Q1 2020 Earnings Call
We thought about the hospitals side leave aside the freestanding clinics, but just the hospital side what is it that you learned during that time period that you think might be applicable to how hospitals might respond in terms of capex allocations for the next year or so.
Yes, great question and we are looking at it so let me wander for a second I'll get right. Here question I think one of that really important things to keep in mind is how much that business has changed over the last decade. So at that point in time services were about 30% of revenues.
Today, there are 50% of revenues at that point in time, the Americas was a much bigger piece of the portfolio America's product today.
Im fit bond this Mike, but 20% to 25%.
So and that's probably down 10, 15 points from where it was in 2009 or or 10. So so that the company is much more resilient much more diverse in our backlog coming into this 30% higher.
Than than than that point in time, we did debt. We did look at the comparison 2009, maybe Chris you want to take the could team through a comparison here.
Yes, if we go back to 2009, we outpaced the rest of the market in terms of orders growth during that time. So the rest of the market saw some decline I think that there is a similarity there in that if you look at our trailing 12 month market share on both orders and revenue we are up. Additionally, as we look at the Mark.
Good how are we still see the trends such as adaptive therapy being very important as we think about personalizing care for patients and the market reception on E. Those with the 11 orders in the quarter in North America, and the overall market reaction that we've got something that really leapfrogs utilizing.
Artificial intelligence has been strong so our portfolio is much broader now then back then as well as when we look at our position in the market, we really feel that weve never been in a stronger position competitively.
Thanks, very much on the back in Q.
Our next question comes from Matt Taylor with you'd be US. Please state your question.
And that's.
Hi, Thank you for taking my question.
All right. So first thing I wanted to ask about you mentioned early in the prepared comments on there has been a shift in some centers at least.
From surgical intervention to radiation therapy, and I guess I was wondering if you could expand on that as that.
Serial trend do you think it's temporary how big is that ship them.
Chris Yeah, Hey, Matt.
So we have seen it in a multitude of different cancer service lines lung head and neck as another example.
As it initially occurred it had to do with hospitals focusing on cope at 19 for patient management eating as many inpatient beds available as possible.
Some indicators were seeing is that this is not just at U.S. phenomenon in discussions with the NHS in the UK I'm, specifically looking at centers in England. The feedback came that they saw the same shift and we got that input from a surgical oncologist at the NHS, who is in a leadership position from a long term perspective.
I think this continues to move towards the increase in hype of fractionation of which were best position.
In terms of portfolio in the market and total number of patients with well over a million patients treated in the hypofractionated environment. So I do see elements of it sustainable time will tell but more than anything it just underscores type of fractionation.
Gotcha Gotcha, Okay, I was trying to piece together when you think about the different.
Moving parts in the first quarter.
Really kind of Q2 small questions are one is.
If you think about how you're trending before co bid and if you didnt have a disruption that did at the end of the quarter.
In the U.S. or in China could you speak to how you think you would have grown on an underlying basis and then.
You talked about that.
Side surprise in terms of the come back you saw in Asia Pac.
Why do you think you came back more quickly and where do you see in the current trends there in April.
You know matta.
It's hard to say I've forgotten everything that happened before March nine.
No.
So it's a little bit hard to say I think if you were just look at last two years. That's the trend line. We've been on that's probably a safe assumption for where we would have been.
Chris do you want to talk little bit about the China recovery and what we're saying pick what we saw their Mount It was that the cancer care is continuing to be at the top of the list of need in terms of resumption in so as there was some.
Loosening are returning to normalcy, there was a desire to resume installations as quickly as possible. So all that in both China and South Korea.
This really does continue to reinforce as you think about globally. The reference to in 2020 and estimated 18 million new cancer diagnoses moving in 2030 to 25 million reality is there still major gaps and access to care. So we foresee with our backlog which is greater than.
$3 billion of product.
That as we get to a place for Lockdowns release, we will be able to resume installations pending vault construction completion.
In other preparatory requirements.
Maybe just a little broader context as well, Matt China is our fastest growing market. We are cautiously optimistic about what we see where the market leader.
Chris talked about net promoter score the highest net promoter score for the company is in China. It's it is off the charts. Our team there is doing a fabulous job, we've invested significantly to become really viewed as a local brand.
Yeah I'll it's.
Treatment volumes are recovering and you know in March we saw pretty much a rebound to to their historical level in in that in that geography. There are almost 5 million cancer patients a year there.
It's not so much of reimbursement driven market. So it's it's a centrally controlled for eventually executed funding model. So it's not up to some of the vagaries that we have in some of our other other markets.
Great. Thanks, Don Thanks, Rob Thanks for the color.
Our next question comes from a reasonable with BTI G. Please state your question.
Alright, Thanks for taking my questions really appreciate it.
Just a quick one here as well definitely encouraging to hear the signs of resumption to normal in China, South Korea, particularly on the orders side could you frame up for some of the difference is obviously I know, there's a greater demand for cancer care in those emerging markets, but then as we think about U.S. and as things start.
To lock down.
Hi, Thanks.
Returned to normal how should we think about the you all.
Trajectory any any color on how you might be thinking about that is a fairly.
It's a good question.
We're having to debate had another we know the full answer your question Murray and side its a.
We are seeing recovery to China. It is more centrally mandated it's not so much.
Yes.
Susceptible to kind of that.
Pre market so to speak.
It's one of the big differences, though is that radiation therapy in China is an inpatient inpatient treatment as such it really the short term impact was much deeper in China. So we didnt see the us.
And as sample of the Thousandish customers that we looked at we didn't see a.
We didn't see much of that steep fall off in us compared to China, because in China. The patients revenue to go into a hospital into a more of a cobot environment, it's more outpatient whether hospital or non hospital based here in the U.S. and a little more coveted friendly so to speak so we didnt see the treatment volumes in the U.S.
Move.
Move down.
You know I as we kind of model. It. It's a it's a really good question I'd say our base case is that it's an environment that is described as recession ill with economic slowdown and geopolitical stability that North America would open by the end of May.
That EMEA countries open variably in the next few months China continues to recover.
I think we'll still see some ongoing.
Southeast Asia Korea, Japan locked down in Australia locked down into the summer. So that's kind of our base case.
But the reason not to give guidance as there is a reasonable probability of a high impact case.
Which is does it switch from recession said more severe economic outlook are there geopolitical instability is as recovery delayed into 21, when do we see do we see a second second surge of the disease. So that'd be kind of the high level macro environment from a scenario plan.
Turning that we're looking at Chris you want to talk little bit about some of the U.S. market stuff and one of the other pieces I'd add as we think about the US is the position of our services business. If you look at external benchmarking such as I envy, we were rated three.
Three times higher in net promoter score than other service providers and as I shared in the.
Call, we've watched the criticality of radiation oncology really increase as part of the pandemic and so with greater than 50% of our.
Business in the North American market coming from services, we feel very strong with that as a baseline as we continue forward.
So it.
Conclusion as it is a little uncertain in the short term no as we as we said in his script.
We do expect a little more pressure in Q3 with sequential recovery in Q4.
That's really helpful. Thank you.
Mentions yet political stability I know there has been increased rhetoric in recent days for your question.
With some flare intentions in China are there any early thoughts or early preparations you're taking now and in case. There is a resumption of trade war tariffs that sort of thing.
Well, we've we've been very aggressive over the last year and a half at repositioning our supply chain and capability. So that we have a lot more flexibility in our supply chain I'd say those plans are 80% to 90% done. So we feel very good about the about the position that we're in so that we don't have the kind of them.
Back that we had.
In the last.
Last year.
Thank you so much.
Our next question comes from Anthony Petrone with Jefferies. Please state your question.
Thanks, Nick and healthy and doing well.
Thanks for all the detail you need to on on oncology one on proton the two questions on on a quantum apology business.
I guess specific to the us would be.
One just conversations with.
With hospitals around how they're looking at capital budgets at this point, obviously, there's still a lot to be determined but just any data points there.
The second question would be we're hearing increasing chatter on.
In a further potential delay to the radiation oncology bundle. So is that still a gen 120, 20 alive or or is there potential for that to be pushed out.
And then I'll have a follow up on proton therapy.
Chris figure day, Anthony So first on the conversations with customers.
As we've been going through with customers the activity and their planned or proposed purchases. What we've seen is the larger health systems with more spread out networks are continuing their plans some community hospitals, who van more impacted with cope at 19 in there.
Local or regional area have.
Looked at a assessments around timing to proceed forward, we have not I heard feedback from them at this point that they have stopped their plans around specific projects more of a timing conversation and then within the freestanding segment little bit of a mixed depending upon geographic position of the institution.
You know as we do look at the mix I know I've said at a few times, but in North America greater than 50% of our bases services, which is a really important part of the business and it keep strong continuity with each of those sites. So it's still too early to really make a call with respect to North America and we're continuing to.
To stay close to our customers on the second point regarding BPM really as we've seen ATM since the inception in discussion around that value based care is where the market has been heading towards we have the best portfolio for value based care environment, we have not seen any.
Impact on purchase decisions from ATM in fact, if you go back to Q1, you saw solid North America orders growth.
I also heard our commentary around some of the push outs in March and related to cope at 19, and really tying to North America. So.
If anything we've just seen the consistent focus as folks have been preparing for ATM.
And thus, we don't really see it as a big net.
Impact one way or another with respect to slightly longer delay.
And question not only nonsense.
Yeah, just a follow up would be again do you think the excellent Dave can be pushed out.
CMS, we're hearing it could.
You pushed out even further than January 120, 21, so the first one and then.
On proton it we you know you have the loan impairment this quarter.
Just as you think about the proton portfolio are there any.
The other impairment risks across that portfolio. Thanks.
Mike.
Yes, Anthony Good question, Yes, we did have an impairment with CPTC this quarter, the California proton.
Therapy Center treatment Center.
And it was going to covert environment the operations were impact predominantly through.
Slower patient volumes and affiliation with the significant clinical partner that stalled.
Quite frankly their ability to refinance their debt in this market is at risk.
So those were the factors that were unique to see PTC and so we believe it's and it's an isolated situation thats why we took the impairment.
Based on the patient information that's available to us at the into the quarter.
We don't see similar risk it other centers at this point, but we review these things regularly.
Okay.
Thank you.
Thank you. Our next question comes from Jason Butler with Piper Sandler. Please state your question.
Yeah. Thanks, good afternoon, everyone, let's take questions and all the detailed in prepared remarks, there down Chris.
Couple of questions from Us maybe starting on your European franchise, where where growth is really strong going in the quarter. I believe you recently had a leadership transition over in Europe.
Planned transition, but a transition nonetheless.
Spent a region, where bearings up phenomenal job growing above market winning over some key accounts. So just hoping you could offer some views today on the stability that franchise going forward now in light of that leadership change and the pandemic.
Yeah, I mean out from a market point of view that markets, obviously been on a tear last couple of years.
So we had a very significant quarter again this quarter.
With two large wins that I mentioned in the script the National Health service in UK and pharma standard in Russia.
So those are two very big wins, we do worry a little bit about that market in the second half.
Ill so.
We look as we look to Italy, Spain in particular.
What the impact is in those markets clearly theres going to be a slow down to recovery in those markets.
I think adds there would be as we look at the region.
First to me is really a composite developed Europe as well as some growth.
Platforms, So India as an example, we consolidate in our EMEA geography. In addition to that as you think about Africa, where the population over a billion and very restricted access to care across the continent. So when we think long term about the region. We have both the replacement cycle in the developed market or we have a very robust instead.
Ill base, and then a lot of growth opportunities throughout the emerging areas.
The Cts I acquisition that we made positions us well in those growth opportunities those or geographies, where you see a smaller or reduced number of clinical personnel to perform treatment planning or other services and so Cts I can.
Augment nicely and mix for another addition to our portfolio of solutions. So in net we will see some areas, which for harder hit by the pandemic that do slowdown, but it's a very diverse geographic platform.
And we remain positive from a longer term perspective.
Very helpful. And then just two more quick follow ups for me.
First I don't think you made any comments and sorry, I missed abound, maybe comment on.
Your long range plan provided back in November just didn't know if that was something you're recommitting to today or not.
And then a quick one on those just any timelines that you're getting on windows that to prove a lot of China.
Yes kit the approval one first Chris and then I'll talk about long range stuff sure on.
China approval for eat those sets its in the 12 to 14 month range in terms of clearance.
I do want to make one other comment on east coast, though it was in.
Prepared remarks, and this emphasis around as we look at a 100 patients treated at our first center her love Hospital in Denmark.
The results of 50% reductions in dose to critical structures and more focus on the target I think this is the type of data you're going to see common thats going to really drive ethos across all of the markets.
And then relative to the first part of your question, Jason and I can assure you that we did not have covance 19 in our long range plan. When we when we generated clearly our long range guidance is based on our business momentum and long term outlook combined with our strategic initiatives and the kind of.
Execution track record that we've had.
We still feel very good about this strategy, we think its overall strategic direction that company is right on we're going to continue to invest in our R&D initiatives.
So it's.
Heavy organic growth you know with some M&A will continue to look at our.
Interventional.
Solutions business, how we can enhance that the portfolio very well positioned to grow and take market share over time and expand the market through our technology enabled services and other softer offerings.
We mentioned on the call this win that in Texas.
Memorial Hermann $15 million over five years.
Thats something we would not have had one year ago and.
You know the Cts I acquisition is continuing to really have a great impact on the on the company.
And feel very good about when we talked about how in the last.
10 years, we've gone from 30, 35% of the company being and services to over half the company today being in services I think we got round two of that coming and.
With the with our Cts I build outs, we like it.
So is the short term as short V or along the year, along l. or whatever your economics trends like to like the call. It.
The short answer is I don't know.
I would say our long range when once we get through that trough. We think this thing is right back to its up to as long range targets.
Very helpful. Thanks, so much.
Thank you. Our next question comes from Jeff Johnson with Baird. Please state your question.
Yeah. Thanks, Good evening guys a.
Higher level. They didnt good evening I'll leave you want higher level question for you and Chris and then maybe one modeling question.
For Mike, but from a higher level down to 40, what do you think conversations are going to go over the next six to 12 months.
Various hospitals and other service providers on the hierarchy of radiation oncology versus other hospital capex that could happen.
I think back in the 2910 period radiation oncology given us returns did have a high priority in where hospitals would stand I think Chris as mentioned in the past. There is some 5500 C series, probably down to 5000 C series, let axe out there now that could really get to a nice throughput advantage. So just how to think about the high.
Are you spend next year at the hospital level.
No I think other than the kind of Covidien preparedness and what do we see for IC you capacity events I don't think it changes.
Yes, Chris you want to add anything that corresponds to some of the independent research we've seen that it's still very highly prioritized and Jeff as you articulated. The ROI is very strong that ROI being strong does not only manifest itself in the us submission think about other mark.
It's where maybe it's a socialized health care environment, but it's not a specific dollar return if you look at what one linear accelerator can accomplish in terms of number of patients throughput per day versus an L.R.. There's some real advantages. There. So I think it's too early to tell you know as we shared we've been looking at a multitude of different scenarios, but we.
We still see radiation oncology, having a strong position, but economically and clinically.
All right. That's helpful. Thank you and Mike just from a modeling perspective that 50% of your revenues that services.
Historically, we tend to think of that growing on whatever your TTM installed base has grown maybe some competitive wins in there as well is that the right way to think about it still over the next few quarters, our hospitals asked a little for any kind of relief in the near term on what their pain, maybe for some of the services anything at all.
On that part of the business can that 50% really continue to grow here in the next few quarters and really protect the hardware downside that we'll see maybe in the near term.
Yeah, Jeff.
As Chris stated in his prepared comments, we believe it our services business is relatively insulated and that business has been built up over many years as we've grown our install base and invested in in software and software investments also give us the opportunity.
To to obtain software service agreements over time, so that those growth elements.
Have delivered very strong services growth over the last.
A couple of years now the services growth this quarter is 11%.
No organically from a from a non college you perspective, that's around 4% growth.
So thats a little bit more in line with our install base.
We did have some some.
Some some revenue that we took last year.
Which depresses the growth rate year on year, but for all intents and purposes. We're in that mid single digit services growth rate.
Year on year and that tracks very well with the installed base plus the innovations that we've driven in our on our software.
Thank you.
And Jeff as well the other thing and I know that you took a look at this.
Ill.
12, 18 months ago, but it's not to be over looked at the proton services is growing 61%, we continue to handover rooms operationally and as we do and the move through the warranty period, we were able to generate services revenue there. So.
That's a really good.
Story from an economic perspective in that business.
Understood. Thank you.
Our next question comes from Visa Kumar with Evercore ISI. Please state your question.
Hey, guys. Thanks for taking my question I had a few so hopefully I can rattle off as much as I can one that maybe on the comments around March.
Business trends heading in April was the last week of Marcelo Directionally for you guys. The worst are we passed the worst or is it pull the worst after you guys.
Any color on how we should be thinking about the upcoming quarter I think would be helpful.
I'd say you know the third and fourth week in March 1st week April kind of the same.
Got dotcom and then on I guess the.
The service revenues up double digits, we strongly.
Is let's Cts I've flown through that piece as well and just how we should be thinking about from just given the lockdowns on Monday.
Yes, it he aside does flow through in our services business.
Turning to see how it happens in the.
In the in this environment a lot of this work is done remote and a lot of it is supported by electronic digital technology. So.
It's actually you know as a second Memphis me or Chris who said in our comments the number of treatment plans. We're doing on an annualized rate has doubled we've gone from 8000, a run rate of 8000 Shimon plans year to 16000 treatment plans year, you can see the kind of confidence that our customers are putting enough.
Yes, and yes, there was a we saw a bigger fall off in China, We don't have much Cts I in China.
We did CFO drop off as Chris said here in the U.S., but we've also seen that rebounded pretty quickly to historical levels. So so cts I is.
And at least in the U.S. piece of Cts site is is not that big impacted that piece of Cts side. It is impacted is the care businesses that were in in India, and we have seen the locked down there and it has impacted the.
Yes, I revenue there, but we're also seeing that.
Rebound and believe.
That should come back pretty quickly.
That's helpful, though and if I could sneak in one last one on the cost actions I think.
I don't think I heard what the maybe a dollar figure or perhaps how to think about incremental or decremental margins here heading in the back half. Thank you.
Well, let me make a few comments here and Mike can fix it civil when I'm done by the way I was pretty close in my fifth falling before I said, 20% to 25%. It was 22% so a 22% U.S. hardware on that number anyway for cost. Let me. Let me just say I wanted to reiterate from a liquidity perspective.
Financial flexibility that we've we've built.
Yeah, Mike Mike emphasize that you're not having said that we're considering a broad range of options as if the caution I measure just to make sure. We can maintain our flexibility in all scenarios in both those scenarios I talked about so our focus will be on reducing cost without impacting key R&D and productivity programs. We started some of those.
As in March slowing down hiring replacement hiring and travel.
But we will have.
Some incremental stuff that we do we do here soon as well.
Just as a reminder, as we think about that new cancer patients are going from 18 million. This year to 25 million and 2030. So we're going to prioritize investments focus on our long term growth strategy will take some costs out of second half will be thoughtful and disciplined about how we do that with the recovery in play.
Yes, we will say that our cost mitigation options range on both the Opex site operating expense side as well as our product cost side as we work through the volumes that market's going to going to demand.
For both workplace and workforce consideration. So that's now that's as much as at least at this point that we're going to talk publicly about.
Thank you thanks.
Our next question comes from Tycho Peterson with JP Morgan. Please state your question.
Hi, Thanks, you Dow your commentary on hospitals and platform personnel implies a fairly steep recovery once we tend to get back to more normalized environment can you maybe just talk to why you think thats. The case given the state hospital finances, we've seen no one bankruptcy at this point it.
Well what gives you confidence that we will see a fairly quick recovery.
Well I mean first of all I Didnt mean, if.
If I signaled that really quick recovery I Didnt say that I said, we don't know if it's going to be a short shallow V.
A quick overview or along the just in terms of recovery. So.
Didn't want to give anybody that impression I did say that.
The Americas represents.
22% of our American product represents 22% of our portfolio now services now half.
So it's not that barometer. It was 10 years ago, when when it was probably 40% of our.
40% of our number.
I'd say in the U.S., we with the services portfolio. We have we're much more resilient than we used to be growing Cts I business growing services business.
I think that we've seen a general trend in the last five years of consolidation and the strong remained strong and those are the frankly those are the ones that we've seen investing and radiation oncology.
Our our Americas growth rate the last.
Two and a half years has been very strong strong.
Mid single digit five 6% and.
No thats been a that that's that's been the market that we've seen the last last 334 years.
The.
You know, we have gone out and touched our backlog to make sure that their secure we haven't seen any.
Cancellations in our backlog.
I said, we have seen some pushes but that's an ability to get.
Vault constructed because of construction shutdowns in the locked down or access to access to vaults. So.
You now so.
We've touched hundreds of customers in the process of doing that maybe even thousands of customers and gotten all Chris you want to add any color. There I think the one other AD that would be that we're not just dependent on capex as we look at our products and getting them into institutions have also looked at opex type of solutions and add some success there.
With software over time, and we're taking those learnings and just adapting to the environment to make sure that we can get the right solutions in our customers hands to help patients.
Theres no question, there's going to be some short term yeah perturbation that comes out of this but you know as we as we get a quarter down the road, we think it we think it rose back.
And then maybe on that point you highlighted the 1.3 billion on liquidity on the balance sheet. I mean would you ever explore ultimate final. Two models you don't have an operating lease model her for your systems, but would you ever exploring using your own balance sheet to place capital among from Mike any reason cash conversion step by step down again can you touch on that.
I'd say the short version is probably not we do have some pilots running where we combine some capital with the Cts I broader play.
That looks really interesting, where where we where we go in and and kind of do an operating cost and capital cost play. So we are piloting that.
I'd say most of our customers the thing to remember as our cost of equity is much more at much higher than the cost of capital for.
For a.
You S.
Hi, everyone C. Not for profit customer you know, they're looking at cost of capital of 2%, whereas ours is eight ish and.
So I don't think what we can get get down there at that level and people who are doing this on capital can do it because they have a large amount of consumables or something else that they're flowing through so I I think our business model doesn't we will continue to kind of push these pilots and see where they go we like.
What we're seeing so far.
Oh by the way the memorial Hermann is not that that's appear services play.
You know 3 million Bucks year for five years, we can do vary up Chris let's do a whole bunch more of those and a you know that's that's what we that's what that's what we want to do.
You take the cash conversion.
Yes, yes take a look from a.
From a Q2 perspective in and what we've seen to date.
And our AR collections.
I have remained fairly strong and our dsos flat from last year, we haven't seen any covered related impact to terms or or the quality of our of our pay are the.
Inventory that we have.
We had expected actually at the beginning of year for first half inventory to be a little elevated and.
You know it's fairly on our expectations I think the makeup of the inventories a little different we we have a little increased.
Finished goods and lower raw materials, but that's simply due to some of the factory shutdown and and timing of revenues, but the inventory is roughly in line with where we thought.
Accounts payable online as well I think will.
Continue to see how this plays out but you is as you mentioned.
Kind of in the beginning of your question, we do have $1.3 billion in liquidity is a very strong position from our perspective to weather the different types of scenarios that we've been modeling out and in those scenarios, we model out different impacts and cash conversion and again.
We can weather and these types of scenarios fairly well, but the cost mitigation actions that we're driving today, we'll just continue to give us the flexibility.
We wanted to cushion that we won that enough flexibility that we built up over time.
Thanks, and then one last one awkward down he knows it's early days, but can you just talk on whether any of the orders more competitive wins and how you're thinking about.
Thanks, Chris is close enough to it Chris go for it.
Thanks. Thanks, Tyco, yes. They were we had multiple that were competitive wins, one specifically comes to mind that was in the freestanding segment. It was a against them Our Atlanta Act and the choice was to go with ito's for being able to have multi modality imaging AI and have the flexibility to treat both adaptive.
Cases on a daily basis as well as conventional cases, we think this is going to be something to actually accelerates in terms of importance based on the current environment.
Thank you.
Thank you that concludes our question and answer session session I'll turn it back to management for closing remarks. Thank you.
Thank you operator, thanks, the great questions. We're in an unprecedented environment is cobot 19 continues to challenge every company institution in person around the world. This pandemic as reminder of the importance of health and the relevance of our mission to help patients fighting insidious disease cancer.
Our solid orders growth over the last several years has resulted in a strong product backlog concurrently are growing installed base has allowed us to build a stable and predictable services revenue stream and finally, our conservative fiscal philosophy has enabled us to have a very strong balance sheet, all of which position us well as we navigate this unique environment.
Looking forward, we'll continue to invest in our strategic enablers and remain committed to innovating in investing in new technologies to drive toward the ultimate victory a world without fear of cancer. Thanks for joining us today.
Thank you. This concludes today's conference all parties may disconnect have a great evening.