Ion Beam Applications SA (IOBCF)
Q2 2022 Results Conference Call
August 31, 2022 09:00 AM ET
Company Participants
Olivier Lechien - Corporate Communication Director
Olivier Legrain - Chief Executive Officer
Soumya Chandramouli - Chief Financial Officer
Conference Call Participants
Matthias Maenhaut - Kepler Cheuvreux
Presentation
Olivier Lechien
Welcome everybody to the IBA Half Year 2022 Results Conference Call. [Operator Instructions]. I would now like to turn the conference over to Olivier Legrain, Chief Executive Officer of IBA. Olivier?
Olivier Legrain
Thank you, Olivier. Thank you, and good afternoon, everybody, especially our two guests here in the room and more to come. And thank you for joining us for our half year results call. I'm Olivier, the CEO of IBA and I'm here with many, many people, but I will give the presentation today together with Soumya Chandramouli, our CFO.
Before we start, I'd like to draw your attention to the company disclaimers on forward-looking statements. So first of all, to start today. I think I'd like to especially thank the entire IDA team for their continued hard work over the first half of this year, even though it has been more of a normal year -- it's still a bit challenging for many, many reasons that I think everybody knows, especially our colleagues in China that are still some time in lockdown and that we have our time to visit so far. I'm confident it will change soon.
So we are pleased to see that the hard work is paying off with the incredible resilience of our business, and I'm delighted to report on our positive progress over the years. As always, I will give an overview of our business and progress in the first half. Soumya will then summarize our financial statement. And then after, I will discuss the outlook, and we will be happy, of course, to take any questions. Looking at the overview of the numbers. As you know, the group is funded on our expertise in particle beam in technology. We have 4 core business lines, proton therapy, RadioPharma Solutions, Industrial Solutions and dosimetry. Each of these businesses continue to perform extremely well.
We see actually quite an acceleration of the demand across the board for our products. And we -- they will all be profitable or they were all profitable in the first half of 2022. The key drivers of the business unit. Well, for each business unit, we made progress. We have increased our share of the patient QA market. With strong order intake from those inventory in the first half. You have seen that we have announced yesterday also, let's say, a partnership -- a strategic partnership with [Candidus] in Sweden, which will further strengthen our product portfolio in the patient QA segment. As you may have seen, we come on top of another acquisition in the first lab in Canada, MODUS. Where they're fully integrated yet. So I tend to forget the original need. In proton therapy, we have seen an acceleration in the congestion of the backlog, which we anticipate will continue in the southern lands.
I'm very happy about the partnership with CGNNT and the first result we can witness there. We have announced already some sales of the first proton therapy center and CGNNT was able to complete. Also in proton therapy we were pleased to be able to partner with very, very strong name in academia and industry through the recently launched ConformalFLASH Alliance and with the aim of bringing ConformalFLASH proton therapy to the clinic. Our radiopharmaceutical partnership with SK Capital in the development of Actinium-255, 25. I'm a bit tired. And with NorthStar, for the production of isotope continue to evolve positively.
We continue to develop a new area for our business with the IKON, the new 30 MeV cyclotron of the production of mobile isotope -- and last but not least, on the medical device sterilization side, the IBA Rhodotron, supporting a very strong increase in order of volume, and it's confirmed, let's say, or even more so important strategically for IBA. Now let's take a look at some of our key highlights for the first signs of the year. I will now take you through the key operational highlights. In terms of the business unit progress, we were pleased to sell 4 new proton therapy system, 1 Proteus PLUS in China and 3 Proteus ONE machine in the U.S. and Europe, which is an excellent start of the year.
Other accelerator have seen record order intake. 21 systems were sold in the period and one announced already post the period end. The pipeline remains extremely active. This was compared to 14 machines sold at the end of last year. So, it will be a significant growth in the demand for our products. Our new proton therapy installation and line in other accelerators started in the first half despite the pandemic-related restrictions with two new proton therapy centers starting to generate revenues. As mentioned, backlog is at a record high. And while there has been good conversion with proton therapy, conversion across the business, especially in other accelerators, remains in the first half impacted by macro-economic challenges, as well as COVID-19 related travel restrictions.
The backlog sits €1.2 billion, with equipment backlog reaching another record high at almost €500 million. So then this fee has proved a resilient beam connection with order intake up 11% on the same period last year. The acquisition of the Canada-based MODUS medical device completed earlier this year, complementing our dosimetry portfolio and increasing our dosimetry footprint in North America. Our strong performance is confirmed, let's say, by a strong balance sheet with 202 million gross cash. The first time we are above 200 million, I believe. And €137 million net cash. It is also worth highlighting that we completed the share buyback program that we initiated in 2021, representing a total over 300,000 sales.
Moving to post period end highlights. Recently, we announced a multiyear research collaboration with the head of the option from Cancer Center at the University of Washington for ConformalFLASH. More recently, we shared the news of our selection as the only leader qualifying for the second round of the so-called Spanish Ministry of Health tender to supply 10 proton therapy units in the country. This is clearly a very significant and very exciting opportunity, and we really look forward to sharing further ability in the future. The RadioPharma side this week, we were pleased to announce the fourth cyclone items since the product launched to Chengdu new radio medicine technology company. Finally, yesterday, we announced our latest ultimate renewals with the agreement of the strategic alliance with Candidus including IBA acquiring 9.1% stake in the company. I now will pass on to Soumya to focus on the summary of finances.
Soumya Chandramouli
Thanks, Olivier. Hello, everyone. You'll see a quick snapshot here, as usual, of the financial highlights announced this morning. A few highlights that I will mention. Group revenue was $160 million, up 17% versus the last year with the excellent order intake, of course, as activity picked up -- you've seen that we've reached 175 million in gross order intake for equipment versus around 228 million last year for the full year. So we are really on progress towards beating our last year's order intake levels, but of course, reaching a record order intake full year.
The gross margin was 39% of an improvement versus 33% last year, but this was influenced on the one hand, by increased activity in proton therapy backlog conversion by a rather high-margin product mix, but also by indemnities recognized following the bankruptcy of Rutherford in the U.K. and Forex gains on the strengthening of the U.S. dollar. Group ReBIT was €4.6 million. The increase from last year, reflecting all of the above, but also influenced by inflation, investments and OpEx and some write-offs with a net loss of €1.7 million. Order intake was very strong. And in the period, there were 4 proton therapy rooms and 21 other accelerated systems sold, as Olivier already mentioned earlier. That's quite a record. And we reported another record equipment of service backlog of €1.2 billion, and the pipeline continues to remain extremely strong across all of our businesses.
Finally, our balance sheet is very strong with €137 million net cash. And that provides us with significant stability for the future periods despite the current economic situation, if you see. Look at some of the numbers in more detail. The group sales in the first half were €160 million, up 17%, as I said from last year, largely due to increased activity and accelerated backlog conversion as well as the Rutherford impact. ReBIT profit increased to €4.6 million from €3.9 million last year, reflecting strong top line and improved gross margin and the indemnities on the Rutherford bankruptcy, offset by increased investment or inflation, which led to higher OpEx.
We've been catching up quite a bit of investment since COVID, and that certainly has an impact. And we increased FTE by more than 4% over the period to support growth and increasing operations in our businesses. That's around 50 hires over the period. Total group loss decreased to €1.7 million, an improvement of $0.2 million from last year. On the balance sheet, as I already mentioned, we reported a gross cash position of €202 million. That's an absolute record, I think, since the history of IBA and $137 million net cash. We also have €37 million undrawn short-term credit lines available, so significant capacity to be able to invest in future, too. In proton therapy and other accelerators, sales were up 20% from last year, reflecting all the things we just spoke about earlier, despite some travel difficulties, and I've already mentioned, the fact that in China, we're not completely out of the lockdown yet in all regions.
There were 4 new sales in proton therapy and 21 new sales for other accelerators in H1, with one more machine sold and other accelerators and actually more in 5 accounts today after in the period and the pipeline continues to remain very promising. Now this compares with 1 PT sale last year for the same period and 13 sales for other accelerators in H1 2021. On the proton therapy equipment front, if you look more in detail, backlog conversion resulted in revenues improving by 15%. 4 new orders we received in H1 with a total of 24 projects in progress now and services, which are, of course, an important revenue stream for us, we've also seen very strong performance with 2 new PT centers starting treatment in Asia and in the U.S. 9 new installations started in other accelerators and 18 new should start in H2 as some of these issues are resolved.
So we really expect revenue recognition to catch up significantly in both proton therapy and other accelerators. If you look at the group order and take a little bit more in detail, indeed, it's extremely high at GBP 177 million already at the end of H1. And we can see that we are approaching 2021 year-end levels after 6 months. The same goes for the number of PT rooms sold and for order intake of PT and other accelerators, where we've already exceeded the previous year and are approaching year-end 2021 numbers. We also have a very high book-to-bill ratio in both PT and other accelerators as well as in dosimetry, if you look at it. To the extent that we are seeing higher order intake, than we are burning backlog.
The top is very positive for us, and we hope to be able to maintain that into 2023. We have growing sales in Rhodotron, especially for disposable medical device and bioprocess of sterilization as well as for radiopharmaceutical equipment, thanks to the newly developed machines that allow us to serve a larger range of isotopes for our customers. Now looking more specifically at backlog. This has increased to an all-time high of €497 million, as you can see, up from €449 million end of 2021. Of this, Proteus ONE now represents 37% and other accelerators, an impressive 38. On the services front, revenues were up more than 11% to €51 million, growing for the fifth consecutive year despite the Rutherford bankruptcy. Services backlog is now at €661 million, and the decrease due to the reduction of the Rutherford sites. 38 IBA PT sites are now generating service revenues worldwide, and these sites have remained fully operational.
Now taking a look at our dosimetry business unit, which had a very strong H1, driven by the MODUS acquisition on top line, conventional radiation therapy and medical imaging performance. Order intake also was strong at €20 million, and increased 1%. Backlog grew to a record €20.8 billion versus the end of '21, and we announced the strategic alliance with Canada that Olivier already explained. However, EBITDA decreased to €1 million versus last year, partly as a result of inflation, but also due to additional investments that we've been making in supply chain management to support future orders, the high order intake and high-cost one-off purchases related to the shortage of electronic components in the worldwide market.
Now I'll hand back to Olivier to take you for a more in depth business uptake...
Olivier Legrain
Thank you, Soumya. So if we look more closely at proton therapy performance, you can see the geographical split between the 4 contracts signed in the first half, 1 in China, 1 in U.S., one in Milano and one in St. Petersburg and, 1 new installation started in the U.S. As already discussed, the conformal Flash Alliance was launched in June of this year, including the University of Pennsylvania, UMCG Groningen research amongst others, and we look forward to providing updates in the due course. DynamicARC development are also being made with the recent PTCOG presentation showing the potential for proton therapy in the [indiscernible] cancer when using DynamicARC. Looking more broadly at the proton therapy market, we have seen the resurgence in the proton therapy market has continued throughout 2022. IBA has maintained its market-leading position with 60% market share.
IBA has also maintained its leading position of 44% of our proton therapy rooms in operation and 41% for the total market share in proton homes. We continue to work hard on innovating in proton therapy technology, which is key to IBA proton therapy strategy and comes under basically 3 main activities, Motion Management, DynamicARC and ConformalFLASH. With Motion Management, we enable the treatment of more patients with confidence, development for DynamicARC and more efficient and simple way to deliver proton therapy are ongoing at a Beaumont Proton Therapy Center. ConformalFLASH is a potential game changer in the radiation therapy market. In June this year, we launched the Alliance, the first collaboration of its kind between academia and industry to accelerate the delivery of the technology to patients. Efficiently further collaboration on the technology was recently announced in -- with our friend in Seattle.
As part of the collaboration, IBA will equip the proton therapy system and the proton gantry treatment at the Fred Hutchinson Cancer Center with ConformalFLASH research on functionality, which will enable preclinical research on FLASH therapy. Looking more closely at the Radiopharmaceutical business where IBA leads the market for radioisotope production accelerators, including high-energy machine at January, so the launch of the low-energy cyclotron, the Cyclone KEY, increasing accessibility for small- and medium-sized hospitals to diagnose solutions and enabling them to develop RadioPharma product in house. Our Cyclone IKON, which was launched in 2021, has seen a good traction. Earlier this week, we announced our latest IKON sale. The agreement was signed with CNST, a Chinese manufacturer and providers of medicalized, platform oncology.
The ongoing SCK CEN partnership is progressing well with several technological achievements and strategic milestones on the horizon. More broadly, we are seeing growing demand for radiopharmaceuticals and we will keep the market updated on the latest milestone. Moving to Industrial Solutions, Rhodotron, IBA's high-power beam accelerator continue to be the key to this segment. In the first half of 2022, we have seen great progress with the accelerator adoption of E-beam and X-ray based sterilization methods by key players. This continues to be interesting X-ray and E-beam solutions as alternatives to gamma, which is under supply pressure relative to an oxide, which has been impacted by toxicity issue.
The collaboration with NorthStar Radioisotope continues with 2 beamline for the product, for the productional value. In Dosimetry, we have seen a particularly busy front on the collaboration and acquisition with the QA agreement signed in March with Elekta and the acquisition of MODUS, we have already talked about. This week, we announced the acquisition of 9.1% of Candidus as part of a strategic alliance. And hence why, we have seen strong order intake for patient dose-monitoring device on original equipment, the manufacturer. This has been the result of forward planning by the OEMs to be strategic stocks.
Finally, we remain focused on broadening and strengthening the competitiveness of our product offering, particularly in patient QA. This slide will be familiar to you and outline our commitment to acting as a responsible corporation, we'll be updating on the progress made to our impactful social and governance goal at year-end. Now over to Soumya to talk about numbers in more details. Soumya?
Soumya Chandramouli
Thanks, Olivier. So as mentioned earlier, group sales were up 17% in spite of the macroeconomic challenges with an exceptionally strong order intake and strongly improved backward conversion for proton therapy, but it also included the amenities on the Rutherford contract. In other accelerators, backlog conversion weakened weathers last year as a result of pandemic restriction and some supply chain challenges, but also due to timing simply related to the order intake. It is expected that this improves in the second half with a strong increase and a doubling in the number of installations versus H1.
Gross margin improved in absolute value as well as a percentage of sales versus 2021, thanks to product mix revenue recognition on some high-margin contracts and a positive impact from the Rutherford indemnities. The 21% increase in OpEx reflects a rise in activity and an acceleration of large investments in R&D for future growth. Alongside this, there was also an increase in sales and marketing costs as activity returned to pre-pandemic levels. There were also increasing levels of inflation, which impacted the cost line. We are seeing around 5% increase in personnel costs from inflation but also to some extent in material costs, which impact higher up in the P&L -- as a result of the above, IBA reported group ReBIT of €4.6 million and a net loss of €1.7 million.
Now turning to the cash flow statement. There was a positive cash flow from operations driven by higher order intake and related down payments. There was an increase in cash flow user investing with higher CapEx as we invest in infrastructure and R&D, as I explained earlier, and some M&A-related cash outflows from the MODUS acquisition. The cash outflow used in financing activities basically included repayment and borrowings on the repurchase of shares. I won't go into the details of the balance sheet, but it's worth reiterating that both is closed cash position and less cash position remain very strong. We have an all-time high backlog for proton therapy and other accelerators. And we have been optimizing our working capital to ensure that we use our cash to the best as possible. I'll now hand back to Olivier to discuss the outlook.
Olivier Legrain
Thank you, Soumya. I think we have a good flow of good news. I think the strong performance of IBA has been seen across all the business lines, and the prospects continue to be quite good. The order intake has rapidly accelerated across all business lines, and there is potential for this to further accelerate, especially in proton therapy. We have talked about the Spanish tender and also in sterilization business with INDux training, in very high demand across the globe. The pipeline remains extremely active in the U.S., in Asia and in Europe, it provides us with significant visibility for the period ahead. The growing service business provides further visibility at a stable recurring revenue stream and backlog remains high.
Alongside this, our robust balance sheet and record high cash position provide us with significant opportunities for both organic and inorganic growth. It's worth briefly mentioning the situation in Russia. We have operations ongoing in the region and has not seen a material impact on our business, although the dosimetry business has been affected by some bans. And for the business more broadly, there have been some challenges with circulating cash. The broader geopolitical situation remains complex and as a result in supply chain and inflationary implication, pressures of our global business, including IBA. We are managing these challenges proactively.
However, there is some uncertainty as to how the situation will unfold. As a result, we want to remain cautious, and we are unable to provide a reliable financial guidance at this stage. I think we have our financial calendar to flag some key dates of the year ahead. We plan to do a Capital Markets Day at ASTRO in October. So, if you want to join us in San Antonio, I believe, Texas, you are welcome. The date is yet to be confirmed. And as usual, we'll publish our quarter 3 business update on November -- many thanks for your time today. We look forward to updating you soon as we remain focused on delivering our strategy across all our business lines. We are now, Soumya and I, pleased to take your questions. Thank you very much.
Question-and-Answer Session
A - Soumya Chandramouli
Thank you, Olivier. Maybe we can start with people in the room?
Olivier Legrain
Yes, we'll start with people in the room. They deserve it.
Unidentified Analyst
Maybe let me get going then. Good results. It's very strong activity, in my opinion. So my first question will be regarding to that front. You have these massive backlogs, almost €500 million in equipment -- what I'm wondering going forward seems almost certain if the situation does not deteriorate and it improves most likely to have very strong top line figures in the second half of the year and '23, '24. There were 18 systems starting installation on. How should we look at the cost line? The margins, I think, should remain around the 34% mark maybe. But then at the operational costs also, we see some additional investments from labor, how should we model this looking forward? Because I would expect there to be very strong operational leverage coming in, in the outcome.
Olivier Legrain
So I think we don't give guidance. So of course, it's, of course, a difficult line to walk. Maybe I'll start and then Soumya will jump. But I fully show you I think we were going to grow. That's kind of obvious with the book-to-bill ratio. And indeed, I think we will potentially and especially with the tender in Spain, we're going to continue to experience some growth and rightfully so. We'll see some operational leverage definitely. Some of it we'll have to invest in the gross and some of it we'll have to deal with additional inflation, even though we're working also on passing that, or at least part of it, to our customers. So -- we don't give guidance. But in a normal world, indeed, I think we'll see some improvement of our ReBIT numbers going forward.
Unidentified Analyst
I recall that in the past, you mostly said that your operational costs should grow in line with inflation. I mean first half was a bit more than that. I'm just wondering, do you stick with this in line with inflation? Or are there some additional investments to be done because you have such a strong backlog or maybe give some examples of the investments.
Olivier Legrain
No, I think -- I mean, what are the different areas of investment? First of all, and especially if I take industrial application, I think we'll have to give up on our service capabilities. So we need to hire people. When we hire people, we need to train them, and this is additional, let's say, temporary additional overhead, let's say. So we'll see some of it. You have seen the order intake for other accelerators, so we can expect very significant growth into this segment, which will come with, let's say, a significant hiring program to be able to service and install this going forward.
So that's one of the investments. I think the other part of the investment is we continue to invest into digitalization. You know across the board being for R&D purposes or for expansion, ERP going forward. So that's why I think the OpEx will grow slightly more than inflation to basically go through the course. Once again, we don't give guidance on this. But indeed, I think with growth as we see -- and once again, at the book-to-bill, hence in a normal world, try to evaluate what this growth will be, we'll have to have an increase for OpEx, slightly above inflation.
Soumya Chandramouli
And then let's not discount the impact of IFRS, that a lot of software-related investments now potentially have to be put into OpEx rather than into CapEx. So up to now, we've not had too much of an impact on that. But going forward, I don't know we need to see how our future investments will hit the OpEx. But on the other hand, it's an accounting issue more than a strategic issue itself because it's basically bringing CapEx and amortizing it or else directly taking it in OpEx when and as the costs come -- so let's see how that works out. But indeed, as Olivier said that's quite an extensive investment plan. And we can give you a little bit more color maybe at your end on how much we plan to invest once we have better view on that.
Unidentified Analyst
Okay. That's clear. The second question on the second big topic, of course, the Spain tender. I noticed that the slides with the market share, no Varian in there. So I'm just wondering what happened there?
Olivier Legrain
I'm not Varian, so you can ask any question.
Unidentified Analyst
You're in the same bidding rounds or you are in the same contract as them. So regarding to that then and maybe on the tender in itself, how come that you are the sole supplier, selected as the sole supplier. And also, you're still in the bidding process or in the process. But looking at the capacity, 10 systems, could you -- how fast could you provide these systems normally you make them in 2.5 years, but okay, the past it has been taken a bit longer here and there. If it happens...
Olivier Legrain
Mostly because of the customer side. So I think in IBA story, we have always been on time when it comes to being a position to ship the equipment, I think the building on the side of the customers are, let's say, sometimes more challenging. I think in this case, the factory that you're about to visit has been designed to produce, if I remember well, 20 Proteus ONE in one go. It's not only Proteus ONE, we produce here, we produce Rhodotron on as well, and we test machine. So we have a very good use of the factory, but we have also a very good network of suppliers. So I'm not so concerned about our capability to deliver. The Spanish tender needs to be delivered over a period of 5 years, if I remember well. And therefore, it's something we can cope with on top of business as usual.
We continue to intend to sell multiple therapy systems on top of the Spanish tender. So -- and so I don't see any big issue on the capacity here. including the one of our suppliers. When it comes to -- the only thing I can comment is our competitive positioning in proton therapy. I think what you see in the Spanish tender is significantly, let's say, superiority of the Proteus ONE by new proposal. We keep hammering for a long time that compactness is very important, and the Proteus ONE is the most compact system. We keep hammering that standardization is very important, in proton therapy.
And Proteus ONE is the closest you can get from a product standpoint. Otherwise, in proton therapy most of the time you speak about projects, which means that, indeed, we are very competitive into this segment. Whereas other competitors in that way are far from being there and therefore, I believe, potentially challenged from a profitability standpoint, much more than we are and focus on IBA proton therapy for a long time has helped us also to develop a significant network of suppliers that are fully committed behind us to being able to provide whatever the demand will be, which might not be the case of other suppliers. And there may be more arbitrage to be done more profitability, let's say, constraint that we have had into this standard. And it's not that we were the only bidder, we were the only selected bid.
Soumya Chandramouli
I think maybe just to add to that, you must remember that when we decided to build this new production facility, it was also to ramp up the number of sales we were having on an annual basis. And so it came a bit delayed, maybe it's coming now, but it was already a ramp-up basically to deliver more than what we are already delivering. So 5, 6, 7 centers here was absolutely no problem. If we have to do that, that wouldn't be...
Unidentified Analyst
Okay. Clear for me. Just because you mentioned a bit about the profitability. Could you assume that Siemens doesn't want to see any losses from Varian in the proton therapy...
Olivier Legrain
I think nobody likes losses, so...
Unidentified Analyst
Yes. I mean strategy has changed. That's...
Olivier Legrain
Maybe I think once again, Varian is a very good company, and Siemens is also the new company. proton therapy is also a very specific business. And maybe they took some assumptions in the past that are not realizing now, and they correct the trajectory. I think it's potentially that, as I can see. I can assume because I don't see it.
Unidentified Analyst
Thank you for the presentation and for taking my question. First question regarding proton therapy. So you mentioned before that 2022 was not about installation that this will accelerate in 2023. To what extent do you expect the installation to be impacted by supply issues as we saw with the other accelerator in this semester?
Olivier Legrain
Almost everything that we're going to install in 2023 is for shipped or about to be shipped. Most of it -- a lot of it will happen in China -- and so on that standpoint, I think, we are pretty much in good shape. I think overall, we're in good shape, it's like -- I think we can say that lead time has increased -- but it's not that we cannot provide this, more that it takes a bit more time. And indeed, Soumya alluded to already, we had sometimes shipment constraints or things like that. As you know, there is much less shipping lines available...
Soumya Chandramouli
Exactly. One of the things that we try to do is we don't try to -- we try not to ship our equipment in several lots because the cost of shipping is so far away and expensive. So we wait until all the supply has been procured before we ship it. So obviously, that means that sometimes things take a little more time, and that impacts revenue recognition. And that has been the case for PT as well as for the other accelerators. But it's timing mostly...
Olivier Legrain
Yes, mostly timing, I think indeed. When we say, impacted by COVID, the whole global supply chain has slowed down, it's only because of one thing, the shipping going to China, they had to quarantine. So...
Soumya Chandramouli
Plus, of course, the Russian war, which means that all the Russian companies that were in shipping, we don't use them.
Olivier Legrain
So coming back to your question, I think we have a pretty good view on this. What will happen in 2022 second half and early 2023. -- is or in the box or in the already on its way to the customer. We have a which does not remove all the uncertainty because, indeed, our backlog conversion depends also on the capacity of our supplier to, let's say, provide the next wave of it. But I think overall, it's with a little bit slower turnaround, it's coming back quite nice.
Unidentified Analyst
And the next question regarding other accelerators. You said in the past that you were expecting normalization plus level, but we see now that it's been increasing quite a lot. So what's your view on that for the future? What do you expect it to...?
Olivier Legrain
I think there's any different drive from one to the other. I think what we see in RadioPharma Solution is, I would say, 3 drivers. One is a big demand coming from underdevelopment countries. China is definitely moving. India is moving even with Africa, it's moving. We have started to sell cyclotron in Africa. Which is a very good news for all of us. So under-equipped countries are moving. That's the #1 drive. Number 2, drive is new isotopes. -- where IBA develops the competence in providing a higher energy like the IKON, the reason behind the IKON is Germanium, today I'm not good with numbers, so Germanium-68, which is also in high demand because some people have developed generator. And the supply chain of Germanium is in very high demand and our IKON is the answer to that.
Then you have Strontium, Rubidium, but also is 70 MeV where the demand is increasing and people need to buy higher energy cyclotron to do that. So that is in RadioPharma Solutions. In Industrial, you know I work for IBA for 26 years. And 26 years ago, we already said, one day, medical device service, the sterilization service provider, we need to build up capacity for stabilization using E-beam because there's some limitation to alternative technology such as gamma radiation and ethylene oxide, and we were right but 26 years too early. And the good news is still today, we're so far ahead of competition, and it's really happening.
So I think the big players in the field have decided to move they are building up capacity. The reason why they're doing it, we mentioned it in the presentation is that there is strong, let's say, concern with the use of EtO. I think I've seen another recall recently of food products that were infected with EtO because the gas is very [indiscernible], explode we have seen a few accidents. So there's a lot of scrutiny over EtO and definitely also, people believe that they will be able to expand a bit the existing capacity, but they will have no new permits to build your capabilities. And on gamma irradiation, you need to use cobalt sources. There's a huge usage globally of cobalt.
So there is no choice. And it happens at the time where there is a huge increase of the demand of sterilization, amongst others due to COVID, because of the need to stay alive for centuries, -- and therefore, their kind of in a hurry to expand their volume and IBA seems to be -- it's not that we're only one, but we have a very mature technology, and we have a huge competitive advantage when it comes to the level of energy and power that we're able to develop with the Rhodotron isn't made on the market. So yes, we see a massive increase of the deep end. And your question was about the future. I think it will continue for a while, if we're going to grow like this. I don't know, but maybe it will stabilize at this rate. Strategically, we are preparing to significantly increase our capacity in Rhodotron for sure and to a certain extent to cyclotron.
Soumya Chandramouli
A part of the OpEx increase is also related to the ramp-up on that. To face... But it's always the same story. You have to ramp up before you have the revenue. So there's a timing difference between the 2. Yes. We have Matthias on the line, Matthias.
Matthias Maenhaut
Yes. Can you hear me?
Soumya Chandramouli
Perfectly.
Matthias Maenhaut
Maybe two to start with all the topics that have already been touched upon, but it's a bit of a follow-up question. Specifically on the operating leverage, could you maybe just elaborate a little bit on your personnel costs? How much does it actually contain of the OpEx? How much sits in Belgium? And how should we think about inflation going forward? And then also, probably importantly, if you look at inflation, how well are you able to pass on that inflation towards your customers? So what is the past-through mechanisms in the existing -- in the backlog, I would say, if you could elaborate on that?
And then second question maybe on the Spanish tender. Could you maybe give us a little bit of an indication on the timeline, actually, so -- and what still needs to be... Yes. I would say, decided given that you're now the only contender that goes into the next phases, it's a bit of abstract maybe that there's still the second and third round. So could you maybe elaborate a little bit on that? And then on the execution of the contract, how should we see this -- how should we think about this falling through into sales? If you could give us some guidance on that, that would be great.
Olivier Legrain
So, on the inflation, if I remember well all your questions, first of all, we -- when it comes to people, we have about half of our people here in Belgium and half in rest of the world with a main jurisdiction being Germany, U.S. and China. And then the rest is basically spread. But with Belgium, U.S., China and Germany, we cover probably... Yes, we probably cover like almost 90% of our people, 85% of our people. So you know the numbers probably as well as I know them in Belgium when it comes to index that we are going to face. I think we speak more or less of 10%. That's net. In the rest of the world, there is no mandatory index. Now there's also a fight for talent. So you can assume that inflation in these countries are probably the number we are looking in terms of salary increase. When it comes to mechanism for passing it to the customer when it comes to service business, it's contractual.
So I would say most of our service contracts have indexation clause that we basically apply. When it comes to backlog, equipment backlog, I would say that most -- not all our recent contract has an indexation clause or some older contract has no indexation clause. Now most of them are about to be built or, let's say, the purchases have been done. We have ordered the supplier. And still, we have the intention to open the dialogue with this customer to basically -- we see negotiate additional price increase if they are significant, but I'm not aware of any significant price increase in the backlog. So I would say we're, overall, quite protected. I still expect to see an impact, but it's not going to be very significant. We have anticipated some of it already. We have already adjusted in our numbers, let's say, some kind of reserve for increase of supply chain...
Soumya Chandramouli
I think you also asked us, what's the proportion of our OpEx, which comes from salaries, right? It's between 70% to 80%, depending on -- so a big chunk of the OpEx is in the...
Olivier Legrain
So when I look at this DynamicARC, I mean, I think there is basically going forward, 3 things that will happen. One, we will grow U.S. already anticipated that. So we'll see some operational leverage. The second thing is we're going to see some inflation. So we'll have to, let's say, increase prices to compensate for these price and we need to work on both the operational leverage, but also efficiency across the operation. So overall, once again, we don't give guidance -- but we can expect, how do we say that the profitability expansion or the...That's all right. And I'm allowed to say it... Thanks to the growth despite the context -- and everybody is with me now very upset.
Soumya Chandramouli
Not at all.
Olivier Legrain
But - sorry.
Matthias Maenhaut
No, no. Go ahead, please.
Olivier Legrain
Okay. So...
Matthias Maenhaut
How much profitability -- no, no. Just kidding. The second question was on the Spanish tender effectively on the...
Olivier Legrain
The Spanish tender, it's quite simple -- well simple. There is 3 envelope. One was the -- you have to help me maybe, Soumya. One was the qualification criteria.
Soumya Chandramouli
All the criteria, for example, how many -- you had to have a certain number of proton therapy centers working, et cetera, et cetera. So basically on what we already do in proton therapy.
Olivier Legrain
And this one has been opened, and we passed this number one step. We have already submitted the three envelope. Nobody else can submit three envelope. Everybody has submitted a three envelope. They have opened envelope number one. And based on what they had on envelope number one, we are the only qualified supplier -- so then they have opened now envelope number two. Envelope number two is technical specification. So they have opened it, they've looked at it, they say, "Oh, it looks good. But still, they have a committee that is supposed to go through the technical specification of our offer. And then they will -- and I expect it to be almost certain, but you never know, I would say IBA complies with the technical specification of the tender.
And then they will open the third envelope. It's the most important one, the price. And they will basically open our envelope. They will look at our price. They will look at other handler price. I know because there is no other handler price -- so then I think I expect this one to go through quite well, as well. And then we will contractualize all this. How long will it take? That's a very good question. I think there's some, let's say, will to make it fast because the Ortega Foundation gave a frame for it to happen. So they don't want it to take 10 years before we can start to work on this. They want to have a good, let's say, a good reason to this.
So I guess, the end of the year is a good estimation on having the 3 envelope open and IBA confirmed as a supplier for the pen system. And then we will start to deliver them. I think, Matthias, you know very well, the kind of timing we're looking at. They will have to build 10 buildings for proton therapy. We'll have to build 10 Proteus ONE. Standard, let's say, least time to produce a Proteus ONE is 18 months. So we'll start to produce them in 18 months and we'll start to deliver them one after the other, which -- with a few months space gap between all of them. So 18 months, we deliver one. A few months later, with deliver number 2, 3, 4, 5, 6.
So if I were -- if I had to do a business model, that's what I would look at it. First thing to work on it in January 2023, 18 months lead time, one delivery every 3 months, let's say, to say something starting month, 18 going forward. That's, I think that the standard plan and then we'll see what happens. If there is some delays on the building side or faster building side, we'll try to -- I mean, we will work in full sink with the MOH. And we speak about 10 systems, but it's 9 -- it's 8 single rooms and one double room, but the double room will be a double Proteus ONE. So that's why we say 10 Proteus ONE. But we will work with the 9 customers in the 9 regions to basically think our delivery and installation with their building. We can expect some of them to be fast. We can expect some of them to be slower -- so that's a little bit of uncertain, let's say, some variability on the model with just...
Soumya Chandramouli
I think anyway, once we -- we need to win the tender and then we need to negotiate. So once we have that done, when that happens, we'll be able to give more color on that.
Olivier Legrain
Yes. But overall, that's what it will look like.
Matthias Maenhaut
Okay, clear. Maybe just one short follow-up. You might have said it or I might have missed it. But in terms of services contract for these 10 rooms, if this makes this, how would I say, subject of the present tender and negotiations? Or would that still be negotiated afterwards?
Olivier Legrain
In the tender, if I remember well, we had to give an indication of price and service, but it will be negotiated with every 9 customers later on. All right. But we can expect to see the usual level of services for the 9 or the 10, but you have understood, let's say, the 10, the 10 machine.
Soumya Chandramouli
I think we have another question. I'm sorry, I don't know who it is -- can you please introduce yourself? Apparently not. Were there any other questions, please raise your hand and we can take them.
Olivier Legrain
Otherwise, we have one more question in the room, I think. You had one more question. It wasn't a -- okay.
Matthias Maenhaut
I still have some questions, in the meantime, maybe on dosimetry in general, acquired MODUS Canada. Now yesterday, again, a few years ago, you were willing to divest the business. What's changing your mind on this front?
Olivier Legrain
No, I think we've changed our mind a few years ago. I think a few years ago, we've looked at what was the potential strategic, let's say, a strategic alliance with someone else either a better shareholder for those interested in IBA, we didn't think was a good thing to do. So as soon as we decided to let's say, keep the business, we also decided to continue to invest into it. And what we have said is basically, we believe this business can significantly grow, providing we complete the product portfolio, and that's what we do.
So we develop new products and when we believe we are well positioned to come with appealing application or we buy products that are nicely adding to our product portfolio. This is what we did with MODUS and what we are going to do with Candidus. Sometimes it is an acquisition because people are entertaining the conversation. Sometimes it's more of a strategic alliance, which can be good because they want to keep, to stay as an independent company. But that's our focus. So complete the product portfolio. We are very strong in some areas. You remember in those images, basically, there's 3 segments, let's say, Machine QA, Patient QA and a more of a diagnostic application and mainly OEM, very strong in OEM, very strong in Machine QA. We had a significant gap in our product portfolio in Patient QA. This is our focus now.
Soumya Chandramouli
We will take one last question. I think Matthias still has one question.
Matthias Maenhaut
It's a housekeeping question. The impact of the acquisition in H1 and what you expect for the full year and dosimetry, so MODUS medical..
Soumya Chandramouli
We haven't disclosed it separately from the rest of dosimetry. -- but I think anything you will -- the IFRS report will be out soon and you'll see the value of the acquisition, which was, I think, mentioned I don't remember you mentioned, but you will see it in the IFRS report. On the impact on the P&L, it's already accretive. So we already have a positive impact from it, but we aren't disclosing the amount right now. So that's the way it was planned. Basically, we wanted to ensure that we would have a positive impact on the first year of acquisition. And by the way, going it's very short, but for H2, we'll see that impact appearing.
Olivier Legrain
And by the way, it's working very well. I think we can say that we have appeal the commercial financing. So the idea once again is to take a product like our sales, let's say, a single product company, which is Candidus, but MODUS has a very nice product portfolio, but they didn't have the full range and adding the 2 portfolios together, we were much more competitive. And we have seen -- we're able to push through our commercial channels, the product of MODUS much better than we used to do it, and we have seen quite a significant uptake of the sales volume...
Soumya Chandramouli
Great. There are no more questions, I think we can close the call. Thank you everyone for attending, and we will speak to you very soon.
Olivier Legrain
Thank you.
Soumya Chandramouli
Bye-bye.
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Ion Beam Applications SA (IOBCF) Q2 2022 Earnings Call Transcript