Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Johan Andersson – Director of Investor Relations

Tomas Puusepp – President and CEO

Håkan Bergström – CFO

Johan Adeback – Head of Treasury

Hans Ericson – Group Controller

Gustaf Salford – Group Controller

Analysts

Johan Unnerus – Swedbank Markets

Patrik Ling – Nordea Markets

Lars Hevreng – SEB Enskilda

Richard Koch – Kepler Cheuvreux

Kristofer Liljeberg – Carnegie Investment Bank

Veronika Dubajova – Goldman Sachs

Justin Morris – BofA Merrill Lynch

David Adlington – JPMorgan

Michael Jungling – Morgan Stanley

Hans Mahler – Handelsbanken Capital Markets

Romain Zana – Exane BNP Paribas

Elekta AB (OTCPK:EKTAF) F4Q13 Earnings Call June 5, 2013 4:00 AM ET

Operator

Thank you for standing by and welcome to the Elekta Q4 conference call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. (Operator Instructions) I must advise you that this conference is being recorded today, Wednesday the 5th of June, 2013. I would now like to hand the conference over to your first speaker today, Mr. Johan Andersson. Please go ahead, sir.

Johan Andersson

Thank you and welcome to Elekta’s Conference Call following the publication of our full year report for the fiscal year 2012-13. My name is Johan Anderson, Director, Investor Relations and the moderator for this call. Here in Stockholm, we have Tomas Puusepp, President and CEO, Håkan Bergström, CFO, Johan Adeback, Head of Treasury; Hans Ericson and Gustaf Salford, Group Controllers.

We will start with a presentation by Tomas Puusepp and Håkan Bergström and afterwards conclude with a Q&A session. With this, I’ll hand it over to Tomas Puusepp.

Tomas Puusepp

Thank you, Johan. And once again, welcome to Elekta’s full year’s conference call. I am better pleased and extremely proud of Elekta’s performance for the fiscal year. We managed to exceed all financial targets. We grow faster than the market and order bookings increased by 14% for the year.

Over 50% of our growth in revenues and even more in orders this year came from emerging markets. This highlights the value of our number one position there. Emerging markets accounted for approximately 35% of our order intake for the year. Order bookings grew by 15% in the fourth quarter and we have strong growth in Europe with 29% as well as the Americas with 9%.

Net sales grew by 16%, excluding currency effects. This is over our guidance of 15%. In Q4, net sales was up 25% with good growth in all regions. This is an all-time high in terms of deliveries and we are extremely proud of our efforts.

Operating profit grew by 40% in Q4, based on fixed currencies and for the full year, EBIT grew by 17%. And Håkan will discuss in more details.

Importantly, Q4 was a record in terms of cash conversion with over 100%. For the full year, we received a cash conversion of 76%. I am extremely proud of our organization and employees for the effort during the year and I am also pleased that more patients do get access to our clinical solutions throughout the world.

Looking back to the last years, we have achieved another record year and our eight year sales compound average growth is 16%. This is driven by our number one position in emerging markets and strengthened position in our established markets.

Importantly, we have achieved an EBIT compound average growth of 24% during the same period, highlighting the leverage we have in our business model.

We launched our new linear accelerator system, Versa HD, in the quarter. Versa HD has a unique combination that provides high dose rates, good resolution and low radiation leakage, all key elements for providing cancer care.

In addition, the system operates fast and enables advanced treatments without compromising during a standard treatment time slot. We have had very strong interest from our existing customers and also from new customers. At the launch event in Atlanta, over 1500 persons perused it.

In April, it was presented at the first major European event at ASTRO and the focus on Versa HD was overwhelming. During the first sixty days, we have received 30 orders for Versa HD system and the first patients has ordered their ongoing treatments.

We are the pioneer and the inventor with several areas of modern cancer care and treatment of neurological disorders. This includes stereotactic radiosurgery, stereotactic radiotherapy, image-guided radiation therapy and brachytherapy.

To further strengthen our leadership, we will increase our investment in research and development and for the coming year by more than 20%. We have an extensive product development program focusing on for instance, integrated software solution brachytherapy, and image-guided radiation therapy.

Our aim facilitating treatment combined with advanced magnetic resonance imaging is progressing very well. We are very pleased that we now have the world-leading clinics such as MD. Anderson, NKI-AVL from Amsterdam, Sunnybrook in Toronto and University of Utrecht, as members of the research consortium. That together with us and Philips we’ll develop this system.

We are uniting the state-of-the-art MRI with the cutting-edge radiation therapy system to create an MRI-guided radiation therapy system. This will provide physicians with exceptional images of a patient soft tissue and tumor during the radiation therapy and everything in true real-time.

This breakthrough innovation also aims to enable clinicians to adapt treatment delivery in real-time for most precise cancer treatment possible. This project is part of our increased efforts to further strengthen and accelerate our technology leadership.

As I said, during next year, we will increase our investments in R&D over 20%. We foresee that R&D investment will amount to around 10% as a share on net sales going forward.

Elekta has reached a leading position, good cash generation and strong balance sheet. Based on that, the Board proposed an increased ordinary dividend to SEK 1.5 per share from SEK 1.25 last year.

In addition, the Board has proposed a three-year program with extraordinary dividends to the shareholders amounting to SEK 0.5 per share and year.

Let me now go through the development in our regions, starting with North and South America. Elekta’s order intake was good and grew by 9% both in Q4 and for the year. In the US, Elekta’s order booking were solid and we sold good number of Versa HD systems.

In addition, we achieved good growth in brachytherapy and also for Leksell Gamma knife. The US market in general is associated with some uncertainty related due to reimbursement levels and the Healthcare Reform. But as I said, our business has grown at the good rate.

Turning to Canada, they are currently expanding and building capacity in cancer care. We have good momentum in the country with strong growth. Received amount for large comprehensive deals where the provinces strive to expand capacity within radiation therapy.

Deliveries worth of record high and net sales grew by 13% for the full year and 14% in the fourth quarter. Sales were strong across all product areas and as expected volumes increased without within our brachytherapy product area.

Medical device tax has been incorporated in the US as of January 1 with a 2.3% impact on most of our equipment and software sales. The impact has been approximately $2 million for last fiscal year. And the tax is impacting gross profit.

We have leading position in Latin America and both order intake and sales were strong in Q4. As you all know, there is a major procurement process for 8th Linacs and other equipment in Brazil. And we have received the document related to the tender and are in the process to clarify certain elements of the tender.

We cannot comment any further on the timing, but remain confident that we have the ability to deliver on what is requested in the tender. Brazil is a long-term growth market for us and we will continue to invest in our operations there.

The contribution margin was 35%, the lower level compared to lost is related to high growth in South America and the medical device tax in the US.

Turning to the regions, Europe, Middle East and Africa, the market trend in Europe has been positive and order bookings grow by 29% in the fourth quarter and is up 9% for the year. We achieved good growth especially in the Northern and Central Europe, as well as in the regions’ emerging markets.

Countries with strong growth include the UK and Germany and Russia. We are also growing very fast on the African continents. It is also gratifying to see that the development in Middle East has been so good.

We have closed a number of deals in the region, which has contributed positively to the growth in order intake and net sales for the quarter.

Now, turning to Asia-Pacific. The Asia-Pacific region is characterized by a major capacity shortage and the prospects for growth will remain good for many years to come. We are the market leader in the region and order growth for the full year was 23%.

Development was extremely strong in high growth markets such as China and India where the growth was 42% and 60% respectively. China is now Elekta’s second largest market.

We also see continued good demand from new emerging markets which has strong ambition to build cancer care capacity today and in the future. Elekta’s business in Japan continued to grow and for the full year order intake was up 14% in local currency.

During the last year, orders increased with 8%. We have an excellent collaboration with Toshiba which is performing very well. Our cancer care solutions are much appreciated by the customers currently using Siemens machines.

We believe we have taken good volumes of Siemens replacement on the hardware side and we also seen a favorable development regarding updates of software to our Mosaic system.

Currently, approximately 25% of cancer patients in Japan receive radiation therapy and we foresee that this will increase in the future. The double-digit market growth rate is expected to continue in the Asia-Pacific region triggered by strong underlying demand, a government sponsored program for investment in radiation therapy.

Now, I hand things over to Håkan to go through the numbers in more detail. Håkan?

Håkan Bergström

Thank you, Tomas and things goes well for Elekta. We once again have our best year ever in financial terms. I will now cover some of the key areas financially in our income statement, cash flow and balance sheet even though I think the report is quite clear to understand.

So, for the year, net sales was up 16% in fixed currencies and for Q4 net sales was up 25% as Tomas said it’s been very active for us in Q4. Operating profit excluding non-recurring items is up 17% versus last year and in Q4, operating profit is up 40% in fixed currency.

And once again, the volume is clearly giving us the leverage when it comes to the financials and all the related items. Looking at gross margins, they came in at 46.3% slightly below last year.

One should always remember talking about the gross margins for Elekta that one can separate the recurring versus the non-recurring items for the more hardware we have delivered which we have in Q4. That has a slightly negative effect on the overall gross margins. So we are quite pleased with the gross margin we achieved in the quarter.

Looking at the year-over-year comparison, currencies has played a negative role and slightly also geographical mix and not forget the medical device tax in US. Looking into the R&D side, before capitalization they increased 14% to approximately SEK 900 million.

As talked about, we will increase R&D investments for the coming year by approximately 20% and going forward our best estimate is that the level will then continue with sort of the normal increase that we have in cost and I think Tomas will get back to that as well.

We continue to achieve efficiency or leverage on our fixed cost base. Looking at our SG&A, in relation to net sales was reduced with some 70 basis points to 19.6% to be precise. During the year, we also had one-off cost related to ongoing US lawsuit of SEK 46 million.

Tax rate for the year was 25%, a bit lower or a bit faster, maybe we achieved a 25%. The corporate tax rate is trending down and we do expect that to reach 23% within two years.

Talking then about the cash flow, as you have seen, we had a very strong cash flow in Q4 and after continuous investments we came in close to SEK 1.3 billion for the year and achieved the cash conversion of 76%.

As we have improved our reporting, when it comes to visibility, I can assure you that the definition used is the same quarter and year that we compare with, sort of 76% is definitely apples-and-apples to all the other numbers that you see on the slide.

Working capital as a percent of sales improved and it’s now 11% which we believe is good level to be at. Currency, for the year it has been movements quite significantly. The Swedish krona has been strengthening and obviously that has an effect on both top-line and the operating results.

So for the top-line it’s a negative currency effect of 2% and on EBIT net of hedges, the effect was around SEK 90 million negative.

Looking to the fiscal 2013, 2014, we believe currency will have around 3% negative on the EBITDA included on the exchange rates differences that will be around positive SEK 50 million.

Finally, talking about the balance sheet and I am very pleased in my position to see that we continue to strengthen our balance sheet based on the performance made. So that is the foundation for the investments that we do operationally and obviously also to the shareholders with an increased dividend.

And including those investments, the balance sheet will remain very strong. So I am pleased to hand it over to you once again Tomas.

Tomas Puusepp

Thank you, Håkan. We expect that 2013, 2014 will be another strong year for Elekta. The need for good and cost-efficient cancer care will grow around the world. We expect continued good growth in emerging markets where Elekta is actually number one. We also aim to strengthen our position in our established markets. The first priority next year is growth and we expect that the majority of this to come from emerging markets.

Net sales in local currency are forecasted to increase by more than 10% and technology leadership has been a main contributor to Elekta’s growth and also in increasing the usage of radiation therapy and helping more patients live a better life.

We have a number of very interesting products in our R&D pipeline within all our product areas. Among them is the MR Linac project that I described earlier. To further strengthen our technology leadership, we will increase our investment in R&D and next year by more over 20%. We are convinced that to accelerate project is the best way to achieve sustainable profitable growth which we also have demonstrated in the past.

This year, we manage to leverage on our SG&A cost and our business model provides for further leverage also next year. On the other hand, next year, we will also see the full impact of the US medical device tax affecting our gross margin base.

All in all, we expect EBITDA to grow by approximately 10% in local currency and the currency effect is estimated to some three percentage points on the growth.

So to conclude, we delivered an outstanding performance for this fiscal year which ended end of April. We are stronger than ever both in terms of market position resulting cash flow as well as balance sheet.

The Board has therefore decided to increase the distribution to the shareholder and we expect a good next fiscal year where we will characterize growth and also increase our investment in R&D for long-term sustainable profitable growth. Thank you.

Johan Andersson

Thank you, Tomas. We will now open up for the Q&A session. And please state your name and company before you ask your question and may I please ask you to limit your questions to two per person and if you have any further question also you can definitely contract the investor relations. So, please operator, can you start the Q&A session?

Question-and-Answer-Session

Operator

(Operator Instructions) The first question comes from the line of Johan Unnerus. Please ask your question.

Johan Unnerus – Swedbank Markets

Yes, good morning. Johan Unnerus from Swedbank. Two questions then on R&D. And you are talking about increasing R&D about 20%. But if I understand it correctly, you're also talking about R&D to reach about 10% of sales.

And I suspect that's a gradual increase, because if you would reach that level for next year, you're looking at way above 20%. So that's the first question. And then, is it possible to specify or give us a flavor of how much of the R&D is related to the MRI project?

Tomas Puusepp

Hi, Johan. As we look lot of the – as we stated, it’s a 20% increase in general, but and the effect of that will be that we will end up around 10% of our sales in R&D for next fiscal year. If you look on the Linac MR system, it is large project. There is no question about that.

But that doesn’t – we also have a number of other projects going on, but I will say that the Linac MRI will accelerate that project quite significantly for next year and years to come.

That is also based on the consortia group which we have actually been extremely pleased to see that we are the leading center throughout the world who will actually be a part of this equation and that actually support, this also is a success of this.

And that is also the reason why we together have decided really to accelerate this project. But they will continue to have projects in other areas as well. So this is not the only project, but it’s one of the biggest projects we have in the R&D portfolio.

Johan Unnerus – Swedbank Markets

So 10% of sales, I mean, that suggests a lot more than 20% increase on the R&D line.

Håkan Bergström

I mean, what we are talking about this is obviously more than 20% and we are talking about coming up to 10% and the guidance and particularly on the R&D side, I think this was quite clear from what Tomas just said, it also depends on the consortium members.

And as the consortium is just sort of starting now, I think we need to get back to everybody how fast and how we are going to see all the projects. We have no intent to be specific on how much that investment will be. So it will be part of the whole R&D effort.

Tomas Puusepp

Thank you, Johan.

Operator

The next question comes from Patrik Ling from Nordea. Please ask your question.

Patrik Ling – Nordea Markets

Yes good morning, Patrik Ling from Nordea. I have two questions. Firstly, when it comes to Versa HD, you saw a very rapid uptake in the end of last quarter of last year. Could you tell me, really cutting edge of Versa HD compared to other products on the markets are to a very large extent, the Agility part of that system.

Has the success in the uptake of Versa HD in any way had a beneficial impact on other upgrades for Agility, for sort of non-Versa HD machines?

Tomas Puusepp

Yeah, I think it’s – hi Patrik, when looking at the Versa HD in general, I would say that it’s actually combination of all this bits and pieces, leakage radiation, speed of the leaves, high dose rates, the combination of that would make it so unique in the marketplace.

But, so you can’t carve out one, just one component to say that that is actually the driver. It’s actually all in combination. But what we have seen is actually an increased interest in Agility also based on that. So we do see some additional product interest. There is no question about it.

But I am very pleased that we have been able to actually receive 30 orders during the last 60 days. It is actually a very clear sign of the importance and what people believe in this. And we talk about leading centers are doing that.

So it is a confirmation, but it’s not only my words, it’s actually also our users and also new users who really confirm that this is really something which is a significantly better than anything else in the marketplace. So I am very pleased of the results and the interest and the tremendous feedback we have got from the early users.

Patrik Ling – Nordea Markets

Okay, good. And just a short follow-up on that one. Could you give any flavor of the sort of the beginning of 2013, 2014 for Versa HD?

Tomas Puusepp

No, we do see a continued interest for this and it’s difficult to really to say exactly how much that will have an impact yet. But it’s definitely according to plan or ahead of the plan.

Patrik Ling – Nordea Markets

Okay, great. My second question related to Siemens. You talked about the strong development in the Japanese market converting a lot of Siemens machines. But on the other hand, you also mentioned that Germany was one market where you did very well. Could you give us a flavor for how you are converting Siemens machines and Siemens users on other markets except Japan?

Tomas Puusepp

In general, we get what we usually get in the Siemens installed base, as we say in Japan, it’s more, because Toshiba have a large installed base and they have an excellent connection to the installed base and that is made – the majority is actually Siemens machines.

So that we have definitely a pretty good position. In the other markets, we actually get what we have seen in the past there is no change despite the barrier on the Siemens relationship, yet. But we will see, it will take us some more time before we will see and got incremental volume from the Siemens installed base.

Patrik Ling – Nordea Markets

Okay, great. Thank you. I’ll jump back into the queue.

Johan Andersson

Thank you, Patrik.

Operator

The next question comes from Lars Hevreng from SEB. Please ask your question.

Lars Hevreng – SEB Enskilda

Yeah, thank you. Did you say anything about your cash conversion ambitions for the year that has started?

Tomas Puusepp

Okay, Hi, Lars, both Håkan and I can say, that we don’t guide cash flow, but when you look into – if you look historically, correct me if I’m wrong, we have been around the 70% roughly, if you take it over the years and I think this year we have exceeded that, but we don’t really guide in cash conversion.

Håkan Bergström

Maybe an additional point on the guidance, this is an important, to reach to 70% is an internal target. So that is where we set compensation system. As we have been focusing mostly on the last year, is obviously that the question, the attention from the markets, from you and others Lars, that we do that more explicitly.

We will of course talk about the cash conversion going forward. I think the business model as we have been talking about should get to the 70% as a good average. In the coming year, obviously we also have the investment in technology which might affect it.

But it’s also on the positive side, if the European legislation is coming in, the Italians doing what they should do and pay the receivables in time that could be really good for us. So, I think, I mean, to expect around 70% is a good average over the years is what we stick to.

Lars Hevreng – SEB Enskilda

Okay, thanks. Can I just follow-up, the outliers on the receivables, so to say, countries like Italy, how big portion of that is that of your amount – your total stock of receivables, so to say?

Tomas Puusepp

We are not going to sort of do any deep dives in countries for little bit for obvious reasons, but it’s not the risk in Italy as we see it. People do pay, but they pay very late. So the risk for us and sort of I think value is relatively lower or it’s very low and we see cash coming in particularly in some parts of Europe it takes longer than it should.

Lars Hevreng – SEB Enskilda

Okay, thank you.

Tomas Puusepp

Thank you, Lars.

Operator

The next question comes from Richard Koch from Kepler Cheuvreux. Please ask your question.

Richard Koch – Kepler Cheuvreux

Hi, what is the reasoning for switching to EBITA in your guidance and what level of amortization do you expect in this current fiscal year?

Tomas Puusepp

Handing over to Håkan, Richard.

Håkan Bergström

Hi, Richard. I mean, the logic behind any sort of level of P&L and we can always discuss and obviously you will have all the insight, all the relevant levels anyway. Why we start to focus little bit more on the EBITDA is because we think it’s clear on the underlying performance of our business, particularly when we do the big R&D project and it’s also sort of correlates better to cash generation and cash flow.

The specifics on the amortization, of course we have a plan, but we are not disclosing that that is very closely linked to the R&D projects. But I think you can expect that to go up a bit as compared to this year. But we will give you a more flavor late when we have full visibility on the different projects, but particularly maybe there are more projects.

Richard Koch – Kepler Cheuvreux

Okay. And how do you see the year developing regarding the individual quarters? Can we expect the current fiscal year to be as back-end loaded as this last one?

Håkan Bergström

We don’t, Richard, we don’t guide every quarter. So what we are looking to is what the full year’s performance. But, I will not be able or we will not be able but we will not guide the quarter, because, individual quarters doesn’t really make any sense for us, but for the full year, that’s what we guide and we expect to deliver this.

Tomas Puusepp

Maybe one additional, we do have quite an effort ongoing for a little bit obvious reason to make sure that we even out the quarter and even the months. So the ambition is to have more in the beginning of the year and don’t have this Q4 effect that obviously I mean it’s not really where we would like to be. But I think it’s too early to promise how that work and executed in effect you can see.

Håkan Bergström

And you also have some seasonality it’s also regarding – so if you take Japan, for example, their budget year is the end of March. So when you look into that, it’s something we can’t have an impact on. So, in that perspective and that is third and obviously third largest market for us is China, the second largest market. But this will have some impact on that as well.

Richard Koch – Kepler Cheuvreux

Okay. It's just that, yes if we were to have a very weak first few quarters, it's probably wise to communicate on that. Last question, what impact have you seen so far for the Gamma Knife in the US?

Tomas Puusepp

I was there late this last week and actually the interest is there it was very good year for us with the Gamma Knife in the US market. We haven’t seen any change. It’s clearly so that the people are have to put new numbers into their models, so it takes a little bit longer time.

But they really dig into the issuers with a number of codes which is related to Gamma Knife treatment it’s actually not as severe as it might look on the first round when you look into that.

And so it is actually, it’s not as bad as it might be look like, it’s also actually a very good year last year and we have – no one have jumped, so we are not prepared to do it. So it is actually pretty good.

Richard Koch – Kepler Cheuvreux

Okay, thanks.

Tomas Puusepp

Thank you, Richard.

Operator

The next question comes from Kristofer Liljeberg from Carnegie. Please ask your question.

Kristofer Liljeberg – Carnegie Investment Bank

Yeah, good morning. Kristofer Liljeberg from Carnegie. First, a follow-up on Richard's question about EBITDA. Is your definition of EBITDA, do you adjust for all amortization of intangibles and not only acquisition-related?

Håkan Bergström

All.

Kristofer Liljeberg – Carnegie Investment Bank

All, okay, and the guidance for EBITDA of 7% approximately reported, would that be for much if you were guiding for EBIT instead?

Håkan Bergström

On that – we are right now, I’d say it’s pretty much the same. We will get back if we need to.

Kristofer Liljeberg – Carnegie Investment Bank

Okay. My second question on the order growth, of course a very strong figure. I wonder if you could – one thing, say a little bit more about, you seem to do better than competition in the US. If you could give some flavor on that?

Also Middle East where there are some bigger orders there explaining the strong growth for that Europe, Asia, Middle East region? And also could you give the growth figure for Asia in Q4? I guess, it wasn't that strong given the difficult comparison, but I only saw the full-year figure.

Tomas Puusepp

Yeah. Hi Kristofer, if you look at US, I think we are a little bit in a different situation than when you look into our other competitor, because we have more hospital bases than which has always been quite robust actually. And I am there quite frequently and also during last week went through some of the key centers in US and it’s clearly show that we see a little bit more an appetite there.

But I also agree Richard I think some of you have also made some statement around is that the freestanding centers is little bit more volatile. So we see more of and I expect that you will see also more consolidation in that part, but that is a relatively small segment for us and much bigger for our other competitors.

So that’s why we have been quite robust and I am very pleased with the performance we have been doing in the US and North American region. If you look at Middle East…

Kristofer Liljeberg – Carnegie Investment Bank

Could I just follow-up on you.. Do you think, are you gaining some market share, I am thinking about the MD. Anderson order, for example?

Tomas Puusepp

No, no, we will see more and more interest for what we are offering and we are gaining market share, yes, that’s what we see. Yes. And when you look into the Middle East area, it’s not one major large project. It’s several projects from different hospitals and you can say that Turkey is part of the Middle East have also played an important role for our growth there.

Kristofer Liljeberg – Carnegie Investment Bank

And then Asia, first, could you give the order growth figure organically for Q4? And also could you just repeat what you said about, say, order growth for Japan India, and China, so I think I missed that.

Tomas Puusepp

Yes, if you look in the order growth for Q4 in that region that was around 9% in Q4. But – and you cannot draw in a conclusion that it’s a negative trend, now but for the full year, about 23%. So you come to a conclusion for one senior quarter of course. But if you look it, it was a strong growth both in China and in India, so there we had a growth of 42% in China and 60% in India and in Japan, we had a 14% growth in orders.

Kristofer Liljeberg – Carnegie Investment Bank

Okay, and you also said China now being the second biggest markets, I think Japan has previously been second biggest with 10% of your sales. Is China 10% of more than sales now?

Tomas Puusepp

Yes, that’s correct.

Kristofer Liljeberg – Carnegie Investment Bank

Okay, thank you very much.

Tomas Puusepp

Thank you, Kristofer.

Operator

The next question comes from Veronika Dubajova from Goldman Sachs. Please ask your question.

Veronika Dubajova – Goldman Sachs

Good morning gentlemen. Veronika here and thank you so much for taking my questions. I have two, if I can. One, I want to clarify couple things on the R&D spend increase and what that means for EBITDA versus EBIT. So, Håkan, just maybe thinking about the increase that you are talking about in terms of the 10% of revenues, can I just confirm you are referring to the incurred costs there not what appears in the P&L? Is that correct?

Håkan Bergström

That is correct.

Veronika Dubajova – Goldman Sachs

Okay, perfect. I just wanted to make sure I was on the right page there. And if I look at where sort of you've been with amortization of R&D historically, would we see a significant change in the pattern in terms of what gets incurred – what gets expensed versus what gets capitalized? I mean, are the projects that you were taking on in this 20% increase more likely to be primarily capitalized than incurred?

Håkan Bergström

It’s always hard to forecast projects of this size as you hopefully are aware the R&D capitalization goes with tollgates. And, based on the tollgates you capitalize and obviously after that you amortize. I think for now, one shouldn’t expect any sort of major change in the pattern, obviously I mean, we are going to do more R&D. So it’d be more on both sides anyway. But I think we will need to get more clear to everybody going forward. But for now, I don’t think that should be the major concern.

Veronika Dubajova – Goldman Sachs

Okay, okay. And if you look at the growth in amortization year-on-year, 2013 versus 2012 was the increase primarily related to acquisitions or was it – can you split it out between acquisitions and R&D because if I look at your amortization…

Håkan Bergström

This is mostly R&D.

Veronika Dubajova – Goldman Sachs

Mostly R&D, okay. That's very helpful. And my second question is on the North American margin, and I am just wondering if you think you can go back to the 37% here or there was 35% the new normal in the short, medium term?

Håkan Bergström

As I think almost explained, it’s also, I mean it’s not just North America, this is Americas as you see and obviously I mean, it’s a little bit of a difference. In North America, I mean, this is medical device tax, is not helping us in terms of margin. I think one can see even in sort of the South American improvement in the margin. So, at least I am cautiously optimistic on getting back to the level that we have seen.

Veronika Dubajova – Goldman Sachs

That is great. Thank you very much for that.

Tomas Puusepp

Thank you, Veronika.

Operator

The next question comes from Justin Morris from Bank of America. Please ask your question.

Justin Morris – Bank of America

Yes, Hi gentlemen, thanks for taking my question. I just wanted to follow-up on Veronika's question about capitalization of R&D. I mean, the capitalization seem to increase significantly in the fourth quarter more towards 40%. Is that the kind of level we should expect in fiscal 2014? Or should we expect it going back more towards the 20% we saw in the last couple of quarters?

Håkan Bergström

I think it’s my question once more, Hi Justin. I mean, let’s get back when we have as I was trying to say, when it comes to the whole R&D capitalization amortization, we need to sit down with a consortium members. So we see clearly the tollgates and how that might pan out.

Of course, we have a scenario, but as said right now, I mean, don’t expect any major changes in Q4, I mean, we probably capitalized a little bit more, but I think you should go back and see the normal pattern and we explain going forward, why it might defer. I think that’s the best way of looking at it.

Justin Morris – Bank of America

Okay, thank you. And my last question was on the cash conversion, I was just wondering the reason for the payables increasing from SEK 721 million to SEK1,217 million at the end of year. So, I mean it’s increased over 50% in the quarter. Could you please explain the reasons behind that and how we should expect that to evolve next year?

Håkan Bergström

Yeah, looking at different item lines in the working capital. So it’s – and you picked one of them. I think one should look at the combined working capital and particularly for the payable side, if you take the accrued expenses and look at back, it’s actually going down.

So for some part of the cost base, we already have an invoice and obviously we haven’t paid it yet, which you can see, but when it comes to the accrued, which is sort of the same thing, either you accrue when you got an invoice it’s going down. So if you combine those, it’s not the big difference.

Why it’s going up? It’s very much related to the volume in Q4 particularly on the big ticket item. So, most of the increase in payables or all – is related to the volume and maybe you suspect that we are not paying the supplier is and I think that’s not the sustainable way of doing business. So they are very much part of our value creation. So that’s not the answer.

Justin Morris – Bank of America

Okay, thanks for taking my questions.

Tomas Puusepp

Thank you, Justin.

Operator

The next question comes from David Adlington from JPMorgan. Please ask your question.

David Adlington – JPMorgan

Good morning, guys thanks for taking the questions. First one is sort of slightly bigger picture. You are obviously taking the view that you need to invest more in R&D. I just wondered if you were comfortable giving us a timeline in terms of when that might feed through into accelerating growth. And secondly, just in terms of the cash conversion, I just wondered if you had employed a greater level of factoring in the quarter. Thanks.

Tomas Puusepp

Okay, hi David. More in R&D, yes, we will do more and I think that the reason for it is that we have quite, I would say more comfort today on the way forward also and where we need to accelerate and that has been, actually both of the consortium and for the MRI stuff but also in some other areas as well.

So that will pay off and exact to tell you is next quarter and next year, of course we’ll have a clear plan. But I can’t give you that right now. We will inform that over time, but the good thing is really that, when you look into historically of Elekta’s success, so I think that we have actually turned or majority of our R&D projects into shareholder value.

And this is what we intend to do also in the future and we have really interesting projects in our pipeline, which I think will make a significant difference for the cancer patient and where we actually can contribute more value which is – it will also create even a stronger company than we are today. So I think it’s extremely, well invested money, there is no question about that. The cash conversion, take that Håkan?

Håkan Bergström

Yeah I guess, so and hi, David. I mean, I think the question on factoring, if you broader a little bit the discussion when it comes to how do you turn sort of our receivables into cash which I think is the related one. As we are present in all different countries with different ways of paying, it’s hard to say on a definition like factoring, but I think what is important at least in my perspective what’s important is that we don’t take any risk.

So it’s in our recourse that we have. So we have to pay something that is already payback, something that we already paid to us. So my statement previously is that we don’t do factoring with some kind of risk.

Tomas Puusepp

And I think there is no difference in that path as we have done in the past.

Håkan Bergström

That’s clearly so that I mean – and I think it is maybe different in this business model that we have, but as I said people do pay for some little bit late, but they do pay.

David Adlington – JPMorgan

Okay, great. Thanks, guys.

Håkan Bergström

Thank you.

Tomas Puusepp

Thank you, David.

Operator

The next question comes from Michael Jungling from Morgan Stanley. Please ask your question.

Michael Jungling – Morgan Stanley

Thank you and good morning. I have a question on outlook and secondly on receivables factoring. Does the receivables factoring, when you do it, impact your gross profit? And then secondly on outlook, can you give us the following three guidance points?

If I look at the EBITDA starting point for the guidance, is it fair to assume that you've taken the EBIT of SEK2,012 million meaning including restructuring charges and then you are asking us to add back SEK211 million. So, therefore, the starting point for your EBITDA guidance is the number SEK2,223 million.

Then also on outlook on tax rate, can you give us some guidance for the fiscal year 2014? If I look at the fourth quarter it was quite a good tax rate. Is that abnormal or is that more of a guide going forward? And then also in outlook, can you give us an indication whether there'll be any non-recurring items that are in your guidance of 10% constant currency growth?

Tomas Puusepp

Hi, Mike, I’ll hand it over to Håkan. There is a few questions, it was little more than two.

Håkan Bergström

Yeah, I will answer two. Starting with, I mean, it sounded like you said, when you do the factoring on receivables, we tell you that we don’t do. So I think that is the question. But obviously if you have a cost related to the receivable, it’s typically done in the financials net, but as we don’t do it and I think that’s the answer.

And, you gave us bit of numbers and I sort of prefer that, I mean, we can do it with each of you, but we do it sort of individually to see what you compare with. But the operating result or the EBIT that we have for this year excluding then on recurring was SEK 2058 million.

I have an EBITDA number which I need to get confirmed to SEK 2.300, but we can go through that and confirm that that’s the one you should use. We can take that offline with each of you.

On the tax rate, there is quite a lot of activity, I mean, obviously within Elekta but also in different geographies. So the tax rate is going down. We expect around say, 23%, 24% for the current 2013, 2014 and around the 23% level. But it’s actually is trending down. So, if we speak half year from now, we can have seen sort of some upside on that one. Non-recurring, the US lawsuit continues. We will see if that is material or not. I can’t really forecast whatsoever when it comes to that. If that continues, we probably will have that as a non-recurring for the fiscal year.

Michael Jungling – Morgan Stanley

And I said, non-recurring charge would not be included in your 10% constant currency growth rate, correct?

Håkan Bergström

Correct.

Michael Jungling – Morgan Stanley

Great, and on the tax rate, can you explain to us, I mean, if you look at your tax rate over the last years, it's been 30%, 27% and we are sort of closer towards the 27% now. What is happening in 2014 that suddenly the tax rate could go down three points?

Håkan Bergström

What is happening, I mean, it’s all – first of all, the corporate tax in I mean major countries like Sweden for us major countries like Sweden, UK to mention two, is going down rapidly. UK is now on or will be at the level of 20%, which is quite substantial decrease and it’s also including different incentives.

I can call it from the tax standpoint on the R&D investment. And I don’t think I go further on that one, but that is what is happening and that is sort of what is driving the tax rate down.

Michael Jungling – Morgan Stanley

Great, thank you.

Håkan Bergström

Thank you.

Tomas Puusepp

Thank you, Hans, sorry, Michael.

Operator

Your next question comes from Hans Mahler from Handelsbanken. Please ask your question.

Hans Mahler – Handelsbanken Capital Markets

Good morning and congratulations to a very strong order intake in the quarter. First of all, given the strong sales in Q4, could you give us some kind of color of why cost was so much lower both if you look on a year-over-year basis and on a sequential basis? And secondly also, if you can quantify the contribution from Versa in terms of revenues, orders and probably or if possible also gross margin in the quarter? Thank you.

Tomas Puusepp

I guess…

Håkan Bergström

I mean they are high on. For Q4, I mean, the expenses mostly that is currency. There are some effects on the Nucletron integration that you start to see, I mean the integration meaning there's less cost done. So that’s the major answer for the cost base. On Versa, we are not going to give out any specifics on that.

There were just a handful deliveries, I mean, effect in Q4 was pretty much nothing. Orders we have already talked about. So, I mean, I think it’s as always when you introduce something, I mean, of course it’s important, but in this quarter, it hasn’t had a great effect on this.

Tomas Puusepp

And we launched it in March. So it’s very recently also.

Hans Mahler – Handelsbanken Capital Markets

Okay, thank you.

Tomas Puusepp

Okay, Hans.

Håkan Bergström

Thank you.

Tomas Puusepp

Thank you, Hans.

Operator

Your next question comes from Romain Zana from Exane. Please ask your question.

Romain Zana – Exane BNP Paribas

Yeah, good afternoon. Most of my questions have already been answered, but first question on the rollout of Versa HD. You mentioned that – well, it’s the first 60 days you've seen 30 orders. I was wondering how these figures can be compared to the previous flagship product launch as you've made in the past.

And other rather housekeeping questions. The first one on the accrued receivables. If you can just give us the absolute level of accrued income booked into receivables. And if you see your bargaining power increasing with that, especially in emerging markets or even maybe deteriorating. And second housekeeping question regarding the impact of acquisitions on the sales growth for the full year? Thank you.

Tomas Puusepp

I think there was a little bit too many questions there. But let's ask – if I ask – answer the Versa HD, yeah, the pickup of Versa HD have exceeded actually, initially exceeded our expectations. So, to answer your question, yes, it is a better impact than we believe in the beginning. So it is more successful than we have seen in some other areas.

Håkan Bergström

And if I take the accrued, I think we are little bit running out of time, so if you get back to us with other housekeeping, we will try to do that. But on the accrued income, if you look year-over-year, it’s SEK 100 million lower end of this fiscal year than the end of last year.

So you can say, we invoice more. Just to give you perspective, this accrued income is contractually a receivable. So it is very much a receivable and I understand talking to others in Sweden that many booked as an accounts receivable which we have chosen not to. But this item is going down according to plan.

Tomas Puusepp

Okay. So we are now – the clock is now 11 and we need to continue our program for the day. So we’ll thank everyone very much for participating in this call. And please do not hesitate to contact us if you have any further questions. Thank you very much.

Operator

That does conclude our conference for today. Thank you for participating. You may all disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Elekta AB's CEO Discusses F4Q13 Results - Earnings Call Transcript
This Transcript
All Transcripts