika, are you okay with that? Yup. Okay. Thanks, Veronika, for that. We'll move to the next question, please.
Operator: We're moving with Patrik Ling and DNB. Please go ahead.
Gustaf Salford: Hi, Patrik.
Patrik Ling: I mean, given that we've known that there's been this anti-corruption business in China for quite some time, I mean, what was it that changed since the Q3 report on that front that made you actually be so positive after the Q3 report that the Q4 would be strong that didn't really materialize during the sort of the last two months of the quarter? And how has that changed to make us in the market to actually believe that you have visibility? That's the first question.
Gustaf Salford: Yes. Hi, Patrik. I think, we show good numbers for orders in China for the Q4. We saw Unity orders. We saw underlying growth. That's what we're referring to, it's coming back. However, when you look at installations in China in the next half of -- in this half, Q1, Q2 this year, that's a difficult comparison, because the order numbers were low in Q3 and Q4 in the fiscal year 2023-2024. But what's positive and what we want to highlight, we have the same view that China was growing orders in the fourth quarter and that we're also showing in the quarter report.
Tobias Hagglov: Yes.
Patrik Ling: But given that you actually stated that EBIT would be in line with Q4 EBIT, I mean, that would imply that installations also in China were expected to be higher for Q4. So was there anything dramatic that changed that? Because, I mean, you gave the guidance when you had two months left of Q4?
Gustaf Salford: So, that was -- Patrik, that was not about China, that was about US and Europe. That's often a bit higher margin markets compared to the Elekta average. So that was not about China. It was more about mature markets being slower on the installation side in the fourth quarter.
Patrik Ling: Great. Okay. Second question. I mean, what will be -- I mean, what's the average time since you took orders for the orders that you will deliver from the backlog going out into fiscal year 2024-2025?
Gustaf Salford: We often say it's a year, roughly a year. Of course, it depends on product and how many years the orders are for. But often it's a year between when you take the order and installation. But it can be anything from say six months up to two years. And if you have multiple years, it could be a public tender, you could be up to five years, because maybe it could be three or four linacs throughout that period. So, it depends. But on average around one.
Tobias Hagglov: So you have a bit shorter time for our brachy products and average about the linacs and then a little bit longer here for the gamma knives and Unity.
Patrik Ling: Okay, great.
Peter Nyquist: Thanks.
Patrik Ling: And then my last question, I mean, you talked about improving gross margin, that you need new products be -- able to improve gross margins. But, I mean, if we go back a little bit and look at your gross margin, say, 10, 12 years ago, it was almost 10 percentage points higher than what you have today. Is that a sign that you haven't developed enough products, or is it the sign that the customers are actually much more skilled buyers than what they were 10 years ago?
Gustaf Salford: No, the key reason for that is where the growth has come through throughout those years. It's been high growth, emerging markets, driving a lot of that revenue. So compared to the revenue mix we then had 10, 15 years ago, that was relatively more than mature markets as I see it. So that's the main reason for it. When we say when we want to get back to pre-COVID gross margins, then we're more referring to the 40%, 41% that we saw in the period of say 2016, 2017, 2018, 2019. And then we saw the big drop to say 37%. So, the journey now -- the path is back to there, around 40%.
Peter Nyquist: Thanks. Thanks, Patrik.
Patrik Ling: Okay, great. Thank you.
Peter Nyquist: Thank you.
Gustaf Salford: Thank you, Patrik.
Peter Nyquist: We are now ready for the next question, operator.
Operator: Our next question comes from David Adlington and JPMorgan. Please go ahead.
Gustaf Salford: Hi, David.
David Adlington: Hey, guys. Hope you can hear me. Hope you can hear me okay. Just coming back to the first half, I just wondered if you're able to give us some quantification of how much we should be modeling to be down through the first half, just so we don't get any further surprises and assume we are down like in a mid-single digit. What underpins your confidence in what we should be approaching double-digit growth to hit your full year numbers in the second half? And then just on China, I just wanted to also get any thoughts not just on anti-corruption, but any tailwinds from the recently announced stimulus plan.
Gustaf Salford: Sorry, can you repeat the last two sentences, David? It was a bit bad line. I couldn't hear.
David Adlington: Yes. Just on China, so outside of the anti-corruption rolling off, there is some -- there's been some reports of stimulus plan for hospital CapEx. Just wondered what you were thinking there in terms of potential tailwinds in that?
Gustaf Salford: Yes, absolutely. So if you take the first year, we're not quantifying the exact effect in the first half, but it will be weaker than the first half of last year, that we can say. And then you have the pickup in the third and fourth quarter on the revenue and margin side. And I will repeat it, because it's so important. That is linked to more installation of Elekta Evos, Brachy Studio, Elekta ONE, all the products that we now developed and have been launching together with Elekta Esprit installations. So I have a strong product portfolio that will now installed in the second half driving that growth. I mentioned a bit earlier the China stimulus packages, but I'm happy to take it again that overall the China packages are very positive for Elekta. We have a strong position there. We have a strong local partner. We have local manufacturing and development facilities. So we expect those stimulus packages to drive CapEx, medtech CapEx, as well as radiotherapy in the quarters going forward, first as orders and then as revenue. What's positive with China is often quite a short time period between order to revenue. So, we expect that effect into this year as well.
Peter Nyquist: Okay. Thanks, David.
David Adlington: Thank you. Apology for my stereos.
Gustaf Salford: Thank you.
Peter Nyquist: Thank you. No problem. So, next question please.
Operator: Our next question comes from Sten Gustafsson with ABG. Please go ahead.
Gustaf Salford: Hi, Sten.
Sten Gustafsson: Yes, good morning. Sten Gustafsson from ABG. I want to go back to the -- your comments regarding challenging market conditions, and it sounds like you're saying that the CapEx spending on hospital level has slowed down in mature markets. What exactly -- or when did you notice this slowdown and what makes you confident that it will improve going forward? And -- I mean, your -- the installations you planned for Q4 were on old orders that had already been booked. So I'm not sure I understand the connection there? And also, if you could, my second question would be on -- if you had taken any orders on Evo already now, even though it's not approved yet?
Gustaf Salford: Yes. So we start with the first question on the conditions. When we talk about revenue, it's really about installation. So it took longer to install some of the products that we had in the backlog, especially then for U.S. and Americas as well as EMEA. So, it took longer. On the overall CapEx environment for orders, Sten, I expect that to take off at some point in time again, both in the U.S. And I think, as we always say in the U.S., Elekta has a good opportunity, because we have a low market share in U.S. We can grow that market share with our new product portfolio. So, we are optimistic on that. But in terms of installation, that took a bit longer in the quarter and we expect that to come back then those installations throughout the next year. Positive on China, also countries like India and Mexico and Indonesia, where I expect to see good growth both on orders and revenue throughout the next quarters, next years. So, I think that's the overall market conditions. And sorry, your second question that was?
Peter Nyquist: If you had taken any orders on Evo.
Sten Gustafsson: If you had taken any Evo orders?
Gustaf Salford: Yes. We need to have regulatory clearance for it, for CE Mark and FDA approval. So, we expect most of them to come in as orders after the summer. But we have many, many great ongoing discussions when it comes to Evo orders. I'm very positive about the momentum. And for those of you that were at ESTRO, the big trade show in Glasgow, I think you saw that Evo was the talk of the show. It was the key product launch at that very, very important trade show, and that will be translated into orders and revenue in next year.
Tobias Hagglov: And also, I can just add that there is also a willingness for pay for these extra feature functions that we equip the new solutions with, which is also healthy if you look at a more long term financial perspective.
Sten Gustafsson: Okay. Thank you. Just as a follow up on the first one, when you say it took longer to install, is that related to the -- that the hospitals were not ready, or is it sort of on your behalf that when you make the installations that there were some hiccups along the way? Or what exactly is the reason behind the longer installation time?
Gustaf Salford: Yes. It's not on our side, Sten. It's really about the projects, building works, et cetera, that's been taking a bit longer. Some of that industry has been pressured in places like Europe and US, and I'm sure you follow that. I think that will ease in the coming quarters, and we will have faster turnaround on the product buildings in hospitals and cancer centers and so on. And also expect the cost and inflation in that area to actually go down. Because one thing is sure, that both Europe and the US needs more capacity. They have huge cancer backlogs, they have a lack of staff, and they need efficient new innovations in radiotherapy field in linacs to make sure that they can take care of the cancer patients. And I believe that the product portfolio right now is very well suited to cater for that need. And of course Evo will be a highlight where you can both work with the personalization as well as the productivity for those patients. So when those building construction supply chains will become faster, we are very much ready to deliver on our new technology.
Peter Nyquist: Thanks.
Sten Gustafsson: Okay. Thank you.
Peter Nyquist: Thanks, Sten. So next question please, operator.
Operator: Our next question comes from Lisa Clive and Bernstein. Please go ahead.
Gustaf Salford: Hi, Lisa.
Lisa Clive: Hi there. I just had a few questions on the Evo launch and specifically around the design of this platform. So is this just an upgrade to existing machines? What sort of uptake do you expect in your installed base over the next, say, three years? And is it just -- and once those updates are requested, given that it's not delivery of a new machine, will there be a sort of shorter delivery time?
Gustaf Salford: Hi, Lisa. For sure. It is a new platform. It is a new machine. So, Elekta Evo is significantly improving image quality. It's enabling adaptive workflows and that's the key trend in the industry right now. And it's also both offline and online adaptive. So that you could -- with the image quality, with the upgraded image quality, the new image quality on the machine, together with the new software platforms, you can then do online adaptive treatments on a C-arm linac. And I think that's a big, big need in the market and that is what we will deliver on. I expect this to be a big part of our volumes when it comes to high end premium linacs. And this is very important as well, because this is a segment that I think Elekta and I are very pleased to have the market leading linacs in, because that's the segment we're also seeing more functionality, you see higher margins. So, that's a key launch for us overall. And I do expect that to be a big part of our volumes going forward, especially after the summer and onwards. It's also the capability that we can go to the installed base and with a significant upgrade enable the image quality as well as the adaptive workflows on Versa HDs in the installed base. So you have both of these two opportunities, but it is a new platform.
Lisa Clive: Okay. So, clearly, you’re selling new machines, but for those who want to hold onto their Versa HD for a while longer, they have the option for an upgrade basically?
Gustaf Salford: Yes. And I think that's the strategy, that's product strategy and that plan for Elekta is the right one, because a lot of our installed base really want a path to go to online adaptive treatments that will be a key functionality of radiotherapy clinics in the years to come.
Lisa Clive: Okay. That's clear. Thank you.
Gustaf Salford: Thank you.
Peter Nyquist: Thank you, Lisa. So, we're getting close to ours. So with Lisa's question, I think we will finalize the Q&A session. But before closing the call, Gustaf, you would like to have some final remarks.
Gustaf Salford: Yup. Thank you for all your questions and thank you for listening in. I mean, we have been driving profitable growth and improved working capital and cash flow situation in the fiscal year of 2023-2024. We are not pleased with the performance in the fourth quarter. But if you look for 2024-2025, we expect the first half to be weaker due to challenging market conditions and also tougher comparables in Europe and China. But during the second half, due to many of the drivers we have been discussing in the call, we expect sales and profitability to pick up from the new product launches as well as productivity measures. And that net sales for Elekta is expected to grow by mid-single-digit for the full year 2024-2025 with an improved margin. And if we look ahead then, based on the very strong customer interest we have for our market leading product portfolio and look beyond 2024-2025, we will drive an EBIT margin expansion to 14% and higher. So with that, I would like to thank you all for listening in and look forward to talk and discuss with you soon again. Thank you.
Tobias Hagglov: Thank you.
Peter Nyquist: Thank you.
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