Q2 2020 Earnings Call
[music].
Good day, ladies and gentlemen, and welcome to Berrian fiscal second quarter 2020 earnings call.
As a reminder, this conference call is being recorded and a replay can be accessed on the dairy and investor website at Www Dot variant that Tom Flash Investor.
Now I will turn it over two and show my Schwark <unk>, Vice President up in Investor Relations and Treasurer. Thank you you may begin.
Thank you operator, good afternoon, everyone and welcome to varying fiscal second quarter 2020 earnings call.
Joining me today on the call are varied President and Chief Executive Officer, Dol Wilson, Chief Financial Officer, Mike Brown.
And president of Uncalled, you systems, Chris talk.
Today, we will be we will cover our second quarter performance and discuss the impact of covered 19 on our business.
On the various Investor Relations website, you can find our fiscal second quarter 2020 press release and earnings presentation, which are intended to provide additional perspective and detailed.
A webcast of this call and any accompanying non-GAAP reconciliations are available on our website at www Dot variant dot com slash investors.
Unless otherwise stated.
All financial results discussed our non-GAAP.
Oh referenced as our to net earnings per diluted shares.
All growth rates are year over year.
Any references to orders our gross orders.
All reference to organic growth exclude the impact of FX.
And growth from the acquisition of cancer treatment services international or C.T. aside.
And our interventional solutions business.
Oh periods referred to our fiscal Peter it unless otherwise stated.
During this call, we will be making forward looking statements, which our predictions projections or other statements about future events, including our comments regarding the impact of covered 90.
These statements are based on current expectations and assumptions that are subject to risks and uncertainties.
Actual results could differ materially because of factors discussed in todays earnings release, This conference call and our FCC filing.
We do not undertake any obligation to update any forward looking statement.
And with that I'm pleased to turn the call over to Dow for his comment.
Thanks, actual and good day, everyone before we get into details for the quarter I want to express our gratitude to everyone on the frontline fighting this global pandemic and hope everyone, staying safe and feeling well from our 10000 plus employees all over the world. We say thank you [noise]. Furthermore, I want to thank our valuable employees customers suppliers and distributor.
As for their hard work, it's important partnership during this extraordinary period.
Your efforts have ensured that cancer patients globally continue to receive idled treatment.
Fiscal second quarter performance reflects the escalation of covert 19 in our global response.
On this call we'll share our experience in the quarter, our framework for engaging those who rely on us and our priorities and actions in these challenging times.
And then it gets created some unique operational challenges around delivery of our products and solutions as well as opening new opportunities impacting the quarter, which was driven by timing delays around installation and acceptance of our products has varied by region based on the stage of containment and government actions.
China, South Korea seemed to be ahead of other countries and controlling that pandemic and progressing towards normalcy.
Conversely, the rest of Asia Pac Americas in EMEA geography is continue to take actions to stem the outbreak.
While we're cautiously encouraged by the recovery in China, we remain sensitive to future uncertainties, including continued spread or recurrence of the pandemic, which could slow progress towards recovery.
Focus now as it has always been is keeping our employees safe supporting our customers and their patients and shrink supply chain stability and maintaining business continuity.
Our employees are crucial to our mission and that we saw this outbreak breaks shift into a pandemic. We took several actions to ensure their safety and well being.
We instituted work from home policies and workplace safety measures and protocols to support our workforce, we implemented additional employee benefits in March that will continue as needed to fiscal 2020.
We also implemented new programs aimed at educating our employees on how to operate in this new virtual physical distancing environment.
We recognize the challenge for health care resources to manage Cobot, 19, and Noncovered 19 related care since radiation oncology is not considered an elective procedure. Our teams are taking actions on a customer by customer basis to ensure they can deliver therapy to patients.
Furthermore, during this pandemic, we've seen in some clinics across the globe a shift from surgical intervention to radiation oncology further underscoring its importance.
We are actively deploying remote tools across our training installation and field service teams to ensure continued access to our products and solutions.
Secured and stabilized our global supply chain with ongoing efforts in place to continue to monitor and mitigate any new risks that emerge.
After being closed for a limited period in the quarter are essential manufacturing facilities in Beijing, and Palo Alto are now fully operational we continued to ship our products and honor customer commitments during the factory shutdown.
Finally, we're taking steps to bolster our already strong financial position in view of the possible continued impact of cobot 19, we're taking prudent actions to manage costs, while continuing to make planned investments that will allow us to execute our growth plan, Mike will discuss these later I.
I believe our long term fundamentals remain strong and our business as well position financially and organizationally to whether this environment as well as expand our global leadership in oncology with that Mike will discuss our financial performance and liquidity in more details.
Thanks down and Hello, everyone.
Total company revenues were $794 million up 2% in dollars.
Three person to in constant currency.
Organic revenues declined 1%.
Looking at oncology systems orders were $773 million up 1% in dollars and 2% in constant currency.
And over the trailing 12 month, 5% in dollars and 6% in constant currency.
We ended the quarter with a robust backlog of $3 billion up 3%.
To date, we have not seen any coated night t. related order cancellations.
Revenues were $761 million up 2% in dollars in 3% in constant currency.
Driven by strong growth in software and services.
On a trailing 12 month basis revenues grew 10% in dollars and 11% in constant currency.
Now, let me share some insights into the timing of the impact of Cobot 19 in the second quarter.
In the first two months revenues were up approximately 8% year over year.
Cobot 19 spread globally, our March revenues declined 4% year over year.
Driven by the Americas, an immediate geography, which combined declined 7%.
Partially offset by improved performance in China in South Korea.
Moving into hardware software and services.
Hardware revenues were down 7% our worldwide net installed base of 8634 units grew 342 units for 4%.
This continued growth in our installed base drives future recurring revenues from upgrade software and services.
Software revenues grew 6% driven by continued adoption of our software solution.
We remain focused on investing in innovation around efficient clinical workflow systems integration and treatment planning.
Services revenue grew 11% and net of acquisition services revenue grew 4%.
Let me provide some insight by geography.
In the Americas revenues grew 4% and was up 4% in our North America region.
Orders were $355 million down 3%.
On a trailing 12 month basis orders grew 4%.
In EMEA revenues declined 2%.
Orders were $259 million up 11%.
On a trailing 12 month basis orders grew 9%.
In Asia Pac revenues grew 4%.
Orders were $159 million down, 5% and on a trailing 12 month basis orders declined 2%.
The proton solutions business posted revenues of $22 million it declined to 32% primarily driven by a slower order run rate in prior years, partially offset by continued growth in services revenues, which was up 61%.
In the quarter, we were awarded to proton orders in our a pack geography.
Total company gross margins were $339 million up 6% and 42.7% of revenue an increase of 150 basis points.
Driven by our portfolio mix and the benefits from tariff exclusions and acquisition, partially offset by factory cost.
Investing in R&D to drive innovation remains core to our growth strategy.
In the quarter, we invested $71 million in R&D up 19%.
Which is 8.9% of revenues.
That's today expenses were $166 million up 16%.
Which is 20.8% of revenues.
Excluding the acquisitions of Cts I Endocare, Alec on and the Boston scientific bead portfolio.
She is in a was up 5%.
In March we began to take cost mitigation actions in response to the impact of Cobot 19.
While we did realize some benefit in the second quarter from slower hiring and travel.
We expect the benefit will be more significant in the back half of the year.
Company operating earnings were $103 million down 14%.
Which is 12.9% of revenues down 230 basis point.
The lower operating earnings were a direct result of covert 19 impact on revenues.
GAAP EPS was 47 cents and non-GAAP EPS was 85 cents.
This quarter, our GAAP operating earnings and GAAP EPS included a 41 million dollar impairment of our loan receivables from California, Proton therapy center due to their operational and market challenges.
It also includes the benefit of $9 million from the reversal of acquisition related earn out.
Our tax rate was 23% and diluted share count was 91.4 million shares.
Cash flows from operations were $22 million up $35 million, driven by working capital usage and timing of certain tax payments in both years.
Oncology D.F., though.
With 110 days flat from last year.
As part of our regular review of counterparty credit to date, we have not seen any material decline in customer credit quality or payment terms due to cope with 19.
Let's turn to the balance sheet and liquidity.
We ended the quarter any strong position with $1.3 billion in available liquidity, including $668 million in cash and equivalents.
And $661 million available under our 1.2 billion dollar revolving credit facility that matures in 2024.
Our debt balance at the end of the quarter was $521 million and our net leverage ratio as defined under our credit agreement was 0.2 times trailing 12 month earnings before interest taxes, depreciation and amortization or EBITDA.
Our capital allocation priorities remain unchanged.
Well, we plan to continue investing in our growth initiatives, we are taking proactive precautionary actions to enhance our financial flexibility.
For example, we have pause share buybacks to preserve liquidity.
Additionally, in the back half of the fiscal year, we will be focused on reducing cost.
But with the discipline necessary to ensure we continue to prioritize key R&D and productivity programs to support our long term growth goals.
We believe our current liquidity position.
Combined with the precautionary actions being taken leave us well position to navigate through this economic environment and continue to advance our long term strategy.
I will now turn it back over to though.
Thanks, Mike I'd like to quickly touch on our progress across our strategic enablers. This quarter first let's review our progress on innovating and radiation therapy.
We continue to extend our market leadership and expand our addressable market with our innovation comprehensive portfolio and services offerings and our oncology business. We've gained market share over the trailing 12 month on both an orders and revenues basis in February during the peak of the pandemic in China, We received approval for Halsey on 2.0.
During the approval reaffirms the government's commitment to provide patient access to high quality radiation therapy technology.
The system incorporates imaging technologies, such as kilovolt, IDG Columbian C.G. and area iterative reconstructive Colombian see cheap for better soft tissue that definition.
As order activity in China resumed in March we received three new system orders and five system upgrade orders for Halcyon Halsey on 2.0, and we have a strong second half funnel.
Besides an agreement with National Health Service Trust for 15 to be machines, and five house town systems to equip centers across England.
We closed the probing 360 system purchase contract and the APAC geography. This was our second award in the quarter and APAC as highlighted in our first quarter earnings call. In January we were selected by China Medical University Hospital in Taiwan to install a probing 360 system in a single room configuration with the ability to add a second ganji later.
University of Alabama at Bermingham, Birmingham Proton therapy center treated its first patient on our Probeam compact system.
We currently have 78.
[noise], putting 39 rooms that are operational across 26 sites globally.
Second, let's turn to our progress and leveraging artificial intelligence machine learning and cloud solutions.
In February we received FDA 510 clearance for our eat those therapy solution in the U.S.
Customer engagement remains strong and there continues to be excitement around the technology.
In the quarter, we received 15 E. Those orders, including 11 in the Americas three in EMEA and one in a pack.
We now have five centers treating clinically with Heath those treatments that are first clinical site and her love Hospital, Denmark continue to progress well.
The centers already delivered 100 adaptive fractions for bladder cancer patients and are seeing impressive treatment margin reduction of up to 50%.
In March Madness spectrum, 20 hospital in the Netherlands treated their first two patients for prostate cancer.
And in Australia, both icon cancer Center, and Royal Northshore Hospital treated their first patients for prostate cancer and head and neck cancer.
Building on our leadership position in high fractionation and radio surgery demand for Hyperarc, our high definition radiotherapy solution for Stereotactic radio surgery has continued to grow 33% of our Truebeam installed base now has hyperarc capability and very saving exceptional feedback from the clinical community.
Third, let's discuss emerging businesses geographies and technologies.
Received an order for 12, Truebeam machines 22 housekeeping on systems and one Vitalbeam from pharma standard in Russia Pharma standard currently operates diagnostic imaging centers across the country ended extent and is expanding into cancer care. We're excited for this first phase of what is a multiple year plan for expansion into cancer tree.
Yes.
Cts I was recently awarded a $15 million five year contract with Memorial Hermann Health system.
Provide onsite and remote physics, and Dosimetry services Memorial Hermann is the largest not for profit health system in South East, Texas and consists of 17 hospitals eight cancer centers and three heart and vascular Institute.
Since the acquisition of Cts I in May of 2019, the annual run rate for treatment plants has doubled greater than 16000 per year, our pipeline in the United States and globally is strong and continues to expand.
While we had some challenges in the quarter.
In the current operating environment and logistical barriers created by the pandemic I'm very pleased with the team's execution during the quarter.
Now moving to guidance.
Since our marks night's press release, the severity of that pandemic has expanded globally and has resulted in a dramatic shift in the macroeconomic environment.
While our long term fundamentals remain strong the uncertainty around the severity and duration of cobot 19 has impacted our ability to reliably quantified the impact of the pandemic for the balance of our fiscal year.
As a result, we will be what's driving guidance for our fiscal 2020.
In lieu of that I would like Chris talked president of our oncology systems business. The share with you that trends that we're seeing in the market Chris. Thank you Dan when Hello, everyone. These are indeed unprecedented times and the uncertainty from Cobot 19 will have an impact for some time on the health care market in capital equipment purchases as Mike mentioned our SEC.
Third quarter performance was ahead of last year until March when we started to see the impact of cobot 19 in the Americas and them yet.
Based on our current visibility, we believe orders and revenues will be stress in the second half for fiscal year due to lockdowns restricting access the sites and delaying both construction. We believe this will have higher impact in our fiscal third quarter, followed by a sequential improvement in our fiscal fourth quarter, assuming no second wave of infection.
<unk> or lockdowns.
Let me share the overarching trends, we see and how we're positioned as the market leader in radiation oncology and a cross oncology with an expanded cancer care portfolio, let's start with the market.
Well delays in elective procedures, such as mammograms prostate cancer screenings, and radiological exams have slowed new cancer patient treatments starts treatment itself is not considered an elective procedure.
As such it can only be to be delayed for a short period of time without significant negative consequences to the patient.
To this end the criticality of radiation therapy for cancer treatment in the United States has increased since the Pandemics again and this was illustrated in the April Twentytwenty Field report published by the Advisory group.
The respondents in the study, 60% saw a marginal increase or no change in radiation oncology patient volumes compared to surgery, we're only 10% Saar marginal increase or no change in patient volumes as a pandemic stabilizes in cancer screening procedures resumed in the U.S. and other markets.
We expect to see a catch up period during which new average daily volumes of radiation therapy treatments will increase significantly in the short term.
Moving to customers based on our interactions with customers access to the latest radiation oncology solutions remains a priority and varying continues to have the best portfolio of solutions in the market.
Orders trends from late March have continued through April and we'd expect budget limitations foreign currency headwinds lockdowns and uncertainty around the pandemic to drive delays in orders I will walk you through some of what we're seeing in each geography.
In the Americas during late March we saw a delay in new orders of approximately $40 million due to covert 19, North America had the largest portion of these order delays while order activity resumes in April it is too early to estimate.
When it will return to pre pandemic levels. We're currently monitoring closely the removal of locked down restrictions as a critical first step along with capital budget allocations of hospitals.
We believe the recovery in Latin America will follow that up North America.
In EMEA, where we've had strong orders growth over the last 12 quarters customer behavior has varied by country and by the severity of the pandemic for example in Germany activity remains strong however, in Spain, and Italy, we believed that the impact from covered 19 will affect tenders and new equipment orders in.
India, while demand for equipment and expansion of cancer care remains strong the extension of the lock down as momentarily impacted activity substantially over the past 30 days.
Within Asia Pacific Chinas, New tender issuances have resumed close to pre pandemic levels in indicating stabilization.
Further in China, where average daily treatment volumes were most affected globally Buda radiation oncology being an inpatient procedure. We are seeing on remotely monitored system average treatment volumes returned to pre pandemic levels try to recovery is being tracked closely and we are cautiously optimistic that it is sustainable.
In Japan post the state of emergency we've seen some new tenders slow well many active tenders in customer conversations continue towards order placement.
Turning to backlog conversion with some geographic variation customer site readiness in access remains challenging.
These logistical challenges will be a moderate headwind and will impact timing of certain installations in the second half of fiscal 2020.
Our teams around the globe have navigated exceedingly well to continue installations in trainings, where possible, including leveraging remote technologies. For example in China of the 12 accelerator installs delayed in our second fiscal quarter.
Six were completed in April this experience leads us to believe that as a pandemic is contained these challenges will dissipate.
We believe services are reasonably insulated from covert 19, driven by our large installed base and long term service contracts as well as the criticality of radiation oncology treatments. Our service engineers globally continue to access sites to provide critical service to our customers.
Our teams great customer focus is evidenced by an increase in our net promoter score in all major markets.
Cts I technology enabled services have also positioned us well during this time through our ability to support treatment planning quality assurance and other services remotely.
In proton solutions due to the high upfront capital outlay purchase decision delays will likely be more pronounced.
We will continue to execute on projects in our backlog and expect services to be stable and grow overtime.
Finally in interventional solutions decreased access to hospitals has impacted treatment volumes.
In many cases ablation procedures for early stage cancer patients have been deferred well advanced stage cancer patients have continued with their local regional treatments, including embolization.
We believe these trends will drive near term pressure across our interventional portfolio.
We are encouraged by the resumption of procedure in the Americas and EMEA geographies.
In summary, there are near term headwinds that will impact us however, as the market in innovation leader in a market, which we'll see total new cancer patients increase from an estimated 18 million in 2020 to 25 million in 2030, we believe we are well positioned for long term growth.
Inpatient care impact.
With that let's go to Q in a operator.
Thank you.
At this time will conduct our question and answer session. If he would like to ask the question. Please press star one on your telephone keypad, a confirmation tone would indicate that your line is in the question Q.
You May press Star followed by the number two if you would like to remove your question from the Q.
Participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys.
My first question comes from Matt Taylor with you'd be S. Please state your question.
I'm sorry. The first question comes from I mean Hassan with Goldman Sachs. Please state your question.
Oh, Thanks, Hey, good afternoon, I mean, I mean, let me start Hey, how are you let me start with them. The comments that you made about the impact in the second have a margin and into April just to maybe get some clarification. There we'll start with the 30 million impact yeah. If you can give some qualitative comments on.
You know what type of customer was actually cancelling and why they were cancelling and then Conversely, what you were seeing some customers that kept installed plans that differentiated them from those they cancel.
And just to be clear, we're not talking about cancellations. These are $30 million of push outs in the quarter you know so they were sites.
In Americas in EMEA, where we were not able to get into the site because of covert 19 restrictions to complete the installation.
So that's a that's we're talking about we had about $30 million of that in the quarter. When we gave you. The main update for guidance, we had seen that already in China. So that was in our revenue guidance at that point in time, an incremental to that guide you know what we saw a as we've made very clear at that time. It didn't include the impact.
Act of America's in EMEA pandemic spread and that's what we saw over the course of March.
Mike I say anything about margin impact of that.
Yeah, I think it's important to note was we saw the impact in March to our Americas EMEA geographies.
As to your or the highest gross margin geographies, we have especially in the Americas, they're significantly higher than the rest of our geography, so that had an impact to our gross margin rate in the quarter.
The other thing to offset that is.
There was some unexpected good news in the Asia Pac geography, it did recover faster than we anticipated when we gave the March nine update so that provide enough some of upside to offset.
A portion of that 30 million.
And maybe just a little more color on the revenue side.
January and February.
Revenue growth was pretty good you know, we saw 8% quarter to date through February so very much on kind of the track of the last several years and then oncology March revenues were down 4% year over year. You know maybe just as a reminder, this service business continues to be very soon.
Strong as we said in the call services were up 11%.
Big.
Nice increase from our Cts I acquisition, what we're seeing growth on on those numbers are very encouraging and the.
Overall Varian service growth was was 5% in that recurring streams of about half a little more than half the company now.
The color and then my second question is on the U.S. market in investors are understandably focused on on that in Dallas I'd Love Your thoughts on just thinking back to 2009, but as you can around that period and I know, it's not a perfect analogy, but still if.
We thought about the hospitals side, you know, leaving 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.
Yeah, Great question, and we are looking at it and so let me wander for a second then I'll get right. Here question I think one of the 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 Americas product today.
You know I'm fit bond this Mike, but 20% to 25% you know so and that's probably down 10 to 15 points from where it was in 2009 or or 10. So you know 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 I'm you know we did a we did look at the comparison 2009, maybe Chris you want to go to take the could team through a comparison here.
Yeah. 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're up Additionally, as we look at the Mark.
Good 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 need 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 I'll get back in Q.
Our next question comes from Matt Taylor with you'd be S. Please state your question.
Matt.
Hello, 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 had been a shift in some centers at least.
[noise] from surgical intervention to radiation therapy, and I guess I was wondering if you could expand on that is that a material trend do you think it's temporary how big is that ship them.
Chris, Yes, Hey, Matt So we've 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 hypo fractionation of which were best position in terms of portfolio and.
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.
Was trying to piece together a you know when you think about the different moving parts in the first quarter.
I'm 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 the disruption that you 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 you know.
Why do you think you came back more quickly and where do you see in the current trends there in April.
[noise] you Nomad, it's hard to say I've forgotten everything that happened before March 9th [laughter].
So it's a little bit hard to say I you know I think if you were just look at the last two years. That's a trend line. We've been on you know 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 a 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 a with our backlog, which is greater than 3 billion of product.
That as we get to a place where lockdowns release, we will be able to resume installations pending bulk construction completion.
In other preparatory requirements.
Maybe just a little broader context as well, Matt you know China is our fastest growing market. We are cautiously optimistic about what we see you know where the market leader.
Chris talked about net promoter score the highest net promoter score for the company is in China. It. 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, Yeah, I'll, it's a treatment volumes are recovering and you know in March we saw pretty much a rebound to to their historical level in in that the in that geography. There are almost 5 million cancer patients year. There you know it's not so much of reimbursement driven market you know.
So it's a 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 that makes directly for the color.
Our next question comes from a reasonable with BTI Ji. 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 order 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 those things.
All right to you know that's locked down.
So 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.
You know it it's a good question a you know what we're having to debate had another we know the full answer your question Murray and side it's a.
You know we are seeing recovery to China. It is more centrally mandated it's not so much.
Susceptible to kind of the free 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 you know with the short term impact was much deeper in China. So we didnt see the U.S.
You know in S. 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 U.S. compared to China, because in China. The patients remedy go into a hospital into a more of a cobot environment. You know, it's more outpatient whether a hospital or non hospital based you're in the U.S. and a little more cobot friendly so to speak so we didnt see the treatment volumes in the U.S.
Yes move or move down.
You know I as we kind of model. It. It's a you know what's a really good question I'd say our base case is that you know it's an environment that is described as recession, you know with economic slowdown and and 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 you know I think we'll still see some ongoing.
Southeast Asia Korea, Japan lock down in Australia locked down into the summer. So that's kind of our base case, you know, but the reason not to give guidance says 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 his recovery delayed into 21, you know when do we see you know do we see a second second surge of the disease. So that'd be kind of the high level macro environment from a scenario play.
Planning that we're looking at Chris you want to talk little bit about some of the U.S. market stuff like one of the other pieces I'd add as we think about the U.S. is the position of our services business. If you look at external benchmarking such as I am the 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 you know I think conclusion as you know it is a little on certain in the short term no as we as we said in his script.
You know, we do expect a little more pressure in Q3 with sequential recovery in Q4.
That's really helpful. Thank you you mentioned you political stability I know there has been increased rhetoric in recent days beneficial.
With some flared tensions in China are there any early thoughts or early preparations you're taking now in case there the 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.
The impact that we had.
In the last the last year.
Thank you so much.
Our next question comes from Anthony Petrone with Jefferies. Please state your question.
Hi, Thanks, Nick and healthy and doing well.
And thanks for all the detail.
The two on on oncology one on proton the two questions on on a quantum apology business.
Specific to the U.S. would be.
You know one just your 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 <unk>.
A a further potential delay to the radiation oncology bundle. So that's still a gen 120, 20 below five or or is there a central for that to be pushed out.
And then I'll have a follow up on proton therapy.
Chris Tigger 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, a with more spread out networks are continuing their plans some community hospitals who've been 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.
And you know as we do look at the mix I I know I've said it a few times, but in North America greater than 50% of 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.
Ah stay close to our customers on the second point regarding BPM really as we've seen ATM since the inception and discussion around that value based care is where the market has been heading towards a 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 and you saw solid North America orders growth are you also hurt our commentary around some of the push outs in March and related to cope with 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 that's we don't really see it as a a big net.
Impact one way or another with respect to slightly longer delay.
And the question about or non offensive.
Yeah, just a follow up would be again do you think the actual data to be pushed out by CMS, we're hearing it could.
Pushed out even further than January 120, 21, so the first one and then.
On proton I, we you know yet the loan impairment this quarter.
Just as you think about the proton portfolio are there any.
You know other impairment risks across that portfolio. Thanks.
Mike.
Yeah. Anthony Good question, Yeah, we did have an impairment we see P.T.C. this core quarter, the California proton.
Therapy Center treatment Center.
And it was a you into cobot 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. That's why we took the impairment.
Based on the patient information that's available to us to be into the quarter and we don't see similar risk at other centers at this point, but we review these things regularly.
Okay.
Thank you.
Thank you. Our next question comes from Jason Bodnar with Piper Sandler. Please state your question.
Yeah. Thanks, Good afternoon, everyone, let's take the question, who all the details and 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.
It's been a region, where barron's up phenomenal job growing above market, we know where ski account just hoping you could offer some views today on the ability that franchise going forward now in light of that leadership change and the pen pandemic.
<unk>.
Yeah, I mean at from a market point of view you know the that markets. Obviously, then on a tear last a 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 Pharmstandard in Russia. So those were two very big wins, Yeah, we do worry a little bit about that market in the second half.
Yeah. So you know as 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 banner ads there would be as we look at the region first to me is really a composite the 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 with a population of rone billion and very risk.
Eric did 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 installed 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.
Clinical personnel to perform treatment planning or other services and so since you saw it can.
Augment nicely and makes for another addition to our portfolio of solutions. So in that 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 a positive from a longer term perspective.
Okay very helpful. And then just two more quick follow ups for me.
First I don't think it mainly comments and sorry, if I Miss abound, maybe comment on.
Your long range plan you provided back in November just didn't know if that was something you're recommitting to today or not.
And then a quick one then those just any timelines that you're getting on windows that to prove a lot of China.
Got it kept the approval one first Chris and then I'll talk about long range stuff sure on the China approval for eat those sets. Its in the 12 to 14 month range in terms of clearance I.
I do want to make one other comment on east coast, though it was in the.
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 focused on the target I think this is the type of data you're going to see calm and that's going to really drive.
Keith us across all of the markets.
Relative to the first part of your question, Jason You know I can assure you that we did not have covance 19 in our long range plan. When we when we generated at a you know 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.
Here, we still feel very good about this strategy I think it's the overall strategic direction that company is right on we're going to continue to invest in our R&D initiatives or you know its a.
Heavy organic growth you know with the you know 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 overtime 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.
It's something we wouldn't 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 [laughter] 10 years, you've gone from 30, 35% of the company being and services to over half the company today being in services. You know 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 a short V or along V or a long l. or whatever your economics trends like to yeah like the call. It the outlet. The short answer is I don't know.
I would say our long read you know when once we get through that trough. We think this thing is right back to its up to its 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 are.
Higher level. They didnt good evening I'll, maybe one higher level question for you and Chris and then maybe one modeling question.
For Mike, but from a higher level down to 40, where do you think conversations are going to go over the next six to 12 month, a with a various hospitals and other service providers on the hierarchy of radiation oncology versus other hospital capex that could happen. A you know I think back in the 2910 period radiation oncology given us.
Returns did have a high priority a in where hospitals would spend I think Chris as mentioned in the past. There's you know some 5500 C series, probably down to 5000 C series when axe out there now that could really get to a nice throughput advantage. So just how to think about the hierarchy of spend next year at the hospital level.
No I think other than that kind of covert preparedness and what do we see for I see you capacity invents I don't think it changes you know Chris you want to you want to add anything you know that corresponds to some of the independent research we've seen that it's still very highly prioritized and yeah.
Jeff as you articulated the ROI is very strong that ROI being strong does not only manifest itself in the U.S. summit think about other markets, 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 still see radiation oncology, having a strong position both economically and clinically.
All right. That's helpful. Thank you would like just from a modeling perspective that 50% of your revenues that services.
You know historically, we tend to think of that growing on whatever your TTM a 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 asking for any kind of relief in the near term on what they're paying may be for some of the services anything at all.
On that part of the business can that's 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 that 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.
Delivered very strong services group 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 that's a little bit more in line with our install base.
We did have some some.
From a 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 weve.
Revenue in our on our software.
Thank you.
And Jeff as well you know the other thing.
I know that you took a look at this.
About the 12 18 months ago, but it's not to be over looked at the proton services is growing 61%. We continue to hand over looms operationally and as we do any 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 let rattle off as much as I can one that maybe on the comments around March in a business trends heading in April what's the last week of Mark that you know Directionally. After you guys. The worst Oh, 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 thing.
Yes got dotcom and then the on them I guess the.
The service revenues up up double digits, we strongly.
Is like Cts I've flown through that piece as well and just how we should be thinking about New York from just given the lockdowns on that.
Yes, he aside does flow through in our services business.
You know experiencing to see how it happens in the you know 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 as Ah I came in for me or Chris who said in our comments the number of treatment plans. We're doing on an annualized rate has doubled you know we've gone from 8000, a run rate of 8000 Shimon plans year to 16000 treatment plans year, you can see that kind of confidence that our our customers are putting.
Ns and yeah. There was you know we saw bigger fall off in China, We don't have much Cts I in China.
We did CFR 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 a.
You know at least in the U.S. piece of Cts side is it is not that big impacted that piece of Cts side. It is impacted is the care businesses that were in in India and that you know we have seen the locked down there and it has impacted the it.
Yes, I revenue there, but we're also seeing that.
Rebound and believe.
That should come back pretty quickly.
That's helpful down and if I could sneak in one last one on the cost actions I think I.
I don't think I heard what the maybe a dollar figure or perhaps how to think about incremental detrimental 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 went pretty close in my footballing before I said, 20% to 25%. It was 22% so a 22% U.S. hardware on that number anyway for cost you know let me. Let me just say you know I wanted to reiterate from a liquidity perspective.
Financial flexibility that we've we've built Mike Mike emphasized that you're not having said that we're considering a broad range of options as if the cautionary measure just to make sure. We can maintain our flexibility in all scenarios and both us and right as I talked about so our focus will be on reducing cost without impacting Q.
R&D and productivity programs, we started some of those in March slowing down hiring replacement hiring and travel.
But we'll have.
Some incremental stuff that we do we do here soon as well.
You know with just as a reminder, as we think about that you know new cancer patients are going from 18 million. This year to 25 million in 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 a recovery.
In place, 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 the market's going to gonna demand you know for both the workplace and workforce consideration so.
That's right now that's as much as at least at this point that we're going to talk publicly about.
Hey, thanks.
Our next question comes from Tyco Peterson with JP Morgan. Please state your question.
Hi, Thanks, you down your commentary on hospitals and platform. So that implies a a fairly steep recovery wants me to get back to a more normalized environment can you maybe just talk to why you think that's the case the hospital finances, we've seen 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 didn't 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 didnt want to give anybody that him.
Fresh and I did say that the Americas represents a 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 you know I'd say in the U.S.. We you know 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 remains 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, it's been very strong strong.
Mid single digit you know five 6% and.
No that's been a that that's that's been the market that we've seen the last last 334 years.
The you know, we 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 a access to vaults. So you know so.
You know we've touched hundreds of customers in the process of doing that maybe even thousands of customers and I know, 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.
I was 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. You know perturbation that comes out of this but you know as we as we get a quarter down the road, we think it didn't get worse 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 alternate 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 you know we do have some pilots running where we combine some capital with a cts I broader play.
That looks really interesting, where you know, where we where we go in and and kind of do an operating cost and capital cost play at so we are piloting that I'd say most of our customers. You know the thing to remember is our cost of equity is much more at much higher than the cost of capital.
For.
For a.
You S. A tiger one C. You know not for profit customer you know, they're looking at cost to capital of 2%, whereas ours is eight ish and you know so I don't think a 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 you know 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 a pure services play.
You know 3 million Bucks year for five years, we can do vary up Chris supposed to 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 quite I'm.
Yeah take a look from you from a Q2 perspective and in what we've seen to date.
And our AR collections.
Have remained fairly strong and our dsos flat from last year, we haven't seen any covert 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.
It's 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 doing something in factory shutdown and timing of revenues, but the inventory is roughly in line with where.
We thought.
Accounts payable online as well I think will we'll continue to see how this plays out but you is as you mentioned.
You know 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 you'd be modeling out and then those scenarios, we model out different impacts and cash conversion and again you know.
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.
That we wanted to cushion that we want a enough flexibility that we built up over time.
Okay, and then one last one for Dow on Ito's. It's early days, but can you just talk on whether any of the booking orders more competitive wins and how are you thinking about <unk>. Thanks, Chris is close enough to it Chris go for it.
Thanks. Thanks Psycho, 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 East coast 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 be something to actually accelerates in terms of important space 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. So we're in an unprecedented environment as Cobot 19 continues to challenge every company institution and 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 on investing in new technologies to drive towards the ultimate victory a world without fear of cancer. Thanks for joining us today.
Thank you. This concludes todays conference all parties may disconnect have a great evening.