Elekta AB (EKTAF) CEO Gustaf Salford on Q2 2021 Results - Earnings Call Transcript
Elekta AB (OTCPK:EKTAF) Q2 2021 Results Conference Call November 26, 2020 4:00 AM ET
Company Participants
Cecilia Ketels - IR
Gustaf Salford - President and CEO
Johan Adebäck - CFO
Conference Call Participants
Annette Lykke - Handelsbanken
Michael Jungling - Morgan Stanley
Veronika Dubajova - Goldman Sachs
Kit Lee - Jefferies
Kristofer Liljeberg - Carnegie
Sten Gustafsson - Nordea
Scott Bardo - Berenberg
Lisa Clive - Bernstein
Cecilia Ketels
Good morning everyone, and warm welcome to the Presentation of Elekta's Second Quarter in the new Fiscal Year 2021. My name is Cecilia Ketels, and I'm Head of the Investor Relations at Elekta.
With me today here in Stockholm, I have Gustaf Salford, Elekta's newly appointed President and CEO; and Johan Adeback, our Acting CFO, who will be present the results. Today's agenda start off by Gustaf highlights of the development in the first quarter, then Johan will give you details on the financials, and finally Gustaf will take a view on Elekta's outlook and after the presentation there will, as usual, be time for questions.
But before we start, I want to remind you that some of the information discussed on the call contains forward-looking statements, and this can include projections regarding revenue, operating result, cash flow, as well as products and product development and these statements involve risks and uncertainties that may cause actual results to differ materially from those set forth in the statements.
And with that said, I hand over to you, Gustaf.
Gustaf Salford
Thank you, Cecilia. Today, it was announced that I've been appointed as the new CEO of Elekta. I'm very humbled and proud by the trust and confidence in me shown by our Board of Directors. Ever since I started up Elekta, every day, I've enjoyed being part of a truly global company, delivering innovation of helps our customers to improve and save lives. I look forward to leading a fantastic company together with all my amazing colleagues around the world.
I would also like to start with a couple of comments about the lack of purpose and strategy. To health conditions to improve patients lives has never been more important than today, but also more challenging due to the COVID pandemic. All employees at the Elekta are working relentlessly, so that everyone with cancer should have access to and benefit from precise, personalized radiation therapy.
We will continue to leverage our position as the only independent radiation therapy player of scale and also continue to form strong partnerships. We are confident that we'll continue to accelerate with a clear focus on our customers and their patients. And this will now turn to a couple of highlights from the last quarter. One main event was the launch and regulatory clearance of our new Harmony linac.
I'll come back to harmony knee later in the presentation. We'll receive the EU medical device regulation or MDR certificate for the existing linac portfolio with ongoing processes for the remaining products in our portfolio. We see a strong momentum for MR-linac. And we received regulatory clarity in China in August opening the Chinese markets for additional Unity orders.
Of course, the key focus is to secure continued high levels or machine utilization globally during COVID, and we have managed as well with uptime at normal levels or higher. We have also shown resilience and preformed in challenging market conditions. In the quarter, we managed to perform better than overall radiation therapy markets, both in terms of orders and revenue with improved margins and stabilized cash flows.
From a margin and cash flow perspective, the first six months has been the best start of the fiscal year ever for Elekta and absolute terms. Regarding orders and revenue we saw a stable development during COVID, but below historical levels and the long-term potential for radiation therapy market.
During the quarter, we experienced a continued negative impact on orders due to lockdowns and reduced access to customers, especially in emerging markets. And the order development came in at minus 2% in the quarter. However, some markets, in some of the situation improved. Europe returned to order growth and our global linac volumes grew and gained market share.
We continued to drive revenue from our strong backlog resulting in 3% growth. We saw good growth in Asia Pacific with a very strong development in China and Europe. And in Europe, we're going to increase the linac installation.
Our install base continues to grow with around 6% on an annual basis, supporting our long-term ambition to close the linac gap of more than 10,000 linacs globally. Our installed base growth and service business continues to support Elekta's resilience and we're currently focusing on expanding our service offering and reach across regions and business lines.
Digitization is key for the service business and we have the most advanced remote monitoring technology and uptake in the industry, which dramatically reduces unplanned system downtime. We use artificial intelligence to diagnose, predict and correct errors before their rises, and also to improve response and resolution time to customer.
We see continued improvement on our customer satisfaction from already high levels and I'm especially pleased to see this during the COVID pandemic. It is this time that our service engineers and organization is doing a fantastic job around the world under very challenging circumstances.
If we're now turning to the overall market development in the quarter, I would like to share some observations. On the North and South America we saw U.S. patients volumes increased during the autumn followed by a worsening COVID situation in the end of the quarter. CMS released radiation on quality alternative payment model or APM. This model is now set to start in July 2021. And we believe the announcement will reduce uncertainties for the providers in relation to future CapEx investment decisions.
With the less face to face customer interaction, for example, this year's ASTRO was fully digital. And although our virtual events and user meetings worked well in a virtual environment we of course miss being able to interact with our customers' in-person.
For Europe, Middle East and Africa we experienced an improvement in the beginning of the quarter, especially in North Europe. But the situation deteriorated in the last month we start to see first time stimulus packages in parts of Europe and also largely focused on radiation therapy and cancer care. For example, they work on the upcoming European beating cancer plan.
In Asia Pacific, China started to get back to normal levels throughout the quarter and there are no major issues in relation to customer access or procurement processes. In the rest of Asia Pacific, we see a very varied level of activities, whereas some markets still have very low levels of business activities.
Europe's order performance varied across the regions. We saw strong order recovery in Europe in the quarter, but this situation was challenging in many emerging markets. North and South America came in at minus 12 in the quarter and plus 25% for the first half. Europe, Middle East, Africa was strong plus 20% in the quarter and minus 3% for the first half year.
And Asia-Pacific at minus 12% for the second quarter and also minus 12 for the first half, and below you can see some examples of these per region. I'm especially glad to see the first Unity being ordered in China after the regulatory clearance, and also the first orders for harmony to the French markets.
We participated in the first major face-to-face trade show, the China International Import Exhibition, CIIE. And as market, China is back to normal levels, and we feel strong interest in our solutions, especially Unity. We celebrated or market-leading position with exterminate for the thousands installed Elekta in China, something we're very proud of.
One of the key events in the quarter was of course our launch of our new linac platform harmony. It's the solution balancing productivity, versatility, and precision without compromise. For example, when it comes to improved productivity, then it fast track in room experience, reduces patient stepped up time by as much as 50%. Combined with further workflow enhancements treatments can be reduced by up to 25%, enabling clinicians to deliver high-quality council care to more patients.
The products also have smaller size to fit into small existing bankers, and we're offering the product in two versions, Harmony and Harmony Pro in order to offer full versatility. We received CE Mark early November, and we expect FDA approval in the beginning of the next calendar year and then Chinese National Medical Products Administration approval in the beginning of 2022.
We have received great customer feedback on the solution and its enhancements of workflow and ease of use, and we see a very strong demand and traction for the new platform. After Q2 close last week we launched Elekta Studio, which would the imaging ring is that true 3D image guided adaptive therapy suite for brachytherapy.
In the studio, the imaging is coming to the patient instead of having the patient being transported around in the hospital to get the images, saving time and personnel resources. The wide bore 121 centimeters in diameter also enables to do the treatments without moving the patients for both gynecological and prostate cancer, securing the precision and patient's comfort.
Now to Unity, we see a very strong and accelerating development for Unity. More than 1,700 patients have been treated by our customers for more than 30 different indications. The pace at which this breadth of clinical experience can be achieved is unprecedented in our field.
We're seeing technicians focus on the cyst site that we didn't not expect, and this is just the start of discover that we can make. We can actually see what is happening during treatment. We see very good progress on the momentum study that now includes more than 800 patients treated for more than 30 indications.
Overall, there's a strong increase in the number of MR-linac related scientific publications globally, a trend that will continue going forward. We also had our 15th MR-linac consortium meeting virtually with more than 550 customers from almost 50 sites and 18 different countries. It was great interaction sharing of best practices.
And we have mentioned a couple of examples where Froedtert Medical College of Wisconsin, describing their work on both liver and pancreas cancer cases. Netherlands and Italy with scientific publications around bone oligomets or node boost [ph] treatments. And a year ago, we invited you to see Unity treatment and to begin, and today they have done more than 2,800 treatments, fractions sorry
And with that description of the strong global and positive momentum for Unity, I hand it over to you, Johan.
Johan Adebäck
Thank you, Gustaf. I will go through the financials, starting with net sales and EBITDA margin development. As you know, the pandemic has reduced access to our customers and have delayed installation, which in turn has negatively impacted solution sales. Service sales as ever continued to grow throughout this period.
In the second quarter, the pandemic effects on sales are somewhat lower and returned to sales growth of the two quarters with declines. Total net sales increased from 3% in the quarter both solutions and service side is growing. Solutions were 2% and services 4%. This also resulted in a normalization of the sales mix to 60% solutions and 40% service.
For six months, sales were down 1% with solutions sales down 5% and service growing with 6%. Although, we are pleased with net sales development under the challenging circumstances, we are not satisfied from a more long-term perspective and expect to get back to a significantly higher growth rate post the pandemic.
Our EBITDA margin came in at a strong 20% both year-to-date and on rolling 12 months. In the second quarter, EBITDA margin was 21.3% and I will give some more details of guidance later in the presentation. Continuing with sales, the regional picture was mixed in Q2. Starting with Asia Pacific, we delivered strong growth of 42%. This was mainly driven by China, which grew more than 50% and here we are back to normal business conditions.
Turning to North America, the decline of 60% on COVID related installation delays. Canada was the exception and showed good growth in the quarter. Finally, regions, Europe Middle East and Africa. In Europe, we had positive growth. In Middle East and Africa we reported lower revenue, which resulted in a small decline for the region in total. Overall, we saw better performance in the tool market while emerging markets were more challenging.
Gross margin was in line with Q2 last year, but down from Q1. The decline from the first quarter was primarily due to the normalization and the product mix with a higher proportion of solution sales in the quarter. Bottom line, we increased net profit with 70% of the high financing costs and with income taxes on the same percentage level as in the first quarter.
Moving on to expenses, the pandemic as that many of our internal as well as external activities continuing on digital platforms, product launches and Astro, as Gustaftalked about previously are some examples of virtual meetings that resulted in the lowest selling expense.
We are investing some of the savings in selling and administrative expenses, in improved digital ways of working, which enable us to build a lower sustainable cost base. Selling expenses continued on the very low level, but was slightly higher than in the first quarter as travel increased somewhat. Admin expenses decreased, and the change from the first quarter came mostly from a reduced external services spend.
Turning to R&D, on a rolling 12 months basis our gross R&D expenses increased to 10.4% of net sales from 9.7 last year, as we continue to invest.Net R&D expenses decreased somewhat in the quarter compared to last year from high capitalization and lower amortization. In constant currency we also saw an increase from the first quarter, even though amortization came in at the lower level.
As I mentioned earlier, our EBITDA margin for the first half of the year was 20%, corresponding to SEK1.303 billion. And we continue to successfully mitigate the negative market conditions through resilience and good cost control. This bridge illustrates EBITDA growth of SEK360 million or 32%, during the first six months comparable to, compared to last year.
The negative impact from declining net sales was mitigated by favorable effects from higher share of services sales and high margin products as well as with significant to lower sales and R&D expense. FX also had a positive impact on the profitability with the main effect coming from a large negative impact we saw last year. The net effect from foreign exchange when taking into account effects on sales and the cost was approximately SEK90 million.
Moving on to cash flow, we saw the strong earnings result in a high cash flow for results half year. Cash flow after continuous investments came in at SEK399 million. And we achieved an operation cash conversion of 50% for the first half of the year and 61 rolling 12 month business with escort ever in the fiscal year for Elekta. Networking capital increased in the quarter, mostly from high accrued income from number of Chinese and Japanese projects.
In the quarter we paid SEK2 billion in outstanding those. As we see the stable earnings and cash flow develop, we have experience warrants and lower cash position. The repayment has no effect on net debt and we maintain a high cash position also after this loan repayment. To summarize the financials, we are satisfied with our performance in the second quarter, and first half, especially given the challenging market conditions.
And with that, I’ll hand over back to Gustaf.
Gustaf Salford
Thank you, Johan. And now, we'd like to discuss a bit in our strategic priorities going forward, and we see four key areas right now and of course this is about continuing our resilience activities. It's about the deducting to new ways of working around traveling or marketing activities and more flexible work environment for employees, also of course, reducing COGS, always the focus area for us and to continue with simplification of approach sets us through better IT systems and digitalization.
We will drive innovation for long-term growth and accelerate our investments in order to develop the best view software and solutions and platform going forward. Service is crucial for Elekta, and we will continue to focus and drive also a bigger focus on customer satisfaction, new innovations in this field, but also improving processes with more automation, standardization and centralization.
We also leverage some partnerships, as Elekta always has done. And we will continue to be the largest independent player in radiation therapy of scale, and will also form strong partnerships. So we're confident that we continue to accelerate with a clear focus on our customers and our patients.
Now to brief outlook in Q3, we expect the new way of lockdown measures to affect us in the third quarter. We continued uncertainty in order growth and increased risk for delayed installation impacting revenue. We, of course, focus on resilience activities to control our costs, as we shown in the first half and prepare for getting back to growth. We will further strengthen our investments in innovation to capture long-term growth trends.
So with that, I would like to thank you for listening in. And I would like also to address this special thank you to all our customers. The conditions work in day and night to prevent the effect of COVID pandemic on cancer care. And we are dedicated to support to keep their devices and solutions after running during challenging circumstances. We would keep being resilient throughout the pandemic, and support our customer for as long as it takes.
And with that, I hand it over to Cecilia.
Cecilia Ketels
Thank you. And as you probably remember Elekta was postponed in spring in April and we'll now start on Saturday and be virtual. So if you are interested, please join us in Elekta's launch symposium for example or visit our virtual doe both. However, you will need extra pass to join this event. And with this we now open for questions. So please operators, will you give the instructions and let ask question in. Thank you.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Our first question comes from Annette Lykke from Handelsbanken. Please go ahead.
Annette Lykke
Thank you so much and congratulations on very nice margin here in the second quarter. First of all, in respect to margins, could you, Gustaf, help us a little bit on how we should see beyond COVID-19? You have an EBITDA margin of 21% for the second quarter. It will be very nice to have some indications where you see should we go back to normal levels, as it were before COVID-19 or you still expecting to see some sort of savings to continue in looking into beyond COVID-19?
Then my next question is goes to the service business and the installed base you have. Right now solution, as I account is down around 10% for the first six months. How long will it take before the decrease in solutions potentially has some impact on the service or software that you are selling and to the install base? Or will you be able to compensate for that by winning new contracts?
And then, on the win of market share, could you share a bit with us where it is you see Elekta having your game changer? Is it Harmony? Is it Unity? That will be that and then I will jump back to the queue for my other questions. Thank you.
Gustaf Salford
Thank you, Annette. And I will start with the margin question and also solution question and then the market share increase. So, if we looked at the margins, as we see, right now of course, the expenses are low, travel, marketing events, internal meetings as well. And we are working diligently and have many projects running to continue to make these savings sustainable. Of course, we want to start to travel again to meet customers and we see those requests coming as well.
So, we're not continue on these low levels of course, but we are not expected to get back to the high levels were before COVID, because this initiatives. Except that much that would be will need to get back to because it's difficult to predict. We'll say that will probably mostly affect the state and marketing expenses and maybe admin to some extent the concepts of primary functions that have a lot of events and also traveling.
I think as always, when we started talking about it more and more the mix between solutions as service, as you said on that, that really understanding the impact on that on our margins. We are focusing a lot on the service business right now, the service initiatives throughout the install base to have a good strong growth there as well and that should have a positive effect on margins.
And then how to compensate for the lower solutions, if I understood your question right going forward, I see this more it's a delay actually on the orders and some of the installations due to COVID. The demand is the same. It's not even higher going forward for our products. We have said it many times, but there is a gap of more than 10,000 linacs around the world. And every second cancer patients should get radiation therapy, but it's actually accessible to 2 out of 10 cancer patients around the world.
So, I'd say, there is a pent up demand that that will be released when we see more certainty after COVID. Market share increased. We saw very strong development in Europe in the quarter. And it's, you can't say and it's not just about Unity and Harmony has not yet made a big impact on the market shares because it's going through the different regulatory processes. So, it is about our existing platforms like Versa HDs for example. That is taking share around the world. So I hope that answer your questions.
Annette Lykke
Yes. Just on for example the marketing spending, before COVID-19 you were around the 10%. Would it be fair to assume those should be closer to -- would you have a saving of maybe 50 basis points? Or is it a 100 basis point that we should see the margin, the adjusted margins being closer to 19%, 20% or something like that for the indication? How much you believe you can continue to make as a saving for example next year?
Gustaf Salford
Yes. I think it's too early to assume anything there really, but we are driving initiatives to reduce travel and more kind of different meetings, both internal and externally, but we'll need to get back to exactly how that really impacts the margins.
Operator
Our next question comes from Michael Jungling from Morgan Stanley. Please go ahead.
Michael Jungling
Thank you. Thank you very much. I have two questions. The first one is to Gustaf. Can you be perhaps a little bit more precise about whether you intend to make some meaningful changes to the strategy of Elekta, and I'm talking to you about geographical focus and also the technology focus, will you to be the same important growth driver as it was before under a different leadership structure, and that's also comment around M&A question?
Number two is on government grants. You mentioned that, in the first six months, you had 40 million of grants, but you didn't mention that in the first quarter result. Does that mean that you booked 40 million in the second quarter? And are there more grants coming up in the second half of the fiscal year that you could perhaps indicate for us today?
And then finally on order bookings, can you comment on whether the second quarter had an impact from Harmonay? I suspect not given the way that the regulatory timeframe worked out, but maybe if there was? And also should we expect therefore in Q3, a pretty meaningful pent-up demand order number coming through for Harmony? Thank you.
Gustaf Salford
Thank you, Michael. So, the question for meaningful changes and stuff to the government of grounds and the order update on Harmony and kind of a ramp up of that was my understanding are the question. So, if I start with the first one, meaningful changes to the strategy. I'm a true believer on executing our own focused strategy in precision radiation medicine. I think that's clear to say, focusing on helping our customers the conditions treating patients.
But geographic areas, I think Elekta in my mind has always stood for early out in markets, emerging markets, we have followed the growth. We will continue to do so. So, I think you would continue to see that around the world, but I think that is not really changed. It's what we have always have done and that has made us successful historically.
Unity, of course, a key growth driver, both in terms of volume, innovation and number of patients around the world, so that's key. But I would say, Elekta in many years, if you compared to right now, has never been a better product portfolio situation with Harmony, with Unity. You saw the recurring [ph] or the Elekta Studio coming out as well more and more interesting software solutions. We're number one or number two in all our five segments.
So, I think you will see a balanced portfolio strategy going forward. It's not just about Unity. We have a lot of other growth opportunities as well. And growth in terms of M&A is something we're always looking for both on the innovation side. You saw Kaiku, you saw ProKnow, you saw SmartClinic, or PalabraApps that's been added very successfully to our software portfolio. but you will also see more going into new markets and that could be both from own operations, but also from acquiring companies.
I think you want to have the latest on the governmental grants. I would say that most of this came in the second quarter, but there was some of it in the first one as well -- most came in the second quarter. And then on the Harmony, so it's of course at early stage from a volume perspective with Harmony, but we see a very good interest and traction for the product and we see the first orders coming in. I was referring to the two linac dealer for France. And we see more and more of that activity going on, especially now after see market, we recently achieved. So, I think that's where you see the first orders coming and I see with that will be a positive contribution both to Q3 and Q4.
Michael Jungling
Okay. Can you clarify this and with these government grants, mostly in Q2, anything coming through in Q3? Because if I look at Q2, they're probably benefited your margins by maybe 100 basis points or a bit more. Is there a similar magnitude of benefit in the third quarter coming from government costs?
Gustaf Salford
I don't have that number available. So we'll need to get back on that one.
Michael Jungling
Okay. And then briefly also an order booking, so to kind of confirm that Harmony did not have a meaningful impact yet on Q2 order bookings, but it's perhaps likely or at least the numbers line up in a way that keeps we could be benefiting materially from Harmony. Is that a fair summary?
Gustaf Salford
Yes, it's kind of built up to the moment we just recently got to see mark. So you're absolutely right.
Operator
Our next question comes from Veronika Dubajova from Goldman Sachs. Please go ahead.
VeronikaDubajova
Good morning and thank you for taking my questions. I will keep it to two please. My first one is just on the outlook even for fiscal 2021 and I'm just curious. What do you guys need to see to be able to provide guidance? I mean I appreciate there's a fair amount of uncertainty, but at the same time, you continue to have an order backlog that is supportive, your revenue growth year-to-date has been fairly predictable to a large extent.
So I'm just surprised that two quarters in you're so unwilling to give us your guidance, and if you can talk to what it is that you need to see to be able to give us guidance for the full year. That would be helpful? And then just related to that, the China Unity revenue recognition, do you anticipate the two remaining indices to be recognizing in Q3?
And then my second question is on the moving pieces of the R&D expense line, slightly surprised by our low amortization figure in the quarter. Is this the new run rate we should be anticipating? And then Gustaf, I noticed you made some comments around your desire to increase R&D spending as you move into Q3 and Q4. Any guidance or insight you can give us into what the magnitude of that increases that would be great? Thank you, guys.
Gustaf Salford
Thank you, Veronika. And around guidance and uncertainty and it's not our willingness not to guide, but we go out to the customers we asked them for orders and when they want to start to install the linac and when they are not sure, I think it would be almost irresponsible of us to guide, we need to have that clarity from the customer base in order to be able to predict in more detail or revenue in order over the next one, two quarters, but as I mentioned, I see a great potential and I see a pent up demand post COVID, but exactly when that will happen, it's difficult to say.
So as soon as we get the clarity from the customer base, it's easy for us then to also look forward to look for the growth numbers and also look for the innovation initiatives as well. I think we’ve mentioned or I can take the R&D question as well and our additional acceleration of those investments. We believe that's very important to kind of take the opportunity right now to invest in innovation, to secure long-term growth over the next one to five, four, four or five years going forward. So that's what we're saying. And historically we said around 10% to 11%, on as a percentage of sales and we believe that will then be a bit higher going forward. And then, Johan on China?
Johan Adebäck
The Chinese unit is as you know, we took free revenue, free although making the second quarter and we do expect to take revenue on the remaining two in the third quarter, and maybe a bit comment on the R&D expense. So, we saw a decrease in amortization in the second quarter and this is as it is for capitalizations as well and pent on when projects or so when you can start capitalizing and when you finish the amortization. So, we had reduced amortization projects where amortizations was ended was the key driver in the second quarter, but also some in Swedish krona terms and some foreign exchange effect making it lower.
Veronika Dubajova
And Johan is that 160 million or so of amortization the right run rate going forward? Or would you expect it to pick up in Q3 and Q4?
Johan Adebäck
I wouldn't expect it to pick up in Q4, Q3, Q4, but as I said, it depends on where projects come to the phase when you can start to do amortizations.
Operator
So the next question comes from Kit Lee with Jefferies. Please go ahead.
Kit Lee
Good morning and thank you. Two questions please. I think first question is just on Unity in 2Q. Can you just provide us with more colors around installation start and also order intake of Unity in 2Q? And I guess for installation as well, what would be your plan just for Unity on installation start for the year? And then my second question is just on the situation in China. Can you just give us an update on the linac quarter whether the tendering is now progressing? Or is there some bottleneck issues in the market when it comes to licensing? And also for the Unity system, can you just confirm if that would be a Class A or a Class B system for the licenses? Thank you.
Gustaf Salford
Okay. Hi, Kit, I’ll start with a bit on the Unity and then we'd go to China, but Unity overall, I mean, we see very good traction. We highlighted a couple of deals in the material, but we have more. So, you saw the first Chinese deal coming in at post the regulatory appearance. And then we'll also mention one important deal in the U.S. But we’re more than, it's not on last year's level. I can say that as well, but we'll not disclose the number quarter by quarter as we said in the previous call.
So, on the installation side that's going well, it's a bit more challenging of course now during COVID, but we see a good installation with see shortening of the installation times and so on. So, it's progressing according to plan, but a bit more challenging due to COVID, as I mentioned. On the China situation and the licensing now, there was a great opportunity and a great potential.
And we thought that to CIIE, the Chinese international import show. That's a very big interest for Unity. And so, that's a brief summary of the Unity situation with China. We also see the regular linac volumes coming back to normal levels with both public procurement processes ongoing as well as private initiatives in the Chinese market as well.
Kit Lee
But if you look at the additional quota that was announced back in 2019, has that started to come through in some sort of the tender of process and the order you see in China?
Gustaf Salford
The program we mentioned 1,400 linac, I think back then if that's what you are referring to. So, I think, it's not been clear air mark units linked to that plan. And I think the plan didn't roll out as expected. But still we see a huge unmet demand in China and we foresee very good volumes going forward as well, but it's difficult to link it to the plan.
Kit Lee
And can you just confirm if Unity is a Class A or Class B system in China?
Gustaf Salford
I need to get back on that one.
Operator
Our next question comes from Kristofer Liljeberg from Carnegie.
Kristofer Liljeberg
Three questions, first around the cost system and there the government grants you talked about what line the P&L do we see them? And how should we think about breaking costs in the third quarter versus the second quarter? The second question relates to cash flow, you mentioned from the higher recruiting income was related to China and Japan. Could you give some more explanations for that? I guess it might not sound invoice for example for the unit in China. What's the reason for that? Then, on the Unity installation, just a follow-up, if you could say how many installations thought i.e., revenue recognized in the quarter and how many installations do you expect that for the full year? That's all for me. Thank you.
Gustaf Salford
We need to get back on which lines in the P&L. We have a government grants I don't have that in front of me. So, I need to go back to that. Accrued income I can, to point out it came mostly from the three unities we had in China, we had a couple of Japanese projects and so on. We do expect to invoice most of that in the third quarter. So the expectation is that that will come down from those projects. And on Unity installations thought I mean, we prefer not to go into the details on numbers on all of this for Unity's or for other products as well. So I don't have a comment on that one.
Kristofer Liljeberg
Okay. My first question was about operating costs in the third quarter versus the second quarter.
Gustaf Salford
Yes. Again, looking forward, given the how it looks when it comes to pandemic and so on we -- the expectations is that, we will continue to have locals going into the third quarter. And so I'm not going to give you an exact forecast on that we expect continued low cost levels in the third quarter where we stand today.
Kristofer Liljeberg
And they come and they want to accelerate, I think it was R&D investments. How material is that on a sequential basis here in the third and fourth quarter?
Gustaf Salford
I would be gradually ramp up, but I think it's more that we give an indication that we will continue and accelerate innovation investments over the next months, quarters here and years as well, then of course, some of it will be capitalized, and it will not be the same P&L effects, but we are driving you new innovations, software and on our new platforms.
Operator
Next question comes from Sten Gustafsson from Nordea. Please go ahead.
Sten Gustafsson
Coming back to the Unity installations here, and I appreciate you don't want to go into exact details for the quarter. But could you talk about the visibility for the coming one to two years when it comes to Unity installations? I think you should have a backlog of Unity orders of something like 40 to 50 systems. And my question is, well, if we assume that the COVID-19 will sort of go away fairly soon or as they see the vaccine is coming, which will help. When it comes to installations, how all type of visibility do you have to install your backlog over the coming one to two years given the feedback you hear from customers? That would be interesting.
Gustaf Salford
Hi Sten, it's good to have. Sort of visibility from that perspective we're having installation start dates in our contracts and so on, but it's more if something changes in the customers due to COVID or lockdowns or focus on COVID treatments in a specific hospital needs to push that forward a bit. That's what's difficult to evaluate right now. But I mean, we have full visibility on the installation start dates in the coming years from a contraction perspective.
Sten Gustafsson
Do you feel comfortable that your backlog would be installed over the next two years?
Gustaf Salford
We'll often say I think that's a good number of often to consider, that between order and revenue on a regular lean like project is around one year it can of course be shorter and longer on and more like a Unity or Gamma Knife, we've seem more around 15 to 18 months or so on average. I expect that that should be shortened a bit going forward with Unity when we see volumes increasing.
Sten Gustafsson
And I think you've previously I had said that you have the capacity to install two systems per month. Has that changed?
Gustaf Salford
No, it's the same, I would say. We have that capacity and we can build it up as well with adding more resources now. We are doing that continuously. We train in installers and service engineers and so on to take future growth.
Sten Gustafsson
Okay. Excellent. Thanks very much.
Gustaf Salford
Thank you.
Operator
Thank you. Our next question comes from Scott Bardo from Berenberg. Please go ahead.
Scott Bardo
Thanks for taking my questions. So firstly, please, on the Harmony. Have you had any expressions of interest or any success in upgrading your existing order book for standard linac accelerators towards Harmony plus if you can share some sort of insight there, and how realistic that might be to upgrade your existing order book please.
Second question on Unity, it seems like your enthusiasm for Unity is increasing. You talked about accelerated interest yet the disclosure surrounding Unity is decreasing. I appreciate, of course, you don't want to provide near-term guidance here, but of course we an analyst need to try and model your company effectively to allow effective capital market valuation for the business.
So, I'd just like to pursue on a few points here for Unity place. Can you please tell us how many Unities you have yet to install and book as revenues? I think that's an important number for store please. And could you also please share with us what the dynamic looks like in terms of leads out at the moment that you're talking to customers? How is the market opening up as you enter into this new phase, as you communicate?
Last question please, I think I'd very much appreciate the comments about the near-term uncertainty and business managing quite well. But you refer constantly to the medium-term outlook remaining robust for Elekta. We don't have a medium-term outlook in the market. We respect to financial guidance. So the question is. Is there any of you in your mind why your business can't grow in this high single-digit, low double-digit category as previously outlined? Has anything changed in your perspective at this point? Thank you.
Gustaf Salford
Thank you, Scott. So, I think we went through, if you remember from the Capital Day, three years ago. We had three phases in our Unity commercialization. The first phase was of course to get to the unit number at 75 and get to that to first Phase. The second Phase was to back down as well. It was more about the clinical adoption, granular reimbursements, going into countries. And the third phase would be start around 2022, would be more about having reimbursement and further growth phase.
So, we saw it when we hit the targets, we went into the second phase. Then we stopped being so expressive quarter-by-quarter on the numbers because we're not doing that. We're gamma knife for linac and so on as well. It's part of our business. We have five strong business lines as we call them that will drive our growth going forward. Unity is one of those as well that we are super excited about, and we see we're doing what we say.
We see that in a second wave here, with that traction building and it consorts we're meeting with more than 550 customers, talking what they can do about this, this fantastic product, and we also see that that's what I have more than 25 or around 25 clinical machines treating patients. So, I think you will hear more about Unity and the more data is about Unity, but we would go back to guide on Unity numbers by quarter. We don't think that's the right thing to do.
And mid-term guidance, and compared to historical levels, if you follow this market for a long time scoffed, and you've seen it going up and down, but you thought also being over 10% before COVID hits. And we also expect to see their positive development exactly what that will be of the COVID. It's difficult to say. But as with a huge underlying demand, especially from emerging markets, we have a positive growth outlook. But it's too early to say any specific numbers at the moment.
Scott Bardo
Thank you. How many employees?
Gustaf Salford
For Harmony, so on the opportunity to upgrade, already, from the order book better, we see good opportunity because of the attractions from the products or from the customers for the products. There is a good opportunity. It's too early now to say in this quarter in the Q2, but we'll see good opportunities for adoptable in Q3, and Q4.
Scott Bardo
Understood. And maybe last question is different appreciate you've had a lot to deal with this year for the Company in unprecedented times. Given that there has been some changes in the market and obviously your portfolio products is strengthening. When can we expect some sort of capital markets events where elekta sets new targets, mid-term targets for the group in part that sort of volatility? Is that something we can expect in the near-term horizon?
Gustaf Salford
Yes, ambition is of course the given capital markets update as soon as we can. We want it to stabilize a bit so we can have the clarity from the install base. And then we're ready to talk more about the next year and the years after. I cannot commit to certain dates here, but we'll get back to that as soon as possible. I just want to say one…
Johan Adebäck
Likely next year, we'll have that sort of event.
Gustaf Salford
Let us come back to that scope. This is quite a new announcement today. So let me come back with that. Just a clarification, we asked that Unity in China to your question that would be Class A device. Just to clarify a previously asked question.
Scott Bardo
Thanks.
Gustaf Salford
Thanks.
Operator
Our next question comes from Lisa Clive from Bernstein. Please go ahead.
Lisa Clive
Hi, there. Thanks for taking my questions. I have three. During the 2018 CMD, the previous CEO indicated that Unity had the potential to convert a third of the market to MR-linac by 2023. Do you still believe this is an achievable target? What steps need to happen in terms of timeline of clinical data publication and reimbursement in order to get there?
Second question and you've commented a bit on this, but just asking from slightly different directions. Your total order backlog has steadily increased over the years is now around two times your annual gross order intake while your larger competitor has stayed near parity between their gross order book or their order backlog and their gross order intake. Does this mean taking you longer to deliver machines? Or is this somehow putting you at a competitive disadvantage? What really needs to happen in order to decrease the size of your order book? Is it's just coming down to, I mean, you mentioned training people for installation, so is it just greater investment in installations and manufacturing?
And then last question, could you provide any comments, I believe, your list price for unity is about $8 to $10 million. Could you comment on what's been realized AFT that you're generally getting is today versus that list price? Thanks very much.
Gustaf Salford
Thank you. Thank you. So on the first question, I mean the market potential for Unity. We’ve said since the capital market day that it would be addressable market of around 25% is what we believe that MR-linac technology should take -- had opportunity to take of the total markets. It's also kind of those numbers, if you look at what additional cancer indications and treatments you can do with MR-linac compared to a regular CT-based or come in CT-based linac. That's how we see it going forward. That would of course take some time, but that's huge opportunity for us.
On the order book question, our large order book, I mean, it's very good to have right now, of course, where we convert that the order book to strong revenue numbers in the month and the quarters as we right now. I think when you compare with competition I think they have a bit different market mix. So, they're more based in the U.S. and they also have different ways of booking orders as well is my understanding. On the price levels, I mean, it's now we are in the second phase and we see also a bit more varied price levels in the markets, but it's not something we disclose externally.
Operator
Thank you. Unfortunately, this is all the questions time permits. So, I’ll hand it back to the speakers.
Cecilia Ketels
And I mean, if you have more questions, please don't hesitate but reach out to me after the call, but we would like to thank you for participating today. And thank you and have a good day.
