Half Year 2022 Medacta Group SA Earnings Call Sep 9, 2022 (Thomson StreetEvents) -- Edited Transcript of Medacta Group SA earnings conference call or presentation Friday, September 9, 2022 at 1:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Corrado Farsetta Medacta Group SA - CFO * Francesco Siccardi Medacta Group SA - CEO ================================================================================ Conference Call Participants ================================================================================ * Christoph Gretler Crédit Suisse AG, Research Division - MD in Equity Research ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Medacta Group 2022 Half Year Results Conference Call. (Operator Instructions) At this time, I would like to turn the conference over to Mr. Francesco Siccardi, CEO. Please go ahead, sir. -------------------------------------------------------------------------------- Francesco Siccardi, Medacta Group SA - CEO [2] -------------------------------------------------------------------------------- Thank you. Thank you very much, and welcome, everybody, to this H1 2022 financial results. I will go through the slides together with Corrado Farsetta,, Medacta CFO. If we move to the first slide, we can see the key numbers of the H1. We reported already in terms of revenues, a very strong performance above 14% in constant currency, up to EUR 211.3 million. In terms of EBITDA, we did reach EUR 58.1 million, equivalent to adjusted EBITDA of 27.5%. The profit for the period was EUR 25.6 million with a cash flow of EUR 3.8 million. And in the first semester, we did add approximately 80 new jobs within headquarter and branches for a total of 1,421 employees. In terms of key highlights, the growth was, as I said, extremely strong. And it is important, it is a growth which is all volume-based. So we did gain, again, a significant portion of market share through new customer acquisition, which did come supported by a strong and actually accelerated sales force expansion and supported as well by new product introduction across all the business lines and across all geographies. And this growth did come despite some very strong pandemic restrictions at the end of H1, in particular, in quarter 1 in Australia and U.S., which are very relevant in terms of marginality as we will see it later. So this will have an impact in terms of geographic mix. Compared to H1 2019, so pre-pandemic situation the CAGR is almost at the 11% constant currency, so it is now the second year in a row that we really have a very strong true growth well beyond the recovery of the pandemic situation. In terms of EBITDA margin, this 27.5% was impacted by some additional opportunities we had above our plans in terms of sales force expansion. It was negatively impacted by the geographic mix. As I said, Australia and U.S. were significantly impacted in quarter 1, and those are high margin, high profitability geographies. We had some inflationary costs, especially on the transport side and it did come with some FX effect, especially due to the dollar versus euro evaluation. We compare this margin versus 2021 H1, which was extremely high, almost 32%. And this was highly inflated by nonrecurring cost savings still linked to pandemic restrictions, lack of [congresses], travel in particular, and other marketing and fixed costs. I am extremely pleased in terms of continued execution of our long-term value creation, which remains based on our key pillars of introducing constantly new products, supporting this innovation through very, very strong medical education programs. And this is the reason why we are able to continue to attract and hire excellent sales force, mainly coming from competitors. It is extremely important as well during this very, very complex moment and facing a very high growth. We did not face any supply chain issue. We did increase some of our stock, both in terms of instruments and both in terms of implant stock across all the line. And I would like to thank all our people in the supply chain on a global scale that really did an excellent job in this difficult period. We did report already in terms of revenues. The revenue by product line did show an extremely good growth in terms of core business line. So Hip and Knee did grow at 11% and 16%, respectively, which is a very, very significant growth compared to market. And Extremities and Spine did continue on their trajectory, which is as well significantly above the market growth. Overall, what is more important, in my opinion, to understand in the next slide is the revenue bridge by geography, where we have seen really, an extraordinary performance in Europe, which is [collecting] the great activity than in the last years, I would say, with a growth of 22%. We see the U.S., which did perform pretty well at around 11% despite, especially the first few months of the year in Q1 in particular, where we did still see a significant headwind in -- due to COVID and significantly headwind is still there due to the inability of recovery some of the waiting list of patients, mainly linked to staffing. Asia Pacific was as well unexpectedly impacted much longer than usual, especially Australia where we have seen a very, very severe lockdown for almost 4 months of H1. While in Japan, the performance was, I would say, very much in line with our plans, overall, is shy of 4% at the Asia Pacific performance in terms of constant currency growth. 32% in terms of our distributor, roughly, which brings to our 14.5% in terms of H1 overall performance. This revenue geographic mix change, as we will see, will have at least partially an impact in H1 and potentially on the full year. I wanted to highlight with the next slide how the company is performing compared to pre-pandemic level. In H1 2022, the revenue was up 36.5% at constant currency from H1 2019. So we are really growing compared to pre-pandemic level and now is the second year that we are doing that, which represents a CAGR of almost 11% at constant currency. And this is now a performance, which is excellent across all the product lines. And excluding the slowdown of Hip and Knees in 2020 that really performed well across all the lines. I would like now to ask Corrado to go into the details of the P&L and the marginality which factors have been impacting our marginality in H1 and how we see the development moving forward. Please Corrado. -------------------------------------------------------------------------------- Corrado Farsetta, Medacta Group SA - CFO [3] -------------------------------------------------------------------------------- Sure. Thank you, Francesco, and good afternoon, everybody. Now I would like to comment a bit on our results. I think that in summary, we have defended our profitability against several negative factors in the semester. But before we go through the numbers, let me draw gain your attention to the geographic mix which is a key element to read correctly this semester. Because if you look at the composition of our revenue, you see that Europe [passed] from 42% of the total revenue in H1 2021 to 45% of this semester. APAC, the Pacific, did the opposite from 24% to 21% of the semester, while the United States was stable at around 30% of the total revenue. Now it is clear that given the big differences in prices between Europe and APAC, in this case, you can easily understand that this was the main driver of our margin reduction that you see in our profit and loss in this semester. We don't disclose precise number, but we can say that this is representing more than 50% of the total impact of this period. The other main element, which is always unfortunately present is price erosion. Price erosion is normally offset by the growth in key markets, high-priced markets like Asia Pacific and U.S. But this semester, this effect was not there, like in the U.S. or even negative for Asia Pacific. Another small part of this reduction is attributable to the translation effect of the cost of goods sold, which is in Swiss francs and which is translated into euro. So given the devaluation of the euro, there is another portion of negative effect from that. So basically, the gross profit margin resulted in 70.2% compared to 72.5% of the previous year semester. In this regard, just the final comment, has to be done on instruments. Given the already mentioned strategic decision to increase our stock and instruments to avoid potential disruptions, we did not leverage on instruments because that should be, let's say, an expected effect given the big chunk in revenue. So we cannot say that compared to the past, there is a negative effect, but there was not a positive effect coming from leveraging the cost of the period of the depreciation associated to the instruments that we have in the market. If we move down to the OpEx, we see that there is an increase in the research and development. Just a comment -- as you may recall, these numbers report also the depreciation and amortization referring to each line. So the big jump you see in the research and development amount is almost entirely explained by the research and development projects related to the MDR that was, let's say, an activity which was completed in this part of the year. The sales and marketing cost -- these costs are entirely driven by growth. You see here the sales force expansion mentioned by Francesco, you see also here the release of the COVID restrictions that were still in 2021 in terms of congresses, marketing activities and travels that are now back to the pre-COVID levels. And for the first time, you see a big effect from inflation. In this line, you see also a negative effect from inflationary pressure on transport costs, the so-called fuel surcharge and another effect, which is difficult to measure because it is within the travel costs that are much more expensive than in the past. But we see that more or less, this is you can say that there is [0.5] point that is attributable to inflation. As a result, the adjusted EBITDA was 27.5%. And I wanted to mention that for the first time, we have a negative effect from translation into euro, which is around 0.6%. So the constant currency EBITDA margin would have been [28%], 28.1% in the semester. Moving down to the bottom line. We see the profit for the period was EUR 25.6 million. After financial results of [EUR 1.9 million], which compares to a noncomparable 0 in 2021, which benefited from extraordinary positive effects on our debt in U.S. dollar, which was the opposite this year. And a comment on the tax rate, which in this period was equal to 15.5%, is back to a more normal rate after some extraordinary one-off effects in 2021, which were related to, you may recall, the (inaudible) tax deductions in the U.S. where the tax rate is almost double of our average tax rate and the release of some technical treatment, deferred tax asset and liabilities further to the introduction of the Swiss tax reform. They are not there anymore this year. So that's why we are back to a more normal 15% of average tax rate. If we move to the next slide, we see the composition of the investments in this semester. You see that we invested roughly 66% of the total, equal to EUR 24 million, in instruments; and other 23% that are roughly EUR 8.3 million in expansion of our capacity and buildings. We commented that 90% of our CapEx are driven by volume growth because both instruments and spaces and production capacity is -- are directly linked to growth. The remainder part is composed by research and development investments and the other minor part of intangible investments. Moving to the free cash flow slide. You see that despite a so high level of investments, operating investments in instruments, the adjusted free cash flow was positive for EUR 3.8 million. While the reported free cash flow was negative for EUR 5 million, but the difference is primarily attributable to the cost, the extraordinary investment for land which we acquired in this semester to expand the spaces here very close to Rancate to our current site and the settlement for legal claims that we had in the first semester for roughly EUR 2.2 million. Now moving to the last slide of my presentation, the net financial debt was EUR 123.6 million with a leverage very low and stable at around 1x EBITDA. Just one note, there is an increase of EUR 30 million from last year's 31st December net debt and EUR 10 million out of this EUR 30 million increase is attributable to currency translation effect on our debt. So it's not a cash that we -- that went out of the company. This was my last slide. Now I'll give back to Francesco for his comments on the outlook. -------------------------------------------------------------------------------- Francesco Siccardi, Medacta Group SA - CEO [4] -------------------------------------------------------------------------------- Thank you very much, Corrado. I would like to update you in terms of outlook for 2022. We are in September now. So we have a little bit more visibility, both in terms of top line and I'm frankly very pleased with the direction the company is taking this year. Again, we do expect to be able to slightly beat the old guidance. So we want to update our guidance where we expect the revenue growth in the range of 14% to 16% at constant currency. While at the same time, linked to the geographic mix that we had, especially in H1, which we believe will be partially recovered in the second half of the year, together with, of course, some of the inflationary costs we have seen already in H1 and frankly, the higher-than-expected growth that brings together some fixed cost increase as well. The EBITDA margin is now expected to be slightly below the original guidance, so around 27.5% at constant currency. This compares, as I said, to our previous outlook of revenue growth towards 14% and an adjusted EBITDA towards 28%. And both will measure that constant currency. So overall, an acceleration with -- in terms of top line, with slight decrease EBITDA margin associated with the factors we just mentioned. I would like maybe to go back to the operator and manage some Q&A session, if there is a question from the audience. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) The first question is from Chris Gretler with Credit Suisse. -------------------------------------------------------------------------------- Christoph Gretler, Crédit Suisse AG, Research Division - MD in Equity Research [2] -------------------------------------------------------------------------------- Francesco, Corrado, great to speak to you. I had 2 questions just first on FX. I understand your full year guidance is [FX] neutral. And you mentioned this 60 basis points in the first half. If we assume our current rate, is this a good guide for the full year as well? Or should it be kind of higher or lower? And then the second question relates to energy costs. Could you maybe discuss your utility strategy for the plan in (inaudible) particular, essentially kind of what you paid in the past, maybe as a percent of sales? And how your strategy looks like going forward, whether you have any hedges in place? Or what will be the likely energy bill, so to say, for the next year or so just to give an order of magnitude. Obviously, these energy costs are fairly volatile these days and I think the wholesale market in Switzerland is fairly unregulated. So it will be very interesting to know how you're positioned there. -------------------------------------------------------------------------------- Francesco Siccardi, Medacta Group SA - CEO [3] -------------------------------------------------------------------------------- Chris, I would like maybe to take on the second question while probably leaving the first question to answer to Corrado. So in terms of energy, I would say we have -- we play on 2 aspects, key aspects. One, of course, is to try to manage the cost. Overall, the impact of energy in terms of cost of goods is actually relatively small, almost negligible, I would say. We do still expect an increase of cost roughly around [50%] in the second half of the year for the energy portion only, but this is significantly less relevant than any other inflationary costs we mentioned, for example, transportation which is way more impacting our overall EBITDA and profitability. In terms of cost of goods, I did not have request a calculation simply because it would be probably less than 0.1% in terms of COGS. And we can maybe address the first question, Corrado, on the effects on the full year. -------------------------------------------------------------------------------- Corrado Farsetta, Medacta Group SA - CFO [4] -------------------------------------------------------------------------------- So yes, 0.6% is the effect that we measured in this semester now assuming of course that there are some -- I would say there are no changes because that's the assumption that we can do now. No changes in the current situation of FX currency evolution and assuming what we expect to be the geographic mix in terms of currency, the same revenue in local currency. I think that it is visible to say that the expected full year FX effect can be in the region of 0.3%, 0.5%. -------------------------------------------------------------------------------- Operator [5] -------------------------------------------------------------------------------- The next question is from Sandra (inaudible). -------------------------------------------------------------------------------- Unidentified Analyst, [6] -------------------------------------------------------------------------------- First question would be on the NextAR. So you launched that in Shoulder in the first half year. And you mentioned that you have placed more than [100] platforms. Now can you give us some color on what the impact from that is on your Shoulder sales and what we can expect from the launch in Knee and Spine later this year? And the second question is, again, back to the margin. Could you elaborate a bit more on what's the impact on the margin from the cost inflation versus the impact from investments into the sales force. -------------------------------------------------------------------------------- Francesco Siccardi, Medacta Group SA - CEO [7] -------------------------------------------------------------------------------- So NextAR, NextAR has been introduced at the end of H1. So we are just -- as you probably remember, I think we announced that in May that was the full release of Shoulder. We see a big demand that's why we were able to place this significant number of machines in the market and the feedback. The demand was already big and the feedback of the new customers, especially on the Shoulder is excellent, which is something you see in terms of continuous growth on the extremity line, which is mainly Shoulder at the moment. We just got clearance as well as you have probably seen in Japan, which is interesting. So the first Japanese surgeons are going through their training fashion. U.S. and Europe were already cleared. We still miss Australia where we don't have implants yet regulatory clear. This is something we are working on and hopefully get some traction in 2023. Knees and Spine, we have a different situation, slightly different situation in different markets. We believe we are fully on track with our year-end full release of both Knees and Spine in Europe, where we have built a significant number of reference centers in Knee and in Spine. And you know our strategy is always to rely on key centers to be the base on which the future customer will go, see the technology, be trained and run the learning centers. So we are perfectly on track on this. And we will see the effect in terms of implant sales, both on the Knees and Spine, I would say, in 2023 and an acceleration made in the last months of 2022. I would leave maybe the margin question again to Corrado to go into the details of how much is sales force and how much is linked to the inflationary cost increase which today are mainly, I would say, transport cost because, as I said, energy is relatively small, and we still don't see any raw material impact because we had a significant amount of stock, both in terms of raw material and finished product. So maybe Corrado, you can add some flavors to that, please? -------------------------------------------------------------------------------- Corrado Farsetta, Medacta Group SA - CFO [8] -------------------------------------------------------------------------------- Yes, sure. So on sales and marketing, what you see basically is the stability in terms of cost as a percentage of revenue, which shows what we mentioned, sales force expansion because you see a big jump in the top line. So I would say that if you measure the, let's say, the increase in absolute terms, what you can say is that the big part of the increase of cost is due to the sales force expansion and the ordinary, let's say, sales and marketing activity, which is now back to the pre-COVID level of activity. What I said is roughly 0.4%, 0.5% is the, let's say, the effect on that line of the inflationary cost, which is 90% of number -- 95% is transport costs that are increasing. And the rest is something which is something which is [on the] other travels cost that we cannot split between inflationary or other costs. But of course, everybody now can, let's say, testimony that if you buy a travel ticket, you see there is a big increase on those costs. -------------------------------------------------------------------------------- Operator [9] -------------------------------------------------------------------------------- (Operator Instructions) The next question is from (inaudible) with GMB. -------------------------------------------------------------------------------- Unidentified Analyst, [10] -------------------------------------------------------------------------------- I have a question regarding the cash flow generation. If I look at the Page 13 on the half year report, not the present [lateral] report. Once you adjust the cash flow from operating activities, basically at the same level and actually a little bit lower level for half year 2022 compared to '21. I'm just wondering is that a reflection of, let's say, higher cost of achieving growth? Is that something really to sacrifice with the profitability to achieve higher growth? And I got a second question, which is regarding if you could as another question explain again that transition effect on the debt that leads to an increase of debt of around EUR 9 million or EUR 10 million. -------------------------------------------------------------------------------- Corrado Farsetta, Medacta Group SA - CFO [11] -------------------------------------------------------------------------------- Yes. So basically, when we speak about cash flow, the adjustments are, say, attributable mainly to extraordinary investments in this case, the semester, the acquisition of the land close to our current site in Castel San Pietro. Legal expenses, extraordinary say, legal expenses or last year, if you see there is a big difference in the working capital amount, EUR 40 million last year, EUR 30 million this year. The big difference, which was adjusted last year was EUR [18] million, which we're referring to previous year's tax payments that were accrued but not yet paid. So basically, what you see as an adjustment in the free cash flow is basically not affecting the profitability of the company apart from some legal expenses, but that is the, let's say, a very small amount in the semester. You see it's a very, very, very low number. So that is, I think, about the -- I don't know if I answered the question. Back to your second point, which is the FX effect on our debt, we have -- our debt structure is split between Swiss franc, euro, but mainly U.S. dollar. The reason is that we have intercompany that's between our U.S. subsidiaries and the Swiss parent company with that international. Now we cover against this amount of accounts receivable by turning our financial debt into U.S. dollar. Now last year, the effect was positive because the dollar devaluated. So the amount of U.S. dollar translated into euro did show a positive effect, which offset the financial costs, which are always there. This year, we have seen the opposite. The revaluation, of course, inflated our net debt -- sorry, the financial debt in U.S. dollar, and this is a positive effect in terms of cost. Of course, those are unrealized effect because they are only translational effect, but that is what you see in our number when you translate into euro. There is another effect, which is a financial specific effect in our, just to be a bit more specific statutory, balance sheet of the parent company, without international because we have all the -- almost the entire (inaudible) are there and which is when you have the year-end or the period end translation of the accounts into the Swiss franc. So in this case, we have both effects, both the FX effect and the translational effect on this -- on our consolidated accounts that is in euro. -------------------------------------------------------------------------------- Francesco Siccardi, Medacta Group SA - CEO [12] -------------------------------------------------------------------------------- But if I can add on this question, in general to grow in orthopedics is very cash intense. You see on the CapEx side a lot in terms of instruments, every new instrument is given to a new customer or a new product in the hands of an existing customer that potentially is doing hips with us and now with knee. So this is purely growth related. So it's not impacting on the CapEx side, of course, our profitability too much. Of course, there is below EBITDA, some depreciation, which is linked to that. But it's really capital intensive to grow fast in orthopedics. And this is happening both in terms of instruments and as well in terms of stock of instruments of implants, of course. And especially in this period where the supply chain is potentially under stress we even did some extra stock to make sure that we did not have any supply chain issues. So this is even more hitting our cash flow. But it's all growth driven, if you will go down to zero, this is all cash you have at hand. -------------------------------------------------------------------------------- Operator [13] -------------------------------------------------------------------------------- (Operator Instructions) There are no more questions registered at this time. -------------------------------------------------------------------------------- Francesco Siccardi, Medacta Group SA - CEO [14] -------------------------------------------------------------------------------- Thank you very much. If there are no further questions, I would like once again to thank all the participants to this call today and even -- more importantly, I would like to really thank all Medacta employees and customers that did support this very good performance once again in H1 2022 and look forward to speak with all of you again at the end of this second semester after year. Thanks again, and look forward to see you soon in person as well. Bye-bye. -------------------------------------------------------------------------------- Corrado Farsetta, Medacta Group SA - CFO [15] -------------------------------------------------------------------------------- Thank you. Bye. -------------------------------------------------------------------------------- Operator [16] -------------------------------------------------------------------------------- Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephone.

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