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Executives

Johan Andersson – Director, IR

Tomas Puusepp – President and CEO

Håkan Bergström – CFO

Analysts

Kristofer Liljeberg – Carnegie

Patrik Ling – Nordea Bank AB

Johan Unnerus – Swedbank AB

Mattias Haggblom – Danske Bank

Ian Douglas-Pennant – UBS Ltd.

Veronika Dubajova – Goldman Sachs

Hans Mahler – Handelsbanken

Lars Hevreng – SEB

Romain Zana – Exane BNP Paribas

David Adlington – JPMorgan

Justin Morris – Bank of America Merrill Lynch

Elekta B SHS (OTCPK:EKTAF) F2Q14 Earnings Call December 4, 2013 4:00 AM ET

Operator

Good morning, ladies and gentlemen, and welcome to the Elekta Q2 report conference call. At this time, all participants are in a listen-only mode until we conduct a question and answer session, and instructions will be given at that time. (Operator Instructions) I'd now like to hand over to the Chairperson, Mr. Johan Andersson. Please go ahead, sir. And I will be standing by.

Johan Andersson

Thank you very much, and welcome to Elekta’s conference call following the publication of our Q2 report for the fiscal year 2013-2014. My name is Johan Andersson, and I will be the moderator for this call. Here in Stockholm, we have Tomas Puusepp, President and CEO; Håkan Bergström, CFO; the Treasury team, corporate controlling and investor relations.

We will start with a presentation by Tomas Puusepp and Håkan Bergström and afterwards conclude with a Q&A session. In the Q&A session we will ask you to limit yourself to two questions per participant.

With this, I will hand it over to Tomas Puusepp.

Tomas Puusepp

Thank you, Johan and once again welcome to Elekta quarter two conference call. It is gratifying to see that our long-term growth strategy is continuing to be successful. Business in the second quarter was strong and order bookings increased with 10%. The development in Europe, Middle East and Africa was particularly good and order bookings rose 32% in local currency.

Growth was strong in all territories. Our progress is very good in North America and order bookings rose 21% in the second quarter. This is significantly stronger than the market as a whole. In Asia Pacific we remain confident of the performance for the full year. For the first half, order intake has been roughly flat but this should be viewed in light of the sharp increase noted in the preceding year.

During the first half, net sales increased 10% with good growth in all regions. EBITDA, excluding items affecting comparability, amounted to SEK 555 million for the first six months. Compared with last year, the proportion of proportion of Leksell Gamma Knife units in the product mix was lower, but that’s on a stronger order intake. Deliveries are expected to be stronger during the second half of the year.

Exchange-rate effects had a negative impact of SEK 90 million. Adjusted for the exchange rate effect, EBITDA is up 8%. Also note that the second quarter last year was very strong for us, actually stronger than Q3 last year. So the comparison for Q2 was very tough.

Cash flow is expected to be significantly stronger for the second half which is in line with the seasonal patterns of prior years. We continue to fuel our growth strategy by price rising, investment in product development as well as in training and education. During the period investment increased by SEK 200 million which is mainly attributable to research and development and training and education centers. As the number of cancer patients continues to increase throughout the world, we see a growing demand for the use of radiation therapy as a modality for cancer care.

We reiterate our outlook for the full year. Net sales is expected to grow by more than 10% and EBITDA is expected to grow by approximately 10% in local currencies.

We are the technology leader in radiation therapy. Sales of our latest and most advanced linear accelerator, Versa HD is developing strongly, actually better than expected in our main markets which is Europe and North America. We have recently launched Esteya, our new solution for the treatment of skin cancer, which is actually one of the fastest growing cancer in the world. Skin care is a new and incremental segment for Elekta. Our customers have shown very strong interest in it and we are working at full pace to be able to deliver accordingly.

Elekta’s important development project, MR Linac, is progressing very well. Our research consortium recently met with MD Anderson Cancer Center in Houston as the host. The group represented a large proportion of the collective global expertise in modern cancer care. During the meeting, the members shared experiences and planned the next steps in development work.

We have also launched our new treatment planning solution Monaco 5. The interest from our customers is exceeding our expectations. In this solution, we have combined all key features from our existing treatment planning system into one platform. Monaco is a very competitive solution and with this platform we will be able to strengthen our market share with treatment planning software. As expected, Monaco received 510(k) clearance from the FDA during last week. And that's making it available for purchases and use in the United States.

Let me go through the development in our regions starting then with North and South America. The Elekta business in North America is strong and is growing faster than the total market. Our order bookings were up 21% in the quarter and our prospects for the full year continue to be strong. We had good progress with sales volume of our new Versa HD and feedback from our customers is very positive and exceeding our expectations. Reimbursement levels for the next year were decided by CMS in November and this means increased reimbursement for all areas applicable to Elekta.

For treatment with Leksell Gamma Knife, the reimbursement for next year is up and importantly, the suggestion of bundling was added on in the final decision. This means that customers still can get reimbursed for additional codes for the total procedure.

Turning to Canada. We experienced a continuing expansion and build-out of our capacity in cancer care and have very strong position in the country. As you all know, we decided to step up of the major procurement process in Brazil. The process affected the whole market during the period and order bookings and of course, also order bookings in South America due to that declined for us in the period. However with this effect and Elekta’s long term growth potential and commitment to the continent remains unchanged. And also pricing is back at normal levels.

Turning to regions, Europe, Middle East and Africa. We’ve had an excellent performance in the region and order intake grew 32% in quarter two and it’s up 26% from the first half. The established markets demonstrated favorable growth across all territories and we achieved particularly strong growth in Scandinavia and France. In Europe as well, Versa HD made good progress, which is fully in line with the ongoing plans towards demand for more effective and advanced treatment systems. We can also report that the first patient was treated with Esteya in Spain. The development in emerging markets have also been very strong in the region.

Then turning to Asia Pacific. The Asia Pacific region is characterized by a major capacity shortage and the prospects for growth remain good for many years to come. We are the market leader in the region and we see strong order growth prospect for the full year.

Elekta’s business in Japan continue to grow and our collaboration with Toshiba is performing very well and we expect to continue to increase our market share in oncology. Our cancer care solutions are much appreciated by customers currently using Siemens machines.

China developed in line with expectations and comparisons should take into consideration the record order we booked in Q2 last year. Prospects are good for strong development in China for the remainder of the year. In line with our growth strategy, we recently opened a Beijing LINC, Learning and Innovation Center, which is a state-of-the-art training and education center in China.

In India, import regulations for radiation therapy equipment were recently amended, and this combined with a weak currency, had resulted in delays of orders and deliveries. As I said, we see good prospect for order growth for the full year in Asia Pacific region.

Now, I hand things over to Håkan for a more detailed view of the numbers.

Håkan Bergström

Thank you, Tomas. Looking into the performance for the first half, I can say that it came in very well in line with our own expectation. And we do remain confident on the outlook for the full fiscal year. We base our forecast on a detailed bottom-up process, whether regions and the business units have good visibility based on backlog of course and detailed discussions with customer on planned deliveries.

Order bookings as already said increased 10% in Q2 and is up 5% for the first half year organically. Sales was up 3% in the quarter and 10% in the half year based on fixed currencies. As said, deliveries were very much in line with our plan. What is less in Q2 compared to last year was actually Gamma Knife and I get back to that in a moment. The order backlog is increasing and looking at the last 12 months it’s up 12% in fixed currency and in this year it has grown SEK 600 million up to SEK 12.5 billion.

Looking at EBITDA, as Tomas just said, it’s an increase with 8% excluding negative currency effect and non-recurring items. The negative year-over-year currency effect is 6% for the top line and impacted the result with SEK 90 million. Based on the current currency environment we do expect for the full year a negative currency effect of about 3% on net sales and about 5% on EBITDA.

Gross margin for the half year was slightly lower than 43% which compared to last year was negatively affected mainly by currencies but also by lower volumes of Leksell Gamma Knife in the first half year and somewhat also the medical device tax in U.S. For the second half of year, a high number of Gamma Knife will be shipped, which is based on the strongest ever first half order intake. So it’s very much a timing effect for the Gamma Knife that we saw and the business continued to be solid.

Non-recurring items related to legal costs came in at $61 million and the lawsuit with Varian is now concluded and ended. As said, we are in an investment period and the acceleration in product development is mainly driven by the MR Linac project. We do forecast gross R&D investment to be higher than 10% on net sales for the full year.

For tax, we have a tax rate for this year to be at 24%. There are quite substantial lowering of corporate tax rates and other initiatives that going forward we will benefit of and we will see us going towards 22% within, say, two years.

Now looking into cash flow and drivers there. As we already have communicated, cash flow will strengthen quarter by quarter for this fiscal year. So it’s obvious that cash flow now is expected to be significantly stronger for the remainder of the year mainly driven from the operating profit that is forecasted. The fiscal year forecast gives the cash conversion of around 60%.

Looking into investments, we have SEK 200 million for the first half and for the second half we see slightly lower level compared to the first half. When it comes to working capital, we foresee that net working capital will remain at the same level as last year which is about 11%.

In line with our seasonality, we have built inventory in Q2 which then will be delivered during the next quarters. So looking at the working capital items from the beginning of the year, our receivables – accounts receivables has increased with around SEK 50 million. Accrued income has decreased with SEK 300 million and inventory is up SEK 250 million. So all in all it’s on the same level.

Finally then a short summary of the question that we have received during the last month and how then we answer those. And one of the areas is when do elect the booking order and we do book orders when we have a signed agreement without any contingencies or if we have received a public tender or governmental tender award. Payment or payment terms is secured, we have a delivery date and we have a customer site. So with that order booking principle, we are quite confident that our backlog remains in very good shape.

In the backlog hardware service and software consist of slightly different maturities. Hardware obviously then Gamma Knife, Linac and some other pieces are sometimes bundled with software and mostly these are planned deliveries within 12 months of the date of order. It could be actual three months as well, all depends obviously if the site is already prepared or not. For software and some part – for service and some part of the software the majority will be delivered within 18 months. It’s no changes on any time that has been noted from past year.

When it comes to hardware, the majority of the planned deliveries for this year actually goes to emerging markets, while most of the software goes to mature markets. And also reminder when it comes to revenue recognition, that main principle is risk and reward, that risk and reward has passed to the call customer. This is frequently checked by our audit team and we have had that discussion yesterday and they have checked the number of projects and they have concluded that our revenue recognition has passed without comments, so basically fine.

We of course have a slight differences when it comes to when invoicing takes place but as you have heard that the crude income means that we are now invoicing more than we did before. So that ratio has improved. For more details when it comes to the revenue recognition and accounting principles, please read our annual report or contact myself or the IR department.

With that Tomas, I leave it back to you.

Tomas Puusepp

Okay, thank you, Håkan. As I said earlier, the business outlook for the year is good. We expect that this year will be another good year for us and in line with our long term growth agenda. We have a strong product pipeline with many interesting projects within all our product areas. The important project MR Linac is showing great progress. We reiterate the outlook for the year. Net sales is expected to grow by 10% in local currency. EBITDA is expected to grow by approximately 10% at local currencies, and the currency effect is estimated to be some minus 5% on the growth.

So to conclude, we reiterate the business outlook and we foresee good growth in all markets for the year. We anticipate a significantly stronger cash flow for the remainder of the year but remember we are also stepping up our investment in product development. We expect a good fiscal year with strong growth in sales and result and also good development in our R&D portfolio that supports the long term sustainable profitable growth. Thank you.

Johan Andersson

So thank you very much Tomas ad Håkan, and we will now start the Q&A session. So please operator?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Kristofer Liljeberg [Carnegie].

Kristofer Liljeberg – Carnegie

One question for Hakan. Did you say that gross R&D, spending will now be higher than 10% for the full year?

Håkan Bergström

It will be higher.

Kristofer Liljeberg – Carnegie

So could you give some more detail on that? Because previously you had said 10%, right?

Håkan Bergström

But it is around that level but I can get back maybe later but not today, I think we count on the 10% or slightly higher.

Kristofer Liljeberg – Carnegie

And then probably for Tomas. Could you give some more color on the Esteya launch? Have you been able to ship products already and what do you expect in sales number for the full year and going forward?

Tomas Puusepp

Very interesting in fact, and Esteya have exceeded our expectation quite significantly initially. So as all systems which we have in production as far as have they both with customers. We are looking for the possibility also to increase our production capacity for next fiscal year but it’s a limited number of units as you probably – that’s all of the case initially and it definitely is a very, very positive feedback from our users. And we have treated I think so far somewhere between 20 and 30 patients that’s been treated in Spain, where it was installed, very, very good response back from the user. We have probably underestimated their potential for this.

Kristofer Liljeberg – Carnegie

But then you say sold out, how many machines are we talking about for -- and that was for the full year?

Tomas Puusepp

Yes, for the full year, of course it’s a limited number of system for the full year, but all of them has been booked and will be delivered to our users.

Kristofer Liljeberg – Carnegie

But you don't want to give any type of indication how big this product could be in the coming years?

Tomas Puusepp

No, we are revisiting actually the numbers again but with the feedback we have got so far have actually exceeded our expectations. So I think the potential we’ve probably under estimated the volume of that, that’s by the response back to your question.

Operator

Our next question comes from Patrik Ling [Nordea]

Patrik Ling – Nordea Bank AB

Tomas, could you give us some feeling for a more tangible or quantitative feeling for how the launch of Versa HD goes? I don't know if you mentioned that in the beginning, but you just talked about it as very positive and exceeding expectations, but can you give us actually any numbers?

Tomas Puusepp

One thing I can give is – I think it’s 17 countries so far and what has happened clearly I mean, I am very, very pleased with that launch because it shows definitely that we are ahead of everybody else in this particular field, and when you look into what we have seen so far as first of all, it’s a shift when you look into the mix in our order books going forward. So we see more of – there was [indiscernible] but we are also seeing as we are taking market share in softer markets due to the performance which our user has been able actually to prove. I think in general it’s very, very good news indeed. The other component is of course that some of the largest market we haven’t got the clearance yet. So we have not been able to really look into the full potential in the world market. So where we have actually clearance all this product, I would say, very good news. And we expect also that some – and we talk about some really large markets as well, we don’t have the clearance yet and we have to look into what that will give us in the end of the day.

Patrik Ling – Nordea Bank AB

Just a follow-up question on that, you gave us a number of orders after the Q4, but you didn't do that after Q1. If you don't want to do that, could you please give us some sort of proportion of the total number of Linacs that were orders that were actually Versa HD?

Tomas Puusepp

The thing I can tell you that there is growth in this particular area, it’s pretty good and I also mentioned we have 17 countries where it has been cleared and we are both receiving orders and continue to deliver the product, and the feedback from our users has been very, very positive indeed. We will not release exactly number of Versa for the next two quarters, but it’s a very positive trend.

Patrik Ling – Nordea Bank AB

My second question is really on Asia Pacific. You mentioned that the comparison is pretty tough in China, with the $35 million order last year. But the one that you got for $25 million in September, is that one booked in this quarter, or the difference is really only $10 million?

Tomas Puusepp

Yes, but it was a very strong quarter last year for China but when you look into quarters to come, it looks very good also, we have a pretty good visibility in China and what’s going on, both when you look in and seeing orders but also larger orders in China, and it looks quite promising for China also for next couple of quarters.

Patrik Ling – Nordea Bank AB

But the $25 million that's booked already in Q2 now this year.

Tomas Puusepp

That is booked now, yes.

Operator

Our next question comes from Johan Unnerus [Swedbank].

Johan Unnerus – Swedbank AB

Yes, first question is regarding China and Asia. It was pretty poor order intake in the quarter, and you're pretty firm on the outlook for the rest of the year. Can you provide some visibility on that point? It seems to be important now, on the back of this quarter.

Tomas Puusepp

It’s correct. It looks pretty good for the APAC region. The one area where you can say that it’s little bit down predictable and which have changed a little bit versus what we did see in the beginning of the year and so on, it’s actually India. And because there are new regulatory requirements in India that could slow down the process quite significantly. And you also have the currency impact also in India. However that market is I would say relatively low impact on our numbers. But that is actually the one area where we feel a little bit down [ph] also for the next few quarters. But all the other countries where it looks pretty good. And we are very strong in China, very strong in Japan and these are the two most important in the APAC region.

Håkan Bergström

Maybe I can add then Johan, when it comes to China and I think most of you are familiar with the process that goes on and also the healthcare initiatives, so there are investment programs in place and we had quite a bit of review of that last week but it’s also that tender process is sort of three to six months in advanced of a booking, we actually can see where tender is coming up and by that assessing the volumes. And that very much supports the comment of Tomas.

Tomas Puusepp

Another comment also because recently two weeks ago and also met the official and you would see that the new government would like to stimulate even more investment in this particular field, so that could open up also for PPPs now. So that will also start to change the dynamics in the countries as well. So it looks very good indeed for China and Japan [ph].

Johan Unnerus – Swedbank AB

And to get a sense of proportion what -- how big is India versus the rest in this –

Tomas Puusepp

It’s a relatively small compared to China and Japan, of course, it will also have lot of impacts and you probably know, that’s always been the low margin market. So bottom line is that has a very little impact.

Johan Unnerus – Swedbank AB

And finally on the reimbursement on the Gamma Knife, it was -- already earlier it was an open question if this was the final reimbursement or not. And you're now mentioning bundling. Can you give us a sense of the sort of -- what we can expect in that term for 2014? Is it significantly ahead of the 3500 or --

Tomas Puusepp

I think in general if you look in reimbursement what’s been released now in the end of November was a positive receipt, I think for the rollout – that includes actually all areas. But you carve out the Gamma Knife the first clients which we have down there together with our users, what does it really – what is the impact and you should also know that on the – if you look at reimbursement point of view this represents just 30% of the patient flow, Medicare, Medicaid patients represent only 30% of the patient flow to the Gamma Knife, but we can take that 30%. It’s what user will receive is around $6800, which is just not bad at all. So when you look into that I would say that it’s positive news. Of course, everybody like that more, I will say that this is what one should expect and that’s what we expected also, that’s an outcome from this exercise. But in general if you look in the total reimbursements, then the new reimbursement which has been released is quite positive for our business for all areas including rapid therapy, including Linac, [indiscernible] and stuff like that. So actually altogether it’s pretty good.

Johan Unnerus – Swedbank AB

So for the bundled Gamma Knife, it's as high as $6,000?

Tomas Puusepp

Yes, it’s about $6800, when we did the calculation together with our users.

Johan Unnerus – Swedbank AB

And that seems to be about the interim from late August?

Tomas Puusepp

Yes, now it’s positive yes.

Operator

Our next question comes from Mattias Haggblom.

Mattias Haggblom – Danske Bank

Question on Asia. We've had now two quarters with 8% and 9% growth, and then this quarter with 7% decline. If I average-out the tough comparison to second quarter year ago, it seems like Asia is now growing mid to high single-digit, at least in the short term. Any comments on that?

Tomas Puusepp

No, in general we do have to look a little bit more over the role in 12 months, when you look into that – when you look in mid long term, this is actually double digit growth market. You could during one quarter and actually during two quarters, if we get a larger order or not, that could actually have an impact on that. But overall if you exclude India, all markets are actually quite positive. India, I would say, it should be quite a much and we don’t know when that will actually change, but all other markets, all indicators and we have spent a week actually out there together with the management team, so we reviewed every single country in the APAC region and it actually looks pretty good. And what is of course dominating that market is the two countries China and Japan, pretty strong – very robust market and lot of interest and potential for the future.

Mattias Haggblom – Danske Bank

And secondly, on R&D investment, on a 12-month rolling basis you've grown R&D faster than sales for almost four years now. I recall a comment from Hakan probably that next year -- next fiscal year, R&D would not grow faster than sales. Given where your integrated MR Linac product is, I have difficulty seeing that, and it seems like R&D investment will be rather accelerating. So any more color on that given the recent developments and comments on the R&D consortium meeting with MD Anderson, etc.?

Håkan Bergström

I have a hard time commenting on your comment. I think my comment is still the comment that we will have that – that coming fiscal year which I understood the question was more about the growth – the increase of R&D spend will be more in line with sales.

Mattias Haggblom – Danske Bank

It's grown four years -- it's grown faster four years in a row now, and this seems to be the fifth year. Why would it slow down next year given where the –

Håkan Bergström

It’s basically based on ambitions and planning and that’s what I am talking about. So strengths – when it comes to R&D is what the ambitions that we have in the company and the pipeline we are working with. So that’s basically what – where the comment is coming from.

Operator

Our next question comes from Ian Douglas-Pennant.

Ian Douglas-Pennant – UBS Ltd.

Just a quick one on cash flow. If I'm right, you've slightly lowered your expectations for cash flow for the year. Can you just remind us what has changed there? Are you finding more opportunities for investment? And also, maybe you could comment on your payables? I think there was a comment on this at the full year results where it seemed to increase. And I think you put that down at least in part, due to cyclicality. It seems odd that it should rise again at Q2. Maybe you could just talk to that; maybe I've missed something a bit there?

And also on South America, it looks like you had a weak quarter. I guess this is just directly translated through from your correct in our view decision not to participate in the tender there. Is that correct, or is there something else going on? Thanks very much.

Tomas Puusepp

Starting with South America maybe, I think what we are saying there is that the market has been little bit particularly in Brazil on a wait and see mode to see without some of the tender, now when the tender is sort of history, the market is coming back, it looks pretty normally in the way that, that market is performing. The other market obviously in South America has been affected by the tender. So that is still ongoing. When it comes to cash flow, Ian, the 60% cash conversion – I mean we have said that 70% cash conversion over a number of years is a good indicator. Last year I think we came in at 78, 76% maybe, high 70s anyway in cash conversion. This year we talk about 60%. The main difference between the years is actually the investments program that we are running. So I don’t think we have changed anything except that we are being a little bit specific.

The working capital which I think has been most discussed lately is on the same level. Payables I think as you have already answered, yes, that is [indiscernible] business if you like, the more volume that is coming through in each quarter obviously our suppliers send their invoicing and we pay it accordingly to the time when we should. So it’s nothing different in that than we have seen in the past.

Ian Douglas-Pennant – UBS Ltd.

Okay according to my analysis, it looks considerably higher than it has done in past Q2, but maybe I'm looking at it the wrong way.

Tomas Puusepp

Yes, but we also produced quite a lot, and as I said we are building inventories. So we have more volumes coming to and it’s nothing different – it will be different in different quarters when you compare but I can assure you that, that is nothing you need to be worried about that.

Operator

The next question comes from Veronika Dubajova.

Veronika Dubajova – Goldman Sachs

I have three questions if I can. One, Tomas, I just want to follow up on your comment that you made in your introductory remarks, discussing the Asia Pacific order book trend. And if I take it, the average over the past few years, your orders there have grown in the high teens. So can you give us an expectation, do you think 2014 will be a year where your APAC orders grow still in double-digit? Or, given what we've seen year to date, are we likely to see a single-digit growth in the orders for Asia Pacific? And if you can just walk us through your expectations for that on the full-year basis, that would be very helpful.

My second question is on the gross margin; and thank you for the color in terms of what drove the deterioration. I think when we spoke earlier in the year you had suggested that gross margins would be flattish this year. Given where we are in the first half, is that still and expectation you have? Or should we be anticipating a contraction in gross margins on a full-year basis?

And my last question is just on pricing dynamics. I think there's been a lot of concern given the Brazilian tender, in the market about pricing competition and behavior of your largest competitor. Can you give us a color, on like-for-like basis, where pricing has trended for you in the orders that you've booked in the second quarter? And how you're thinking about that dynamic going forward?

Tomas Puusepp

Okay, let’s start with Asia Pacific there. We don’t guide per region but again as I mentioned earlier it looks pretty good in Asia Pacific. The only market where it’s a little bit unpredictable and where we also have seen a slower than expected in the beginning is actually India. But all other markets look actually pretty good. So we don’t foresee a change in our view in region except India.

Veronika Dubajova – Goldman Sachs

And Tomas, maybe you can just quantify, is India big enough to move you from double-digit to single-digit growth in Asia Pacific, or not?

Tomas Puusepp

If you look in mid long term in that market, it is actually a double digit growth market.

Håkan Bergström

I mean the gross margin of course is factor of different things and the currency as we go along this year still will be negative but relatively less negative than the first half which is obvious. The Gamma Knife as we talk about will come back, so that, that’s behind. Unfortunately the US medtech will still be there. So overall I think we can expect maybe a slight decrease but quite okay I will say versus previous year.

Veronika Dubajova – Goldman Sachs

And any change happen in your expectations, medium term, for gross margin improvement?

Håkan Bergström

I mean the gross margin is of course coming from different dynamics, product mix is one, geographical mix is another one. But mostly based on volume growth, so based on the continuous volume growth over 10 plus percent, the gross margin should, if you take away currency and all that, should actually grow.

Pricing is short one there, we look at our pricing, obviously I mean this is a little bit different if you take the full market but our pricing is still going up. If you look at apples and apples our pricing intake is going up. Obviously we now have Versa coming in which has the highest price point, still we haven’t delivered that much of Versa, it’s still in the backlog, it will come to next six, 12 months and see that effect. So in general pricing I think is stable but slightly increasing.

Operator

Our next question comes from Hans Mahler.

Hans Mahler – Handelsbanken

First, regarding the market, maybe you can update us on your outlook for the global growth for the radiation therapy market if you look globally, and then on US, Europe and the rest of the world? And secondly a question for Hakan regarding the cash flow, can you maybe give us the components of the negative cash flow from the financing activities that was almost negative SEK 800 million in the quarter if you can? Thank you.

Tomas Puusepp

In general when you look into the radio therapy market developments now most quarter has been, actually in the past but also what we do see in the midterm at least on the world market is actually continue to be good. And we haven’t changed any of our views of how the growth looks in this particular segment. There is no change in that respect. The only market where we have said, we have seen a weakness are countries, actually India. But all the rest of them is quite robust and you can see that in order intake and actually more or less in all areas have been very, very good indeed. So we haven’t changed our mind there at all. So when you are looking in the tier market, if you look at mid long term it’s a single digit growth as we have mentioned in the past, we have done better than that, but that’s what the market it looks like and if you look in emerging markets it’s a double digit growth. No change there.

Hans Mahler – Handelsbanken

So that translates into your high single-digit for the global market then or?

Tomas Puusepp

Yes.

Håkan Bergström

On your question, Hans, on the cash flow, it’s dividend. So for our shareholders we pay dividends, so that’s the answer.

Hans Mahler – Handelsbanken

Okay so that's the full amount there?

Håkan Bergström

Correct.

Operator

Our next question comes from Lars Hevreng [SEB].

Lars Hevreng – SEB

In the Q1 you talked a lot about expected bigger orders towards the -- for the remainder of the year. How would you characterize that the inflow of more significant orders in the second quarter? And what should we anticipate for the third and fourth quarter? It seems when you were talking about it that Asia in particular will be a key component of that, but could you give us some kind of flavor on that?

Tomas Puusepp

Yes, you are right. We had one large order of course for the PLA and the Gamma Knife PLA order of six Gamma Knife. But of course we have a very good visibility of the larger order, because that is something we are working for quite some time and we know more or less when it will happen and that will happen also for next couple of quarters, absolutely. There is no question about that. So we are expecting some larger order for the four quarters to come. I can tell you we have a very good visibility of those.

Lars Hevreng – SEB

And on that aspect how would you characterize the second quarter?

Tomas Puusepp

The second quarter we actually booked the PLAs for the second quarter, the Gamma Knife PLA order. So that was one of the larger order in Asia. But to answer your question also, will it be more, yes it will, definitely for sure, without any guess, we know that.

Operator

Our next question comes from Romain Zana [Exane BNP Paribas].

Romain Zana – Exane BNP Paribas

Thanks for taking my question, three if I may; the first one on the MR Linac project. I was wondering if you could give us more visibility at this stage on the timeframe for the launch. And the other question may be more for Hakan. You guided at the beginning of the fiscal year for more than 20% increase of the R&D investment, and after six months the total gross R&D spending are up nearly 30%. So should we expect lower investment in H2 or should we understand that the more than 20% actually referred to investment after capitalization, which obviously implies a greater portion of capitalized R&D for the fiscal year? And the last one, very short; if you can just give us the level of the exact cash conversion achieved for the first part of the year? Thank you.

Tomas Puusepp

I will start with the MR Linac before I hand it over to Hakan. This is several years project. The exact launch is not – I will not be able to release that information to you. We have a very good and excellent plan together with consortium and that is exactly on track. So I think everybody, including myself, is extremely pleased with the progress together with our consortium member and it’s clear the feedback we get from them is not only that we are on track, it’s also that they expect that this will actually make a significant contribution in values for the patient, but it’s of course a very important thing also for us to motivate them [indiscernible] when it will be there for commercial release.

To give a little bit, I have talked about the process is that the first – which is close now the first group of a consortium member they will actually start to use the MR Linac prior to its commercial launch is a question. That is clearly communicated also to them. So they are very well aware about that, but there’s nothing I can release to you. The only thing I can release to you that I am extremely pleased with the progress, very, very pleased with the feedback we get from the consortium member about what this will actually give them the patients in the end of the day. So by that I also hand over regarding the cash flow and your other questions to Hakan.

Håkan Bergström

The R&D question I think we have remained with the comments we already had during this call saying that this is around the 10% and we probably can take a more deeper discussion, if you need more than that, but that’s sort of the guidance that we are giving. When it comes to cash conversion, obviously with the cash flow that we have in Q1 which was weak, and now we have still weak but positive in Q2, the cash conversion is quite low. And I think we can have that discussion offline as well but I think more importantly at least the way we communicate is the second half will be strong leading into the 60%.

Romain Zana – Exane BNP Paribas

And this will be based on as you say better operating profit, but you also expect an improvement of the working cap in H2?

Håkan Bergström

I mean basically it is exactly – the operating profit is substantially higher in the second half which gives sort of a good base for cash flow. We anticipate when it comes to working capital the year over year effect to be almost zero. And then in taxes and all the others coming in there, I don’t think it’s much to comment on, it’s pretty normal. That is if you add those together you can get a number very close to 60%.

Operator

Our next question comes from David Adlington [JPMorgan].

David Adlington – JPMorgan

I just wanted to follow up. Most of my questions have been answered, but just wanted to follow up on ForEx. The SEK 90 million you've booked so far I think is probably a net figure. I just wondered what your hedging gains were so far this year, so you can come up with a gross net figure. What I'm trying to come up with is what the potential impact is going into FY’14 and ‘15 as the hedges roll off. Thanks.

Håkan Bergström

We have for this fiscal year and basically the way this currency stays around 70 million positive, that’s the ending effect and obviously that will then not happen the following year, all depends of currencies. So with your logic, you can say that with today’s climate of currency we will have a negative 70 million for fiscal ’14, ’15. Does that make sense to you.

David Adlington – JPMorgan

That makes perfect sense. Thanks very much.

Operator

Our next question comes from Justin Morris.

Justin Morris – Bank of America Merrill Lynch

My first is on the gross margin again. I'm struggling to understand why the gross margin goes down more and more each quarter. Obviously, most of your production is in the UK and the sterling has depreciated, so if pricing was stable I would have thought your gross margin would be going up. So, some comments on the pricing again, especially in light of the market leader saying that they're becoming more aggressive on pricing. Then my second question is just on R&D capitalization. I believe at the end of the fiscal year you said that R&D capitalization would be flat as a percentage this year versus last year. But if we look in the first half, it's still going up significantly each quarter. So, if you could give us some idea of how that will develop in the second half and also going forward that would be very useful. Thanks.

Håkan Bergström

I think partly when it comes to the gross margin, currency and all that, I prefer to take that offline, it takes a little bit – I mean we are just a minute or two left. If you can schedule a meeting and I can go through with and for the interest for all, others we send something out, but this is too deep that we have to cover it right now. But the comment that we have made I think is what we believe and what we see in our numbers but I need to assure – this is what you should see as well. When it comes to the whole R&D capitalization I refer to the same logic that let’s go through that more specifically, so you see what we see and we can talk about that.

Justin Morris – Bank of America Merrill Lynch

Maybe just a quick follow-up then on the pricing. What are you seeing in terms of behavior from the other participants in the market? And how are you responding to that? Because the other participants appear to be suggesting they're competing more aggressively on price, and that's also what we saw from your press release on the Brazilian tender. So it would be good to get some color around that.

Håkan Bergström

I will try to do my part and Tomas will obviously jump in. But pricing – actually the Brazilian one, we didn’t take that orders, so it’s just not going to affect us, it’s probably going to affect them. So as always when you have a situation in any case when you compete, I mean you have to choose your own level of pricing what you can accept. And in this case, we have assessed [ph] that they will be more aggressive, of course, we have to look into that but looking at sort of – before the tender and after the tender this has obviously been done, and I don’t see any change from the orders we are taking and obviously I can’t comment on what they do and how they price themselves. But our pricing remains quite stable. But this field has always been competitive, so it’s not anything is given away or anything like that but we have sort of a business case when it comes to new products coming up, I think we have a good argument keeping the pricing up.

Tomas Puusepp

Actually as we have – our average selling pricing is actually going up. Versa HD is of course a higher price than our other Linac’s, and other projects that we actually get what we ask for. So I think it’s important to say, of course, we always have competitive offering and that’s what we do with and more comprehensive solutions and more larger commitment also to the users, make actually also the pricing to be much more dependable as well.

Operator

Our next question comes from Stan Gustafsson [ph].

Unidentified Analyst

I think most of my questions you have already answered, but I just want to come back to the gross margin. I'm trying to understand the dynamics there with the sales mix. Would it be possible for you to share the breakdown neuro and oncology and software in Q2 please?

Håkan Bergström

As we don’t for maybe obviously reasons disclose all the details with different product lines. I think we can spend some time also offline going into the dynamics of that you are asking for. But generally speaking very much all sort of the last year’s comparison is currency, less Gamma Knife explained a bit and then we have this medical tax in US, which is in light of the difference, I mean minor but still has a negative effect.

Johan Andersson

All right. I think the clock has turned 11 and we have scheduled this call for one hour. So if you have any further questions, do not hesitate to contact the investor relations team and with that, we thank you very much for the conference call today and look forward to talk to you soon. Thank you.

Tomas Puusepp

Thank you.

Operator

Thank you. Ladies and gentlemen thanks for your participation and this concludes today’s conference. You may now all disconnect your lines and once again thank you.

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