Carl Zeiss Meditec AG (AFX) Earnings Call Transcript & Summary

Yes. Good morning, ladies and gentlemen. Thanks for joining our call today, and welcome to our quarterly analyst conference. My name is Sebastian, I'm the Head of Investor Relations. And with me, as usual, our President and CEO, Dr. Markus Weber; and our CFO, Mr. Justus Wehmer. I'd like to hand over to these gentlemen now to give you a quick introduction to the financials in the form of some prepared remarks. And afterwards, we look forward to the Q&A session with you.

Thank you so much, Sebastian, and also good morning from my side, ladies and gentlemen. A warm welcome to the third -- to the 3 months 2021, '22 analyst conference of Carl Zeiss Meditec AG. So what is today on the agenda. So I will start first to give you an overview of the results. And then, as usual, our CFO, Justus Wehmer, will give you more details on the financials in the next section of the presentation. And afterwards, I would like to share some highlights. And finally, I would like to talk about our outlook. So let's come to the first slide, giving our key performance. Overall, a very solid revenue growth and strong order intake in the first 3 months of 2021, '22. So Q1 was a very successful start into the new fiscal year and entirely according to our expectations. So revenues reached EUR 410 million, a strong increase compared to prior year, supported by small positive currency effects. Constant currency revenues at EUR 408 million, so 11% growth, especially due to a positive development in Asia, also an increase in EMEA and Americas. Good news here is that both SBUs are significantly contributed to that and had a significant increase. More information in more detail will be presented by Justus Wehmer. Our supply situation is still tense and requires high attention of the entire organization. We have taken various measures to reduce our limited negative effect as much as possible. So the EBIT margin decreased to 18.1% versus 19.9% in prior year due to also reported and expected increase in OpEx. Please keep in mind that last year's Q1 was really outstanding also due to an extraordinary low level of OpEx due to the COVID situation, especially here also travel restrictions. Our net income reached EUR 38 million, which corresponds to earnings per share of EUR 0.42 direct comparison to last year was EUR 0.52. So this includes, as already reported some negative currency effects on our hedging contracts. So with this, I would like just to summarize that, overall, the development is quite positive despite the corona situation. And now my colleague, Justus will discuss the figures in more detail now, and we'll give you more background.

Yes. Thank you, Markus, and good morning and also welcome here from my side. I'm now going to give you a more detailed overview of our financials, as Markus said, starting with the performance of our strategic business unit, OPT. Revenue came in for OPT was EUR 311 million. Compared to prior year, this is a reported increase of 9.7% and at constant currency, 9.1%. Both our devices and consumables enjoyed solid growth, especially in our refractive business, we saw again a great development. As expected, EBIT margin decreased compared to last year, primarily due to increased expenses in sales and marketing activities, trade shows take place again physically, more international traveling is possible again and the cost per travel mile is also trending upwards. On top, we also saw an increase in R&D expenses to support our strategic innovation initiatives like, for example, our digitalization program. MCS delivered a positive performance with revenue of EUR 99 million versus previous year's EUR 85 million. This represents an increase of around 16.1% and at constant currency, 15.2%, which is a good growth given the corona situation. We clearly benefit from the across-the-board rejuvenated portfolio in a market that has returned to invest. Our EBIT margin is still very strong and even improved versus last year despite increased expenses, especially in sales and marketing. We do feel pressure on our COGS from various supply chain issues, but a favorable product mix helped to offset this effect. Let us next look at the regional development, which varies quite a bit across the globe due to different COVID-19 development. The Americas recorded revenues of EUR 115 million, an increase of 12.3% with quite a bit of currency tailwind from the U.S. dollar. At constant currency, the increase would have been 8.4%. The U.S. showed with 14% and constant currency, 10% growth, really solid performance, but also Latin Americas with an increase of roughly 12%, was good, however, compared with a rather weak Q1 in last year. EMEA invoiced EUR 114 million, which is an overall increase as reported of 5%, respectively, 5.9% at constant currency. The developments per country vary quite significantly depending on the country-specific lockdown policies to manage the Omicron waves in fall and winter. So we see double-digit growth in some countries, for example, Spain, but also only minor growth or even negative growth in countries like France or Germany. In Asia Pacific, we yielded revenues of EUR 182 million, which is plus 14.8% as reported and at constant currency, slightly higher at 15.1%. And again, outstanding performance from China, including Hong Kong. In other countries, just like in Europe, it's a widespread of powerful growth where the pandemic was hitting hard as a year ago and a little or nongrowth, where countries today struggle again with Omicron outburst. So let's have a look then at the P&L lines. The gross margin is rather stable at roughly 57% compared to previous year, supported by some positive foreign exchange effects, mainly from U.S. dollar, as I just explained on the previous slide. OpEx increased mainly due to the COVID development and strategic investments. Our sales and marketing expenses increased noticeably while advertising and trade show activities increased across the globe. We had the ESCRS in October in Amsterdam and the AAO in New Orleans in November. We had also increases in variable expenses like freights and personnel expenses supporting our product launches. R&D increased due to continuous investment in strategic development projects, mainly in the field of digitalization. EBIT came in at EUR 74 million, slightly above prior year's level of EUR 73 million. However, let us keep in mind last year's onetime effect in other results of EUR 2.4 million due to the sale of our office building in Jena. This transaction, as we explained, is related to the construction of a new Carl Zeiss building here in Jena. So with an EBIT margin of 18.1% in our Q1, we are overall pretty pleased and see it as a confirmation of our guidance of 19% to 21% EBIT margin for the fiscal year '21, '22. A brief look at the adjusted EBIT margin, which reached 18.6%. There are rather small effects related to purchase price allocation related to depreciation in both periods. And we adjusted the onetime effect related to the asset sale in prior years. And finally, a short look at the cash flow statement. Operating cash flow was negative with EUR 15 million. This is significantly below previous year's EUR 41 million, in particular, due to the working capital development and tax payments in Q1 to some extent, of course, related to prior year's positive results. Our working capital saw a further increase in accounts receivables due to the strong sales development in the end of the quarter and growing inventories also to support our supply chain and also due to repayment of payables. Cash flow from investing activities is mainly payments for property, plant and equipment, especially the China production and some other locations in which our IMI production is being expanded. And you will hear more about the China production facility later from Markus. Cash flow from financing activities mainly influenced by changes in receivables and payables on our treasury accounts and net liquidity is now at a level of about EUR 900 million. Yes, thanks for your attention. And with that, I hand it back to Markus.

Yes. Thank you so much, Justus. And now I would like to share some highlights with you. Justus has already mentioned some of them actually now even more in detail. So let's get started maybe first with the VISUMAX 800, which enables faster robotic connected laser vision correction. At the end of last fiscal year, we already introduced you significant innovations. And in our analyst conference in December, we actually focused on the QUATERA, so the phaco machine, the new phaco machine and the cataract workflow. And we continue to be very excited about the business opportunity. So this is really running very nicely and very smoothly. We are seeing the first installations of QUATERA and continue to receive highly encouraging feedback as we move forward to seek the necessary regulatory approvals in all markets. In December, we have not talked so much in depth about our second-generation femtosecond laser device, the VISUMAX 800. So please let me provide you with some context around it today in some more details. So the device will probably solidify our market and especially also our technology leadership in refractive surgery. The new VISUMAX 800 has exciting new features, enabling more speed and automation with a better surgical workflow. We therefore refer to it as a faster robotic and connected laser vision correction system. So the biggest advantage of it is definitely the speed and the high degree of automation. So the device can create a lenticule in less than 10 seconds. And when you compare that to our last system, so this is an acceleration of a factor of core. So that means 40 seconds with the previous generation. The resulting shorter section time can reduce significantly stress for patients and further improve patient safety and the risk of rare complications in case of a section loss. So moreover, as a second argument, the VISUMAX 800 connects seamlessly with other -- with our other diagnostic products and solutions from Zeiss, enabling either treatment and planning and handling of the data. So this is exactly our digital workflow and the next step in workflow solutions. So lastly, device is smaller and more compact than its predecessor, which can be an advantage at certain customer sites. So we have been able now to generate first installations in Europe, and the order entry looks quite strong at this early stage. This is a very, very well solid order book. So let's come now to the next highlight of today. And this is the first IOL deliveries from the new Gansu consumables manufacturing plant. And this is something which is -- which goes directly in our manufacturing strategy. So where we want actually now today, announced a significant expansion of our global footprint. So in September 2021, the first batch of monofocal intraocular lenses was shipped from our new factory in Gansu in South China. So we have been working on this new consumer board plant for many years to further expand and diversify our global manufacturing strategy. In IOL production, specifically, we are targeting on the one hand, significant reduction in our cost of goods sold. On the other hand, it also represents a substantial capacity expansion for our IOL business, reflecting our strong ambitions for future growth plans. Operating the site also enabled us to claim local manufacturing status in China, which is, in these days, crucial and team, which can be helpful to mitigate the impact of new regulations in the Chinese market over time. It also sets us up well to mitigate the impact of potential future restrictions on world trade if they were to have them. Last but not least, it also improves the efficiency of our supply chain through additional local sourcing options and reducing transport costs and CO2 emissions with the consumables are delivered into the markets of Asia Pacific. So quite positive and also in terms of sustainability. Regarding the infrastructure, we are able to benefit from substantial on-site synergies with the Zeiss Vision business that operates part of the facility. We strongly believe that the Gansu site will be of significant competitive advantage over time for our consumable strategy. Yes, I think a lot of great highlights now come maybe as the last topic now for today coming to the outlook and especially also for the fiscal year, but also for the midterm guidance. So we believe also our industry is still strongly impacted by the COVID-19 pandemic. We believe that it will continue to benefit from highly favorable long-term growth trends. What are these growth trends. So the first one is, you can all imagine, is the aging of the population or aging of society. Second, growing both in large parts of the world. Third, rising access to health care in the rapidly developing economies. And lastly, fourth, increasing information access. So these trends lead to a growing number of patients and thus even a higher load to the health care systems. So lastly, digital solutions, telemedicine, remote, augmented or artificial intelligence-driven features are becoming more and more relevant for ophthalmology. And this is something we want to address and we want to be the market share leader. The outlook for fiscal year 2021, '22 is quite positive. We aim to outperform our markets, not only ZEISS but the entire industry is impacted by the tense situation of the global supply chain. We cannot rule out an additional impact on market growth from it, but we have a very strong team in place and very good processes actually to address it. As we have pointed out, we have finished last year with a substantial order backlog, and it is very hard to say how long the situation will last. We estimate our EBIT margin for fiscal year '21, '22 to be between 19% to 21%, which would be down slightly from the record levels of the last fiscal year. As we have been seeing already in the current quarters, we expect more normal levels of operating expenses, particularly in sales and marketing. This applies even more so in the context of our product launches. Midterm, we continue to have significant investment needs as we want to further broaden our global presence and want to continue to drive our innovation strategy with a higher level of R&D investment. However, on the other hand, we consider the high level of recurring business is mostly sustainable. Profitability will clearly benefit from this trend. As a result of higher costs, but more also a higher level of recurring business, we are very confident that we can achieve EBIT margin sustainably above 20%. With that, we have come to the end of our prepared remarks on the financials. I hope you enjoyed it. Let me pass it back to the moderator to Sebastian to move into the Q&A session. Thank you so much.

Yes. So we can go to the Q&A session, moderator, please.

[Operator Instructions] And our first question is from [ Axar Wood, ] Bank of America.

I'll keep it to 2, please. I guess the first one on the order book was considerably larger than at least we had expected. So I'm fascinated to get any color you might be able to give on what the main drivers of that were, where you were really seeing the strongest demand? And how we should think about how that flows through into revenues through the year. So that's the first question, please. And then the second question, I'm just curious on pricing, because obviously, your supply chain has been pretty messy across the board. We've had some companies that I think we never expected to be able to take pricing, putting through little bits of price increases to either distributors or their customers to help offset. Is that something that you guys have been doing or thinking about? And are there some categories where it's worth it? Or is it just a case that you keep pricing flat and take the supply chain costs in the meantime?

Here is Justus and maybe I'll start with the question about the order book and then Markus can make some comments on the pricing. So yes, color on the order book. Let's maybe rewind quickly to compare with last year. Last year, our growth in the order book was mainly driven by the consumables. Simply, representing the fact that after the lockdowns, many of our customers started first to push their -- basically their business with laser vision correction and the IOL implantations providing good cash flow to their clinics and offices. And we clearly saw a year ago still some reluctance for investments in CapEx that has clearly changed. And you may remember that we already saw in our Q4 a good upswing in order entry, especially also for our MCS business. And that trend now actually has further continued. That means the order book right now actually evenly benefits from both the good demand for the consumables and an appetite to invest also in our higher ASP devices, like Markus just explained the VISUMAX or the KINEVO from MCS. So I'd say that's pretty much the flavor that I can share with you on the order book. On the pricing, maybe just a couple of comments. Yes, of course, we feel the debt in our input costs from the current, let's say, increased pricing for some of the components that we utilize. Overall, I'd say we have a portfolio which probably, at least in some markets, certainly permits us to also compensate for the price increase in our list prices that we basically give to our customers. So from that, we hope that over the course of the year, we can somehow compensate for these impacts, but we will probably see some volatility on our gross margin over the course of the year and just hope with the normalization of the supply chain that this effect in the end will kind of fade out.

The next question is from Markus Gola, Stifel.

My first one is on the order book as well. Your order intake is still quite impressive, but it seems delivery times might get longer and longer. And so my question is, is there a risk that some of these orders might evaporate if deliveries take simply too long. And can you share some insights whether you have already seen cancellations here? And my second question is on your supply chain. I was surprised that you have not provided more details on this in the slide set. So could you elaborate, please, about the current situation, how much of the margin contraction is explained by this? And further, how do you expect the situation to evolve into the year?

Yes, Markus, let me start with the first question on the order book and the risk of losses due to the delivery times. So first statement for the time being, it is not an issue, cancellations or anything of that nature that we observe simply for 2 reasons. On the one hand side, I think we are not the only ones right now who basically have to cope with longer lead times. Secondly, I think for a good portion of our portfolio, there is not too much alternative that you can buy if you think about the lasers for refraction, for example, or for the microsurgical product. However, that doesn't mean that we are not worrying about that. And therefore, we actively communicate and are very transparent to our customers about the tensions that we are going through. So from that perspective, I'd say, overall, we feel confident that actually this order book will eventually be totally converted into revenues. On the supply chain, I'd say, so far, number one, we have not had any interruptions in our operations, neither for consumables nor for devices. I think that's, first of all, an important message here to convey. As I said, I think our purchasing and supply chain organization, which we have significantly beefed up, so to speak, is working diligently to basically make sure that the inflow of components is not interrupted. And obviously, we cannot predict what's happening next, but we somehow at least are confident that we continue to be able to maintain our operations inflow. On the margin impact, again, as I said before, it's a volatile situation. There is -- depending on our product lines, there are probably products that have anywhere between 50 and 100 basis points impact on margins. But then again, in a monthly average, what is even more important is the total mix of what we have invoiced to then basically ultimately decide whether we see these impacts shine through in our margin or not. And if you now look at our Q1 margin for the group, that is actually the highest ever we had in the Q1, although we have the issues in the supply chain. And as I said, it's too many factors that are basically playing into that game. So it helps you to understand a bit better. But I think the message that I want to bring across is, if our supply chain situation were of a nature that it is critical or even interrupting, then we certainly would have provided more detail in our presentation, but we, I think, so far, have been managing quite well.

And may I follow up here. So in your current guidance, do you assume an improvement in the supply chain situation? And until which quarter would it need to improve so that you still can make your full year profitability at least the lower end? That would be my follow-up question.

I mean, our current guidance is the guidance that we gave last year, first of all. And I think the assumptions were that we would see during this entire fiscal year still some volatility as a cause of corona and that volatility has different perspectives. It is on the one hand side, as we can see right now, that this Omicron wave is still in some locations in the world causing interruptions. And we see in the supply chains, basically the detail and effects of the first, second, third and fourth wave of corona. So -- and I think that picture is -- remains unchanged. So we will have to manage through a year, which will provide different challenges, but that is exactly why we gave the range of 19% to 21%. And therefore, Markus, I'd say, no different view today. This volatility is built in that margin. But I want to repeat what I said. Given these circumstances, we are actually quite satisfied with the margin that we could deliver now after Q1.

And the next question is from Oliver Reinberg, Kepler Cheuvreux.

Three questions for me. And the first will be for Markus. Markus, you already indicated in December that we should not expect any kind of larger deviation in terms of corporate strategy. But after you have now been in office for a few months, can you just share any kind of thoughts like where would you further sharpen the focus in terms of strategic priorities, leaving supply chain issues aside for a second? The second question would be on China. Can you just comment in terms of what do you see in terms of VISUMAX equipment orders at the moment? And secondly, can you just share your thoughts in terms of when China so far still follows this kind of Zero-COVID policy. And obviously, the country has less of natural immunization, less effective vaccines. If at some stage, they would deviate from this policy and opening up this kind of system. What would be the impact in your view for refractive and cataract demand? And then the third question, can you just provide any kind of color in terms of the questions that have been raised by the FDA on the QUATERA phaco machine?

Yes. Thank you so much, Oliver. I'm happy to take the first question. I think second and third will be answered by Justus. So yes, Oliver, as you said, maybe just to keep in mind, I'm already now 20 years besides in KINEVO and very close interactions with Meditec roughly since 12 years. So that means, actually, I was always in a way involved in the activities there. And especially the strategy, which has been completely built up last year, the corporate strategy is, from my point of view, a very strong one, a very good one, a long-lasting one, which actually significantly pushes the growth potential further on. So for me, the strategy is great. For sure, there will be always some updates over the time, but this is for me, just an evolving effect and kind of continuous improvement. For me now, and especially also in discussion with the teams after 6 weeks now being in charge as the CEO, I see especially strategy implementation and operational excellence. And Oliver, you mentioned that in terms of the supply chain. So we want to make sure that we even strengthen our operational excellence. That means strong focus on the supply chain together with our suppliers on the one hand. On the other hand, but also to ensure that we get our market entries and market penetrations for the new products to make sure that we can do that so that we are building up the entire operational excellence. So this is starting the sales and marketing. This is also the reason of the higher investments there. And hence, it's regulatory to make sure that we get to clinical trials in time to ensure that we have a proper market start. So this is the topic here. And so overall, team is responding super well. I think there's a super high energy and a very positive aspect in that -- in this regard. And as Justus already mentioned, supply chain and the pandemic and the effect of the pandemic is very dynamic. The team is -- there's a lot of tension inside, but the team is very encouraged actually to take this challenge. Yes, I think, overall, so just in a nutshell, continuing the strategy, corporate strategy that's for sure, especially there's a strong focus also in digital and in the workforce solutions and then operational excellence combined with strategy implementation.

Okay. Then I take over on the China question. Oliver, you were asking about the order book for VISUMAX, the order book is strong. We still enjoy good solid demand from China for the VISUMAX products. And as we have shared with you some of our key customers in China have publicly announced that they further want to expand and grow the business. And we clearly benefit from that. With regard to your question on the China Zero-COVID policy, I'm not sure whether I understood 100%, but I try to answer what I thought you were asking for and if not then just come back. So we monitor very precisely the number of clinics in China that is open or closed. And so far from the local lockdowns in China, we have actually not seen any significant impact on the total number of clinics being opened and those lockdowns that happened as we have seen were mostly limited to durations of 2 weeks or 3 weeks. And with that, even though it's a bit of a moving target, but the overall number of clinics is pretty stable on a high level, open and active. And that's why we also see that reflected in solid demand for our consumables. On the third question, which was on the FDA approval for QUATERA, I mean, we are not disclosing here any technology details. But as you know, there were some supplementary questions that the FDA had asked us to provide and to answer. The process is ongoing. From our best knowledge, we would right now think that in early summer of this year, we should then finally have concluded the registration process and can fully start with the commercialization.

Then we move on to the next question is from Alexander Galitsa, H&A.

I'd like to ask on the VISUMAX. How do you see the dynamics of customers sort of expanding and ordering new machines versus sort of a replacement demand here? If you could give any comments around that.

Yes, Alexander, I can do that. I mean, as you have seen from Markus report, it's -- it is one different feature, which is basically -- that it has a significant amount of footprint this device. And that certainly opens up a couple of opportunities in accounts, which simply were located in high street clinics where the footprint is, I'd say, an important factor, so to speak, whether one can expand its clinic and invest in a laser or not. So I'd say there are certainly some opportunities. Overall, I'd say I see us growing with our satisfied customers. I just mentioned the importance of us cooperating with some of the big global players, EuroEyes being one, AER Group being another one. They are very happy and satisfied with our current laser, but they certainly want to also continue to work with us. And they are actually pretty much driven by efficiency and productivity in their clinics because they are specializing on this. And therefore, we feel that in this market, not only will we benefit from replacing systems that come to end of life, but we also hit basically a demand of the market of higher productivity. And from that perspective, we hopefully can enjoy continued growth with these chains.

And maybe just one quick follow-up on that. So with this sort of additional value add to the customer, is it fair to assume that you also reap benefits for your company in terms of pricing?

I see potential for pricing. I see potential for higher consumption of treatment tax.

Yes, I think maybe to add on that. As you know, it's a refractive laser business, and that means for us, the business model is, on one hand, the consumables, the treatment packs combined with the vital systems. And as Justus said, actually VISUMAX is addressing 30 different demands from customers. On the one hand, we are highly efficient. That means a clear workflow solution, very digital, but we can offer to the market so that the industrialization process and call center process is even further improved with higher patient comfort. On the other hand, as Justus said, it's ergonomics. And ergonomics is something that this system offers not only in footprint, but also in a way how to handle the patient with this system. And that creates a lot of opportunities for us. And that means we will also go in a value-based pricing to make sure that, that actually the system is represented as a total as a system than in the market that's relevant and the right price there.

That makes sense. And one more question on the Chinese IOL production plan. How to think about it in terms of sort of related preproduction costs. Is it already mostly in the P&L? Or should we expect any dilution stemming from there, at least while the volumes are ramping up?

I'd say you can expect that we will maintain our IOL business in a market where we paid more price pressure in the future. And with that, obviously, we not only want to be able to participate as a contender with a local content, which gives us volume, but then also defend our margin in comparison to other competitors that potentially will obviously try to enter with price being a differentiator.

And just in terms of kind of mechanics, this new facility in China that's already sort of been depreciated. So you have related D&A in the P&L?

Yes, we have, yes.

The next question is from Daniel Wendorff, ODDO BHF.

Three, if I may. So one follow-up on the order book questions. Over what period of time is your order book normally transferring into sales? And that would be my first question. Second question would be, how big is your SMILE business suit overall meanwhile in the U.S.? And how is that growing? Or has this been growing over the last few quarters? Any more color you can provide here I would appreciate. And last question, a follow-up on the QUATERA question for the U.S. How does your launch plan overall look like overall for the cataract suit in the U.S.? Also thinking about the Iontech phaco sling technology here. So any more color here would be appreciated.

Okay. Yes. Thank you. I start with the order book question. So I mean, the transfer into sales obviously depends on the product specifics and that varies from a week into a month and or quarters, I should say. So therefore, it is certainly right now prolonged simply due to the -- as we already said, the lead time difficulties that we see right now. So your question until when will that be completely transferred into sales, I would hope that the majority of our order book today will be converted within this fiscal year, really, again, hoping that the supply chain situation will improve over the course of the summer that is then maybe completely consumed until we have reached then fiscal year end. Again, that's still speculative not knowing what's really going to happen with the global supply chain. SMILE business in the U.S., overall still positive. We continue to increase our consumable business in the U.S. from all we know, all the, let's say, public data on the market, I think by now, we seem to have reached roughly a market share in the U.S. with SMILE of 10% of all the procedures for laser vision correction, which is quite a significant improvement. If we look back only a few years, then we probably would have been rated much higher than maybe 2% or 3%. So therefore, I think we are very pleased with that development, and we could grow our installed base over the last year and most likely will install better lasers and most likely we are going to continue to do so during this year. On the QUATERA, you were asking about the launch plan, the launch plan as we guided to everybody that do not expect from the U.S. launch this year any significant impact on top or bottom line in our P&L, and that has not even so much to do with the -- in the FDA approval even if we had it already today. I think it is clear that we entered this market with this as home turf some of our key competitors. And we basically have to have there probably somewhat patient until it is -- we are growing a visible position here. However, in a nutshell, the launch plan is pretty much that we obviously have a huge installed base of biometry and optomic microscope. And these customers know us. These customers, we can demonstrate the integration of the workflow of the QUATERA with their existing device. And obviously, we can package our deal with the IOL that we are going to launch in the U.S. also this year. So that -- having said that, that is certainly the key focus of our launch plan for this year. And with that, we hope that we can build basically the first Lighthouse installations from which we then can develop the market. And on Iontech, maybe only a word, we're still in the development of that product, it is not yet registered for the U.S. market. So we have to have a bit more patience, but we will add it to our solution portfolio as soon as we have basically completed the registration process.

The next question is from Sezgi Oezener, HSBC.

My question is, first, I would have 2, please. First about operational cash flows in the first quarter, you shortly commented that it's due to ramp-up of inventories and payables. But can you comment a little bit about the project outlook, to what extent do you expect the correction? And my second question is SG&A expense increased because of trade fairs, but we also know that we weren't quite out of the COVID restrictions yet. So do you think that the rise in SG&A expense came to -- has already happened to its full extent? Or do you expect further rise?

Yes. Thank you for your question. On the operational cash flow, yes, again, it's ultimately a function of the supply chain situation. If we see a need for buffering and therefore, increasing our working capital in order to, on the other hand, secure our operations being at all times basically producing, then we will certainly will do that. However, I'm confident that overall, the outlook should be positive for our operational cash flow, driven by our typically stronger Q2 and Q3 operational performance, I would think that there is some, how should I say, up for the cash flow development. On the SG&A, yes, I mean, basically, our numbers for the first quarter confirm exactly what was our expectation in terms of the travel expenses and the activities in marketing. So I mentioned 2 major global shows, the ESCRS in Europe and the AAO in the U.S. that is basically 2 of the 3 top shows each year in ophthalmology have taken place, and they were basically almost as normal as pre-corona. And therefore, the expenses have hit us. So it is, as I say, pretty much what we were thinking it would happen. Your expectation or your question, will we even see a higher increase of sales and marketing expenses as a ratio of revenue, I would hope it will stabilize at that level that we have seen right now.

The next question is from [ Sam Kersten, Lazard Bank.]

I have 2 questions. First one is on Microsurgery. So the expected pressures for the Omicron wave did not materialize in most hospitals and also many countries are lifting all restrictions. So is it fair to assume that the dynamics in the Microsurgery order intake will even increase in the coming months? And then the second question is on the consumables business. Do you see currently customers building up the inventories more in advance than usual because they're afraid of shortages?

Sorry, I didn't understand your name. Can you repeat it?

[ Sam Kersten, Lazard Bank.]

Sorry, I didn't. So Sam, MCS, I say overall, our prospects for this year for MCS remain positive. As I mentioned in my presentation of the numbers, I think we clearly see that the total portfolio, and that's not only KINEVO that's also EXTARO, TIVATO, they are all being well received in the market. They give us also a better position in the, let's say, mid-class or mid-price segment of the market where previously we hadn't always been as competitive. So I'd say that all together has on the one hand side, explain the good order entry that we've seen in Q1. And that also provides some optimism for the next quarters for this business. So yes, I'd say, overall, we are quite pleased with how the markets have returned and are quite positive for the outlook for MCS for this fiscal year. The consumables, this building safety stocks at customers I don't have evidence for it. I think the pattern that we have seen are following pretty much the end competitors, where we typically -- if we talk about the treatment packs, see a first peak in the Chinese New Year vacation period, and that has materialized quite nicely in our refractive treatment pack shipments in Q1. And so I do not really see or hear from our sales organization that there is a pattern that, that would indicate that there is some overstocking. No, I don't. I see it as a function of the increased installed base and its utilization. It's increased lower utilization. Thank you.

We have a follow-up question that is from Alexander Galitsa.

Just briefly on R&D. So you have stepped up R&D investments yet again now into digitalization, which is sort of carbon your short-term margin potential. Would you be able to maybe not speculate, but provide any color in terms of what kind of a lead time for your digitalization R&D expenses you would foresee in the sense that until when we can think of sort of models and ways to monetize those?

I'd say, as we said, we are building basically an ecosystem and the first step is to basically invest in the connectivity of devices and then to bring things into the cloud. I certainly would think that this fiscal year, as we have guided, is going to continue to be a year which we are working on the infrastructure and first applications that we can bring to market. I think monetization, we will probably not see before the next year or maybe even after that year. But let's also remind our digitalization is not meant to completely change our business model, it is meant to implement another trigger point to drive our device and with the device, the consumable business simply by adding features that make it more attractive and more convenient to opt for ZEISS solution. So let's not be misled thinking that we kind of shift our model to become a software provider or anything of that nature. That is not the intent, at least not for the next couple of years, what may evolve out of the ecosystem over time. There are certainly potential opportunities to also develop a bigger contribution from apps and data-related offerings of services. But I'd say for your model for the, let's say, midterm, I wouldn't guide you to expect such a development, yes.

And maybe to add on this also on my side. As Justus said, the digital is actually the backbone for our solutions, for our workflow solutions. And this means in this regard, especially when it comes to ophthalmology and refractive laser correction and cataract, this goes actually mainly in efficiency. And so that means in call center processes, we can increase the digitalization efficiencies. And as Justus said, so this is actually strengthening our workflow and our position in the market for parameters, which matters, I think besides the outcome matters then also very strongly for the customers. On the MCS side, it's a little bit different because here, we have a workplace solution. So that means it's cockpit in the ER. And this is something where it comes more to outcomes. So where actually the connectivity helps to improve the outcome, especially, and that means here, we look more at that actually, for instance, information sharing and information -- with artificial intelligence information enrichment. So these are the 2 directions we are moving in, but not a principal change in the business model.

At the moment, we have no further questions. [Operator Instructions] We have no further questions. I would like to hand back to Mr. Frericks for some closing remarks.

Yes. Thank you. Thank you very much for participating in today's call. Please, as always, we'll be available for you in the days to come for further questions and wish you a lot of success and happy weekend and looking forward to our next conversations and meetings.