EKTAY - Elekta AB (publ) (EKTAF) Q4 2023 Earnings Call Transcript

2023-05-25 13:48:09 ET

Elekta AB (publ) (EKTAF)

Q4 2023 Earnings Conference Call

May 25, 2023 04:00 ET

Company Participants

Cecilia Ketels - Head, Investor Relations

Gustaf Salford - President and Chief Executive Officer

Tobias Hagglov - Chief Financial Officer

Conference Call Participants

Kristofer Liljeberg - Carnegie

Rickard Anderkrans - Handelsbanken

Erik Cassel - ABG Sundal Collier

Veronika Dubajova - Citi

Julien Ouaddour - Bank of America

Victor Forssell - Nordea

Presentation

Cecilia Ketels

Good morning, everyone and a warm welcome to the Presentation of Elekta’s Year End and Fourth Quarter 2022/23. 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.

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

Before we start, I want to remind you that some of the information discussed in this call contains forward-looking statements. This can include projections regarding revenue, operating result, cash flow as well as products 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, here from Stockholm, and really, really thank you for joining our call.

So I’ll just take you a bit through initially, as I usually do, on our strategy Access 2025 and what we did in Q4, because during this quarter, our last quarter of the fiscal year ‘22/23, we continued to deliver on our Access 2025 strategy. Our focus was really to drive and secure profitable growth and reduce working capital. We continue to successfully deliver on our cost reduction initiative, and we launched a new software solution suite. And all of this is in line with our vision of – towards a world where everyone has access to the best cancer care.

So let’s turn to some of the full year achievements. So what you can see here is really the key parts of our Access 2025 strategy. And if you look at the driving adoption across the globe, our strategic milestone to provide access to an additional 300 million people in underserved market is well on track. And by now, more than 180 million people have gained access to radiation therapy, which is ahead of plan and something we’re very proud of.

Also an important part of our strategy is to go direct into the markets. And in February, Elekta acquired our Thailand distributor. If you turn to the customer lifetime companion, in October at ASTRO, the big trade show in the U.S., Elekta launched Elekta Care 360, which is our portfolio of customer services that really help enhancing clinical operations. It includes, for example, dosimetry, consultancy services, physics start-up services, and ElektaCare360 increases our value-added services, and it further strengthened our position as a lifetime companion to our customers.

When it comes to accelerating innovation, our new Leksell Gamma Knife, the Elekta 3, was launched this year and is now operating, treating its first patients in the U.K., Japan and the Netherlands, and very soon in the U.S. When it comes to Elekta Unity comprehensive motion management with true tracking and automated gating, this is a true milestone in the MR-linac paradigm shift. It was launched in October and received FDA approval in February.

And last but not least, Elekta ONE, our comprehensive suite of end-to-end applications just recently launched at ESTRO in Vienna, I’ll come back to that more later in the presentation. When it comes to partner integration across the cancer care ecosystem, it was in the quarter Elekta entered into a joint venture with Sinopharm in China to increase the adoption of radiation therapy to all patients in the country. And we are also very, very proud to announce that Mercurius Health equips the Robert Janker Klinik with integrated oncology solutions from Elekta and Philips. And this is really enabled by the agreement that we have had with Philips now and our strategic partnership.

If we now turn and look at orders and the markets in Q4, the demand for radiotherapy was very healthy, and it supported order backlog growth and a book-to-bill ratio of 1.24. If you look at the markets and the regions, in the Americas, orders were flat compared to last year. North America was slightly down driven by lower order intake in Canada. But throughout Latin America, despite all its regional economic challenges, growth continued due to increased demand for patient access to radiotherapy.

In EMEA, order intake declined by 4%. Europe had good growth from the Southern European markets together with Poland. However, the Middle East and Africa had negative order development mainly as a consequence of weak markets in Egypt and Turkey, as these markets continue to be negatively impacted by their domestic macroeconomic situations.

Whereas in APAC increased by 4%, the three largest countries in APAC, China, Japan and India, all showed double-digit growth during the fourth quarter. This growth was, however, largely offset by headwinds in the Australian market. And we ended the quarter, and that’s important to say, with a strong order backlog of SEK43 billion that will support revenue growth going forward.

So let’s then turn to revenue. So in the quarter, we showed double-digit revenue growth with strong performance for both Solutions and Service. Solutions revenue, as you can see here, was supported by continued improvements in the supply chain situations and strong installation volumes. Service grew with 7%, and it’s really growth across all our business lines. And I’m very, very pleased to see that the Service revenue is growing faster than installed base growth, you can see here on the slide as well. At the end of the period, Elekta had an installed base of approximately 7,150 devices, of which about 5,250 units were linacs, MR-linac or Leksell Gamma Knife systems. For the full year, we delivered 4% revenue growth, which was supported by significant improvements in the global supply chain situation during the second half of the year.

So if we turn to one of my favorite topics, Unity, and look at the development of our MR-linac, we’re really proud to see that Elekta Unity systems are in clinical use on 4 continents, with a total of 75 installed Elekta unit systems across the world. Clinical Unity systems show an impressive 99% uptime, and 100% of the Unity treatments are now adapted to the change position of the target and 6 are adapted to changes in shape of tumor. It’s really clearly demonstrating the Unity’s superior technology and capabilities to change patient outcome. More than 40 indications are treated, with prostate cancer being the largest number. We have seen more than 600 peer-reviewed publications and more than 4,000 patients recruited in the MOMENTUM study, making it a powerful foundation for research and innovation.

And now over to the strategic partnership with Sinopharm. This is really about increasing the adoption of radiotherapy. And it’s also collaboration with Sinopharm that will help ensure that Chinese patients will have access to the same high-quality precision radiation therapy, regardless of where they live. It’s a joint venture with Sinopharm, and they have the largest sales and distribution network in China. It’s about increasing adoption of radiotherapy across the country in underserved areas, it’s about expanding Elekta’s service offering, and it’s also about improving clinical operations at RT centers. So in summary, it’s about combining the high-quality offering of Elekta with the vast network of Sinopharm.

And if we then turn to the big launch we did at ESTRO, Elekta ONE, and this was after the quarter close in Vienna. And Elekta ONE is a comprehensive suite of end-to-end applications and is really offering clinicians more automation, more mobility and more time to spend with patients. And this is really important because Elekta ONE allows our customers to connect their existing product to this new innovative solution with no loss of functionalities, smooth transition to a new platform and continuous data integrity with MOSAIQ as a backbone. And this new Elekta software enables cancer care teams to plan and manage oncology-specific workflows more efficiently. And the goal is to increase our customers’ productivity with around 50% through this enhanced workflow management.

And with that, now over to Tobias for the financials.

Tobias Hagglov

Thank you, Gustaf, and good morning, everyone. Starting with the Q4 financials. Elekta’s revenue grew strongly in the quarter driven by a good conversion rate of our order backlog. Net sales increased 10% organically. Geographically, the growth was driven by APAC with a growth rate of more than 30%. Americas showed 4% growth with positive development in the U.S. and strong growth in Mexico. Europe had good growth in the quarter, but the Middle East and Africa held back to development in EMEA, summarizing EMEA to minus 1%.

Adjusted gross margin improved to 37.8%. Our adjusted EBIT margin increased to above 16% with higher sales and lower expenses. Foreign exchange rates had a positive effect on growth as well as on EBIT margin. Finance net rose in the quarter driven by higher interest expenses and revaluation due to hyperinflation in Turkey.

Our adjusted gross margin improved by 80 basis points compared to Q4 last year. The healthy net sales growth contributed positively with 300 basis points. The strong Solution growth as well as the geographical mix led to a total negative mix of 280 basis points. Foreign exchange rates had a positive impact of 260 basis points mainly driven by the strengthening of the U.S. dollar compared to last year. While supply chain conditions have improved and logistics costs are declining, inflationary pressure from higher material and component prices continue to put pressure on our gross margin. The net impact in the quarter was 200 basis points negative.

Then looking into our expenses in constant currency and adjusted for items affecting comparability. All in all, the operating expenses decreased by 7%, both year-over-year and sequentially, as we continue to see the results of our cost reduction initiative. Selling expenses decreased by 2% year-over-year in the fourth quarter. Sequentially, our selling expenses increased by 3% driven by higher level of in-person activities and inflationary pressure. Our administrative expenses declined year-over-year and even more so sequentially.

Net R&D expenses declined both year-over-year and sequentially. Gross R&D has continued to decline from the peak in Q1. And on a rolling 12-month basis, gross R&D ended at 13.3% of net sales. Net R&D decreased year-over-year as a result of lower gross R&D spend. Capitalization was in line with Q4 last year, while amortization was slightly higher.

For the full year, our revenues grew by 4%. All regions grew, and sales of Solutions as well as Services increased year-over-year. Our gross margin has improved, but was negatively impacted by inflation and higher supply chain costs, despite ease in supply chain disruption towards the end of the year. Revenue growth and FX contributed positively. All in all, our gross margin amounted to 38.1% for the full year.

OpEx decreased by 1% in constant exchange rates, with a sequential decline towards the end of the year. Our EBIT margin came in at 10.3%. Net financial items increased, and income tax rate decreased to below 22%. All in all, adjusted earnings per share increased to SEK3.11.

We have turned a soft start of the year to improve financial performance in the second half. Growth rates have increased. Operational costs have been addressed. Foreign exchange rates have turned to being EBIT margin accretive and the result is an improved operating margin of close to 300 basis points in the fourth quarter.

Since the beginning of the year, we have worked with our cost reduction initiative. It has progressed according to plan. Our spending within the year has declined with the estimated SEK200 million. We have reduced the run rate of spending by SEK450 million. The cost for implementing these savings amounted to SEK312 million, with SEK71 million impacting our gross income.

Then moving over to the balance sheet. Our working capital was substantially reduced in the quarter. Following the strong sales at the end of Q3 and in Q4, inventories decreased. Accounts receivables and accrued income improved driven by healthy cash collection. Also our liabilities improved in the quarter. In the fourth quarter, we delivered a record strong cash flow. EBITDA amounted to above SEK1 billion. Following the reduction of working capital, cash flow from operating activities amounted to almost SEK2 billion, resulting in an operational cash conversion of 76% on a rolling 12-month basis. Our continuous investments amounted to SEK417 million mainly driven by investments in our innovation pipeline. All in all, our cash flow after continuous investments was above SEK1.5 billion.

Our net debt to EBITDA ratio was, by the end of the quarter, below 1. In March, we refinanced maturing debt, which increased our debt portfolio duration to 4.3 years. We are continuing to link to funding to push for our sustainability agenda. And in addition to our sustainability linked bond, now we also have closed the sustainability revolver. This facility is not only linked to the social KPI of linacs in underserved markets, but also to our Scope 1 and 2 emissions as well as the Scope 3 target regarding suppliers setting own emissions reduction target that are Science-based. Including the undrawn revolving facility, our available funds are SEK6 billion. All in all, we have a strong balance sheet and a solid financial position. The Board suggests maintaining the high dividend level from previous year for ‘22/23. This means SEK2.40 per share, which represents a payout ratio of 97% of the net income.

With that, I hand over to you, Gustaf.

Gustaf Salford

Thank you so much, Tobias. And now over to the outlook. So today, we have published our new outlook that goes from the period ‘22/23 until ‘24/25, so the 2 next years, so to say. And if you set it in context, during the last years, the radiotherapy market and Elekta’s growth and margins have been pressured by supply chain challenges and component shortages. However, we have seen this significant improvement in the second half of ‘22/23 that we expect to continue. So from today, our outlook until ‘24/25 is net sales CAGR of above 7%, EBIT margin expansion and a dividend policy of at least 50% of net profit for the year.

So if we then look at the outlook looking into next year, we believe that the uncertain macroeconomic environment remains, but we expect our improvement trend to continue into Q1. But as always, we also believe that long-term market trends to support growth and investment in high-end radiotherapy equipment and margin expansion. So if I then try to summarize our Q4, we end this fiscal with a very strong quarter where we have managed to deliver double-digit revenue, which are record cash flow driven by low net working capital and high earnings. We have successfully implemented cost reduction initiatives, driving margins. And we have launched the Elekta ONE software suite at ESTRO, really strengthening our comprehensive product portfolio.

So thank you for the last year, and I really look forward to see you now in this fiscal year. And now over to you, Cecilia, again.

Cecilia Ketels

Thank you, Gustaf. Well, before we open up for questions, I’m happy to welcome you to our CMD that will take place in our facilities in Crawley on June 20. Please register to this event through the link that was sent out in the invitation press release, either you want to follow this on the web or on site. And for those participants on site, we will pick you up with buses at Gatwick, which is very close to our office. And it’s either if you come by plane or train to the Gatwick station.

So now we open up for the Q&A session. Please, operator, can you open up the first person in line?

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from Kristofer Liljeberg from Carnegie. Please go ahead.

Kristofer Liljeberg

Thank you. First, I just wonder if is it possible to quantify this negative effect from Australia, what orders would have been with the more normal Australia and for how long you expect this market to remain slow? And then I also wonder when it comes to the margin guidance, of course, the fiscal year that ended had large negative effects from hedges. Adjusting for that, I think the underlying EBIT margin would have been around 12.5%. Is that what we should see as a base now when you say margins should improve from here? Thank you.

Gustaf Salford

Thank you, Kristofer. I think I will take the first question, and Tobias will take the second question. So if you look at the APAC region, it was really strong growth, as we said in the call, in the three main geographies, China, India and Japan. But it was a very weak development in Australia due to that they work – they are working around their reimbursement levels and so on in the country. That had a bit driven the lower orders there. I don’t have the specific numbers excluding Australia, but let us come back with that. And for the margin question – yes, sorry.

Kristofer Liljeberg

When it comes to orders, I think expectations were for orders to grow at least mid-single digits, so when you say that you should grow top line more than 7% – or sales more than 7% organically in the coming years, of course, a lot of that comes from converting the backlog. But do you also see orders growing in that range now going forward on a more annualized...

Gustaf Salford

Yes. We don’t guide on orders, but we see a strong demand. And I think it’s also important to look at the order levels. So if you look at the order book to bill ratio, so kind of orders divided by revenue in the quarter, you’ll see 1.24. So it’s still at very healthy order levels to support the revenue guidance of more than 7%. Then exactly what the orders would be going forward, that’s not something we guide for. But we see a healthy market in the coming years as well, supporting the revenue guidance. And I think we will come back more to kind of the market dynamics and looking through region by region and so on at the Capital Markets Day in a couple of weeks’ time.

Kristofer Liljeberg

Okay, thank you.

Tobias Hagglov

Kristofer, nice to talk to you again. Talking about the exchange rates here, so you are right that looking into this fiscal year that has passed, we actually have had a negative impact from that reporting line exchange rate differences. Looking into the next year, we will have some negatives here starting at the year and then flattening out. So that negative impact reported from FX will be less. If you look at the total FX impact hitting most of the P&L rows, FX will be a positive contributor to the year-over-year performance into next year.

Kristofer Liljeberg

My question is when you say that you would improve the margin, of course, you will have automatically improved margin from less negative hedge effects.

Tobias Hagglov

Right.

Kristofer Liljeberg

So would you expect margin to improve if we strip out that accounting effect?

Tobias Hagglov

We will have a healthy contribution here from net sales growth and a good cost control. We still see a pressure on the gross margin. But all in all, we see a margin expansion into the year where FX is one of the contributor, yes.

Kristofer Liljeberg

Okay, thank you.

Tobias Hagglov

Thank you.

Gustaf Salford

Thank you.

Operator

The next question comes from Rickard Anderkrans from Handelsbanken. Please go ahead.

Rickard Anderkrans

Great. Good morning. And thank you for taking my question. So two for me, please. I want to get back a little bit to the EBIT margin guidance there. And the base for the EBIT margin expansion ambition is now 3.5 percentage points lower, looking at adjusted EBIT. Should we interpret the new guidance as a significant cut to your EBIT margin ambition for the year ‘24/25? It would just be very helpful to understand the sort of ambition and the delta on the EBIT margin expansion ambition. So starting there. Thank you.

Tobias Hagglov

No. What we are saying, I mean, we will drive margin expansion, and our vision is to come back to the levels that they have been at. So that is what we will do here.

Rickard Anderkrans

So pre-pandemic sort of levels is still reasonable then for ‘24/25 in your ambition. Or how should we interpret that?

Tobias Hagglov

We don’t provide with specific dates, but the ambition is absolutely to come back to those levels, yes. And I think there are good reasons for that. And if you see – if I may add to that, and if you look at the financial performance throughout this year and look at where we started here in Q1 and Q2 and then see the progression here into Q3 and Q4, that has been a healthy financial development driven by healthy net sales. We picked up that growth rate driven by that. We have successfully worked with our cost reduction initiative. So – and we’re determined to improve going forward as well.

Rickard Anderkrans

Alright. Thank you. And second question, please. So your MR-linac competitor is seeing some turbulence at the moment. Do you expect to capture any of that backlog? And have you seen meaningful increase in interest for Unity recently? And also if I could slip in another one. What’s the total order number for Unity compared to the plus 120 orders you communicated last year? Thank you.

Gustaf Salford

Thank you, Rickard. I’ll take that one because I was just down at ESTRO last week, the big radiation oncology show down in Vienna. And I think the – one of the biggest interest was, of course, Elekta ONE, but the other one was Unity in MR-linac overall and MR and RT at the show. So I think ViewRay, as you said, they have had a bit of financial difficulties over the last couple of weeks and months here as well. However, for us, I think having Unity as part of our portfolio and driving it forward is really a key thing for our growth going forward as well. So I think that’s important. Throughout the last couple of years, it’s been a bit lower Unity volumes because of pandemic and supply chain and so on. It’s significant projects, but I see it very positively going forward. And to your questions on the year, we were around 20 Unity orders in the last year. Going forward, I expect higher numbers, of course, compared to that. And I think what we see in the sales funnel and opportunity in the market is to support good Unity growth going forward. And it’s just amazing to see what are our customers, partners, clinicians are doing with the machine, treating cases that before needed 25 fractions with two and also doing sometimes simulation-free treatment. So it’s just amazing to be part of this journey, and I also see a positive trend going forward.

Rickard Anderkrans

Thank you. That’s very helpful.

Operator

The next question comes from Erik Cassel from ABG Sundal Collier. Please go ahead.

Erik Cassel

Hi, good morning, Gustaf and Tobias. So first, on cash flow, very good this quarter, but I understand that there are different payment terms for the tenders in Italy and Spain. I mean, is this something that has tied up any working capital now or will that happen more as we come closer to – started deliveries now after summer?

Tobias Hagglov

I would say both. But actually, what we – we have had collection according to our contracts with regards to the tenders in Spain, and we will have further collection. So, that is part of the cash flow that you see. But I would look at it more broadly that we successfully have been driving working capital here, as we stated in the Q3. And it also follows the sales pattern here where we had a strong sales towards the end of Q3 and in Q4, and that we have successfully and a good cooperation with our customers work with. So yes, it’s according to plan and following the season pattern here.

Erik Cassel

Okay. And then you bundle inflation and supply chain costs together now and quoted as a 200 bps headwind. I mean is it possible to unbundle that to see how much inflation impact there is here?

Tobias Hagglov

Yes. So actually, what you see here in terms of the – that component, so you are absolutely right that it contains different items. What we see here is actually that supply chain conditions have improved. Logistics costs are coming down. When you look at the other items in terms of the raw materials as such, it’s to a large extent components for us, which are discretionary deals. There, we have higher prices for these material and component prices, and that is what you see here in the net impact, impacting the gross margin in the quarter.

Gustaf Salford

And then I think you can also say that, of course inflation results in salary increases as well.

Tobias Hagglov

Yes.

Gustaf Salford

Primarily often in the first quarter of Elekta’s fiscal year because that’s where we increased salaries for our employees. But – and we are then working with offsetting some of those effects with the excellence initiatives we have been driving and cost reduction initiative. But also we will continue to focus, of course on excellence initiatives to offset that effect. So, I think that’s another driver in the gross margin as well as SG&A and R&D costs and so on. And as…

Erik Cassel

Okay. I guess I won’t get a number on it. But can I ask instead, like, is there more to come through from lower freight costs and all the, I guess 300 bps to 500 bps that supply chain costs was a headwind last year? Is it possible to see more – freight cost coming down more and becoming more of a tailwind, or have you seen the full effects of that normalizing yet?

Tobias Hagglov

No, I think we have a favorable trend here in terms of supply chain and logistics, so that is a positive trend in it. And then also take into consideration the salary inflation that will come here in Q1. But those items that you mentioned, we have a favorable trend on it.

Gustaf Salford

And when we talk to our logistics providers and look at the logistics costs, I think you will see both an improvement versus last quarter, let’s say, and last year’s first quarter going into the next year, just to give a bit more flavor on your question. And I also want to come back to Kristofer’s question. We have checked what APAC order growth was excluding Australia in the quarter, and that was plus 14% compared to then what we report for the whole region of plus 4% in the report, so plus 14% for APAC, excluding Australia.

Erik Cassel

Okay. Perfect. Thanks very much.

Gustaf Salford

Thank you.

Tobias Hagglov

Thank you.

Operator

The next question comes from Veronika Dubajova from Citi. Please go ahead.

Veronika Dubajova

Hi Gustaf. Hi Tobias and thank you guys for taking my question. I have two, please. One, I just want to go back to that mid-term margin ambition. I mean obviously, in the past you were a lot more precise. And if I go back to the guidance you have given back at the end of fiscal ‘21, the ambition was to get to that 14% improved versus that 14% margin that you achieved that year. So, I am just trying to clarify. I think Tobias, your comments about wanting to return to the pre-COVID margin, when you say that, are you talking about the 14%, or are you talking about the pre-COVID margin, which was more like 10% to 12%? And I guess if that is still the ambition, why have you removed it from the mid-term guidance? I will ask that, and then I will have a follow-up after that, but maybe we can get that out of the way first.

Gustaf Salford

Hi Veronika. So, a bit more flavor on the guidance and, of course, it’s a very important topic, how we see the growth and the margin expansion going forward. So, as I have said, strong growth, more than 7% margin expansion, you have seen it in the second half. We look into the first quarter, we see a good trend into that, a strong development. Going into the next year, same message, strong margin expansion and then also in the second year. We want to come back to the previous levels where we started this kind of period and higher. And then we don’t have an exact date for that and a certain percentage. But I hope that gives you kind of confidence in our guidance on the margin expansion going forward. And as we say, many of the trends we see now impacting our gross margin, but also EBIT margins are favorable, and you have seen also our cost reduction initiative really bite in the costs in Q3 and Q4 last year. We will, of course give more inputs on the drivers for this at the Capital Markets Day in, what is it, three weeks’ time. And I think that’s an area that will be a big topic at that day.

Veronika Dubajova

And I appreciate it. That’s really helpful color. I am just surprised. I mean if you are feeling more constructive on gross margin, if you have delivery on these cost savings, why are we not getting that commitment to that 14% margin?

Gustaf Salford

I think for us…

Veronika Dubajova

What’s the offset, yes?

Gustaf Salford

I think what we really, really focus on, Veronika, is quarter-by-quarter improvement in everything we do from the top line to the gross margin, to the EBIT. That’s what we want to show. We want to work with prices. We want to work with installation. We want to work with COGS initiatives. We want to improve the gross margin as well as driving efficiencies in our R&D and SG&A organizations. I think that is the message we want to send out, and that’s what you will see over the coming quarters. And then we will come back and we will come back to higher levels as well, and that’s how we see the plan for the next coming 2 years.

Veronika Dubajova

Okay. That’s very helpful. And then if I can just ask on the shape of the margin improvement as you think about fiscal ‘24 versus fiscal ‘25, is it even paced? Is it front loaded or back end loaded? And then I will jump back into the queue.

Gustaf Salford

Again, I think it’s quarter-over-quarter, that’s how we focus exactly. You know how Elekta is product-based, so it’s not a smooth line, but it will be year-over-year improvements.

Veronika Dubajova

Okay. Thank you, guys. Appreciate it.

Gustaf Salford

Thank you, Veronika.

Operator

[Operator Instructions] The next question comes from Julien Ouaddour from Bank of America. Please go ahead.

Julien Ouaddour

Thank you very much. Good morning everyone. So, I have a couple. So, the first one is just a follow-up to Veronika’s one. With the previous guide, we had some help just to model the margin. Could you just help us just saying, should we expect still to be close to 13% or 14% in 2024, 2025 or like just below this level? It’s just that we don’t really understand why you have changed the guidance or like rebased or cut the guidance if you still believe that there is some margin expansion? That’s the first one. And then the second one, just on R&D capitalization, you said, like, in the past that it should come down – like capitalization should come down, amortization up. Still not really clear – clearly the case today. Could you maybe tell us what to expect for this in terms of R&D over the coming years and next year? Especially, what kind of margin headwind could we expect if you increase amortization for next year? Thank you.

Gustaf Salford

Thank you, Julien. Yes. I will start with the first question, and Tobias will take the capitalization and amortization one. But to the first question, I think it’s the same answer and message that I also said to Veronika’s question that it is really about quarter-by-quarter improvement, back to the levels we were before and also have an ambition to go higher, of course in the coming years. It will be year-over-year improvements, and that’s how we see kind of a margin expansion journey going forward. And to the amortization and compensation question, Tobias?

Tobias Hagglov

Yes. Hi Julien and thanks for the question here. Yes. So, I mean if you look ahead here on the development of this item is that what you can expect here is that in terms of the gross R&D year-over-year, a slight uptick given the inflationary pressure. In terms of capitalization, that will essentially be on par with current year, and then amortization will increase somewhat. So, what does that mean then in terms of the net R&D here moving into next year. Yes, that will be slightly higher, both in terms of in total amount as well as a percentage of sales, and that impact we will have.

Julien Ouaddour

Perfect. Thank you. Thank you so much. And sorry again to ask a question about it, but just a very quick follow-up on the first one on the mid-term guidance. Would you say it sort of cuts of the mid-term guidance or not? I mean in your view, how do you – like how do you see it?

Gustaf Salford

No, the mid-term guidance was margin expansion. That’s where we started ACCESS 2025 journey. And we have seen, as I mentioned, lower revenue growth, 4% per year. That’s in line with the market. And we expect the 6% to 8% at that point in time. The margin expansion going forward is what we see. And now I think and believe and support the more than 7% revenue growth in the coming 2 years.

Julien Ouaddour

Okay. Perfect. Thank you very much. Have a good day.

Gustaf Salford

Thank you.

Operator

The next question comes from Victor Forssell from Nordea. Please go ahead.

Victor Forssell

Thank you so much. Just a quick one from my side, I think last quarter, you talked a little bit more about price than you did today. So, just curious to hear a bit more about how you view the order backlog that you have in terms of price when in time you think that will become more supportive if that’s already next fiscal year. Any sort of figures that you can provide us would, of course, be very helpful, but at least a bit of a discussion around price of – especially solutions and not service. Thank you.

Gustaf Salford

Thank you, Victor. And of course, a great question. We put a lot of emphasis and focus on it during the last year because of the inflation. So, we have seen good improvement in our order backlog. And the orders we get in on the price level, really positive to see. That effect will of course spill into the next year and years from our backlog. We will continue on this journey with price into the next year, of course, to offset the inflation on our COGS and salary increases and so on. So, we have seen some of the effect already in this year, but primarily will come into the coming quarters here with maybe focus on the second half of the year.

Tobias Hagglov

Towards the end of the year where you see the P&L impact, so, yes, that is what you will see.

Victor Forssell

Thank you. And can you just remind us, when we look at solutions, how much any given year stems from the backlog and how much is actually incremental orders for that specific year?

Gustaf Salford

I think the majority is – it will be around 80%, I think on the solutions, something like that.

Tobias Hagglov

Yes.

Gustaf Salford

That comes from the backlog, if you guys look at the solution part, the 60%, let’s say, of our 100% revenue. So, the majority is from the backlog.

Victor Forssell

Great. Thanks a lot.

Cecilia Ketels

Okay. So if there are no more questions, we would like to thank you for listening in today. And please don’t hesitate to reach out if you have further questions later on. And we wish you a good remaining day. And see you on the road. Thank you.

Gustaf Salford

Thank you.

Tobias Hagglov

Thank you.

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Elekta AB (publ) (EKTAF) Q4 2023 Earnings Call Transcript