Medacta Group SA (MOVE) Earnings Call Transcript & Summary

Dear, ladies and gentlemen, welcome to the conference call of Medacta Group SA on the 2020 full year unaudited top line figures. At our customers' request, this conference will be recorded. [Operator Instructions] May I now hand you over to the CEO of Medacta, Francesco Siccardi, who will lead you through this conference. Please go ahead.

Thank you very much for your introduction, and welcome to this full year 2020 preliminary unaudited top line figures presentation. I'm with Corrado Farsetta, our CFO; and Gianna La Rana, our Investor Relator. So if we go to the first slide, you can see Medacta did perform pretty well in the second half of the year, with a very good acceleration in the second semester that was able to almost completely compensate the H1 results. So full year revenues hit EUR 302.5 million, only 2% on a constant currency basis behind last year. And given the circumstances, I have to say, I'm pretty pleased. The second half acceleration, which is very important for us, was sustained by both the recovery of waiting lease, the so-called pent-up demand, but as well by a significant number of new customers acquired both during H1 and H2. The customer acquisition did come through basically 3 different sources, the continued marketing and medical education programs that were tactically changed and partially moved as well online, but as well modified in its physical -- in the physical format by moving them in a more local basis and making sure we could perform in a safe-as-possible way according to all the regulation. The other source of growth was the expansion of our product line in all the categories. And last but not least, the expansion of our sales force across all the geographies to sustain all the different product lines. If we go to the next slide, you can see how the performance of the second half of the year compares with the second -- with the first one. And the minus the 12% H1 almost completely compensated by the almost 8% growth in the second half at constant currency. We will comment on the FX effect, which was negatively impacting our overall reported results. It's important to highlight that although the second half was definitely better than the first half of this year, at the end of H1, second half of October, November and December, again, a second wave of COVID was negatively impacting the market, in particular, in Europe, in U.S. and in the less extent, in Japan and Australia. So we basically had a very, very good quarter 3, and then again impacted somehow less than before. We will see it in more details in the fourth quarter. If we move to the following slide, we can see the comparison by product line. And you could see that the biggest negative impact in H1, as we have presented already, was in the Hip and Knee product business line. At the same time, the recovery that happened in the second half was good. And I'm particularly pleased on the performance of the Hip side in the second half, which was very heavily impacted in the first half. Knees were up as well around 4%. And both Extremities and Spine did further accelerate in the second half compared to the H1 results. Again, as a reminder, the second -- the last months of the second quarter were again negatively impacted by the second wave of COVID. If we then move into the geographical comparison, we can see as expected that, Europe being the most impacted area throughout the year, was still generating the smallest growth in terms of the direct market, but still a good growth, 6%. U.S. did almost completely recovery the backlog and the delay in H1. This was very much linked to the strong acquisition as well of new customers. And the Asia Pacific was, in general, the least impacted of all the areas, with both Japan and Australia working very well, although those regions as well had negative impacts throughout the year, but more on a regional basis. The Rest of the World, which is our distributors market only, although it's a very small percentage of our business, around 3%, was heavily impacted, simply because those are stocking distributors relying on their own stock, and during the pandemic, refund themselves in an excess of goods, which limited their need to purchase additional products in the year. If we go on the full year revenue bridge by product line, we see that although the good performance in the second half, we still have a negative overall full-year impact on both the Hip and the Knee side. Extremities and Spine did perform particularly well, thanks to both, as I was saying, an expansion of our product lines, the very strong momentum those lines had coming into the pandemic. And especially despite the very good performance associated with new products launches and the very strong expansion of our sales force and distribution in the U.S. If we now then move by geographic area. We can basically see the geographical effect of H1 and H2. So Europe is still behind with minus 6%. It's important to note that even within Europe, there are important differences. The DACH region, so Germany, Austria and Switzerland, are -- have been performing significantly better than France, Italy, Belgium, Spain and U.K., with Germany even able to post single-digit growth over prior year, while France, Italy and Belgium were still negative double digit at the end of the year. This means there is still a significant backlog to recover in those countries. In the U.S., we almost fully recovered the H1 delay. And again, we still have areas negatively impacted by COVID, but these -- those areas are positively offset by the recovery made thanks to the expansion of our customer base and increased market share. Thanks to our expansion of product lines, of course, distribution and a good result associated with our ASC strategy that particularly during the pandemic, has proven to be very relevant to continue to gain market share. Asia Pacific was a very good performing area. We could see a 9% growth in the full year revenues. Although as we were saying, some areas in Japan and in Australia did see and did face some partial lockdown, regional lockdown, during the year, but a very good performance with this 9% growth. Good customer acquisition, good marketing and medical education and good sales force expansion. And then we come to the stocking distributors that, as I said, although they represent around EUR 8 million in revenues, they did relatively poorly because they rely on their own stock, and so they have excess, as we speak, of products, so limiting their needs to do additional purchases. In conclusion, on the top line, I think we have seen a relatively high level of difficulty in managing all the geographies. At the same time, we have constantly seen that immediately after any lockdown, the orthopedic market is able to very rapidly or recover with those pent-up demand effect. Medacta has been particularly able to profit from its geographic presence and product mix. So whenever an area was performing well, we could take advantage and the same in terms of product lines. And just as a heads up, we continue not to provide guidance as we -- at this stage. For 2021, we are in the process of reviewing our full year results. And we will provide additional information on the full year presentation, which is expected by the end of March and by which we will hope to have additional visibility and additional, hopefully, light at the end of the tunnel thanks to the vaccination campaign, which is ongoing, as we speak. So this was our short update in terms of top line, and I would be more than happy to answer any question you might have.

[Operator Instructions] The first question is from Alex Gibson of Morgan Stanley.

I have 3 questions. My first one is just on your surgeon numbers. Could you give us the number of how many surgeons you have at the beginning of 2021 versus 2020? And if you don't want to give exact numbers, maybe you can give a growth rate. My second question is just on growth. Consensus currently expects about 19% constant currency growth in 2021, but your exit rate looks to be closer to 3% to 5%. I know you have some easier comparisons in the first half, but it feels like that 19% might be challenging. Do you think that's too optimistic from what you're seeing today? And what would need to happen for you to reach those levels? And then my last one is on investments and your margins. You are still investing in sales as you highlighted, and you had a reasonable amount of government subsidies, I think in 2020, which won't repeat. Do you know what the margin impact would be for those 2 investments or those 2 impacts rolling forward to 2021? And then what level of revenue do you need to get back to reach the 29%, 30% EBITDA margins you were delivering in 2019? It's a handful, but hopefully, you can help.

Thank you, Alex. So in terms of number of surgeons, of course, this is somehow an important number, but the quality of each surgeon and the volume that each surgeon is bringing is always an additional, very important information. But we counted over 400 new additional surgeons in '21, and this is a very important number for us to reach. So that's very important. And this gives us confidence for 2021, although the confidence should be somehow counterbalanced by the uncertainty that we still have, given the circumstances and the little visibility. So the short answer around the question of, is 19% growth rate on the consensus side challenging? Of course, it is challenging. Every type of above-market growth is always challenging, and we've been living this challenge for the last 15 years. We believe that if the situation normalize, that type of growth is within our reach. But of course, the big if, I mentioned, remains very, very strong in front of us. For example, I believe none of us, none of the analysts did really predict a second wave at the end of 2020, and we had to face it. It was smaller than the first one, but we have seen an immediate negative impact. Somehow, this will help us accelerate in 2021, again, with the pent-up demand. But for me, what is the most important is the activity on the ground, the generation of new surgeons, because we know that as soon as the situation normalize, this will translate into top line growth. Last point you asked was about investments and margins, which is somehow, again, very much linked to the first question and second question. So we know we counted very important number of new surgeons. Those surgeons have been served with new instruments, new implants. So we know they are ready to start and some have started, but we simply don't see, in the top line, their contribution yet, because there are the minuses of their colleagues. And in terms of margins, before talking about 2020, '21, I would say that Medacta in 2020 has been extremely diligent. It's true we had a certain amount of government subsidies, which is around EUR 2 million. It's not, of course, going to be available in 2021. But I feel that our profitability has been well protected already in 2020, and we should be able, if the situation normalize, to go back to normal in 2021 as well.

Okay. Great. And if I could just push on that. On the 400 new surgeons, what sort of growth rate is that on your existing base on a net level? And then on the margins, I know a lot of it's -- you control your costs a lot, and it's all dictated by the top line, really. Do you have a level of revenue that you think you need to reach to get back to that 29%, 30% EBITDA margin? Or is it a bit more complex than that?

Yes. So on the first question, I would prefer, frankly, not to answer because the -- as I said before, the number of surgeons per se could be extremely misleading because the quality of the surgeon is more important, the volume of each surgeon. So one big surgeon can make up for 10 small surgeons. So the number is important to show that, first of all, the activity has been successful and has been significant in terms of volume of new surgeons. In terms of sales and margins, I think you will -- I think we can manage to protect a good level of profitability at almost any level of top line growth. The point is that we are prepared, and we are preparing the company for a mid-term sustainable growth of 10-plus percent, which remains our midterm guidance that we had prior to COVID. And we stated several times that the overall market conditions so far did not change, and we remain very much in line with that statement. So because of that, if we are investing and building structures and then for any reason or for COVID reason, we have, again, backlog, that's the only reason why our profitability could suffer. But it will never suffer as much as it did suffer in 2020, and we still did not publish our 2020 profitability. So I'm not worried about short-term profitability. It should remain in a decent level no matter what the top line revenue will end up in terms of number. I think we have a very good grip on the ratio between revenues and costs.

The next question is from David Adlington of JPMorgan.

Again, probably 3 from my side. So maybe, firstly, in terms of the distributor stocking that you pulled out. I just wondered if you could quantify how much you think that was and whether you expect to see some restocking at some point. Secondly, just on Germany. It sounds like you still managed to post some growth. I know they've performed pretty well as a country through the first wave. I'm just wondering if you see any bigger impacts. I know the second wave is substantially worse in Germany, whether you see any impact from electric surgeries towards the end of last year and into this year. And then finally, just in terms of those 400 new surgeons year-on-year, I was wondering if you can give us any color around the geography of where you managed to recruit those.

Yes. So in terms of stocking distributors, as I said during the presentation, it is a small segment of our market. It is around 3% of our revenues. We did add a significant number of countries as we published during the year. And so we do expect a good growth if the situation normalizes and even probably if it doesn't. They did restart restocking at a lower level than previous year already. But particularly in countries like Israel, like South Africa, where the COVID impact has been strong, we have seen a significant wait because they were preparing themselves for good growth. They are very good distributors, and that's why they could rely on their own stock and avoid restocking. But both because of the -- sooner or later, the stock finishes, so they have restarted already to buy. And because the number of distributors has been increased significantly and will continue to increase in '21, we expect this trend to change very rapidly. Germany, we -- you noted that they did manage the first wave pretty well. They did announce on the news, significant changes in their politics for -- on the second wave. But we still don't see a significant negative impact on volumes in Germany at the end of the year nor in the first weeks of '21. So it looks like that the DACH region, Germany, Switzerland and Austria, they remained very active in the health care segment and probably, this is linked to the availability of intensive care within the market, within the country, which protect the elective surgeries from being shut down. The last question was again, around the number of surgeons and geographies, if I remember well. We did see a significant increase in Japan, in the U.S., both in Joint and in Spine. The good performance of the U.S. basically able to full recover the lockdown areas. And as you know, as we speak, there are still important region, the big cities, the West Coast, Los Angeles, the East Coast in certain region, Pennsylvania, which is in partial lockdown. So we do have a significant number of surgeons that are working at a reduced pace, at 50%, at 70%, which means that good performance of the U.S. is absolutely linked to new customers, both in Joint and Spine. In Europe as well, particularly in the countries that we're growing fast like Germany, Italy, Belgium, France, we still managed to grow our customer base during the first wave. And in the second half of the year, we could measure the success of the H1 activities as well. And don't forget, we always have a little bit of delay. So the effect that we see now, in terms of new accounts is mainly linked to the activities of H1 and eventually quarter 3. So if you remember, during the first H1 call, I was waiting to see the results of these new tactics, and they have been proven to be effective.

That's great. And maybe I can just have 1 follow-up. I know historically, your surgeon training, particularly on the Hip side, has been pretty hands-on. And I'm guessing that that's been less possible with the pandemic and the travel restrictions. Do you expect that to get more back to normal? Or do you think we're going to -- what you've learned through the pandemic is going to be sort of sustained in terms of how you train your surgeons?

Yes. So of course, this is one of the tactical changes we had to put in place, particularly on the Hip side, but as well for the new procedures in the Spine, MIS and in general, whenever hands-on training is absolutely required. So for example, in Japan, we used to look at other labs outside of Japan and we managed to organize different surgeon-to-surgeon activities in the country. In general, we redesigned the physical meeting being much smaller, more one-on-one, instead of big labs using mobile trucks. So I'm pretty pleased by the fact that we managed to continue to do hands-on training in a completely different format. But this is one of the biggest results, in my opinion, we have achieved because it was 1 of the most challenging aspect. So to continue to be able to do those hands-on. In 2020, we moved from big labs to track-based labs across the U.S., for example, and much more local labs, regional labs rather than major labs with 30, 40 surgeons per lab. So that's what we did.

Next question is from Chris Gretler of Credit Suisse.

Francesco, Corrado, hope your all doing well. I have just a few questions left, actually one on NextAR. Could you maybe discuss now how that has been received in the U.S.? I think you published that you had the first surgery done in December? Maybe could you give a bit of an indication how the interest in that specific solution was? So that would be my first question. I have 2 follow-ups.

Yes. Thank you, Chris. So NextAR has been very well received. There is a lot of demand we are managing. We have been, of course, forced to manage those requests because, for example, as we know, in Europe, has not been cleared yet. But we have already secured several centers even within Europe with a purchase agreement, although the product is not even cleared yet. So there is a very, very good level of interest. In Australia, we started to expand our customer base. And in the U.S., there is a strong interest as well. And as we know, the target for this system is not only the hospital and their activities, and this was the HSS press release, but as well the ambulatory surgical center, where this particular design will perfectly fit in terms of space, in terms of cost, in terms of capital requirement. And there is a rollout program that has started in H1 '21. We will do it in the usual Medacta way. So we start by training the key reference centers. HSS is going to be one of them, a very important one, of course. And then second half, we'll see a full launch of the platform, and we're just talking about total knee arthroplasty. And as you know, we are preparing the system for the additional application in terms of shoulders and in terms of spine. And those we expect to be cleared within H1 of '21. So the system is going to become more rich and even more appealing to hospital surgeons and surgical centers.

Okay. And the spine and shoulder, that's been approved in the -- approval is expected in the U.S. in first half?

First, we do -- you never know with the regulatory, but in general, we expect it within H1, for sure.

Okay. Yes. That sounds good. And then the second question is -- I think on your slide, you mentioned that you added 80 new employees, which is great news. How many of those are actually sales force or sales and marketing related? And maybe if you also, on the sales force expansion, could elaborate on the relative kind of expansion by region and product lines?

Yes. So first of all, those are, of course, only the direct employees. And when we talk about sales force expansion, especially in the U.S., it is just half, if you want, of our efforts because we have all the indirect agents and distributors in the U.S. market. A big portion of this number, around half is sales-related, happening in the countries. And they are -- we have seen a big increase, for example, in the Asia Pacific market, which is very important, especially Japan and Australia. And this is quite logical to expect as they were less impacted by COVID. So they basically followed almost their original budget in terms of hiring. And then the rest is split between Europe and U.S. But in the U.S., we did have a significant expansion of sales distributors, both in Spine. And we prefer to go through indirect representation expansion on the Joint side as well, given the situation. And we managed to add a good number of additional distributors, significant distributors in the U.S. market as well.

Okay. Great. And then the last question just kind of on -- maybe, on a quarterly basis, the performance. I know you don't want to disclose, but basically from earlier comments, I think you indicated somewhere like low-teens growth in Q3, maybe into October. And then basically looking at the report, the second half report, basically, you come to the conclusion that it was basically somewhere around flattish November, December and Q4 in the low single digit. Is this about the pattern kind of in terms of exit, kind of off the growth momentum you're having right now just to get a bit of a sense, in terms of kind of the latest lockdown is concerned?

Yes, yes, yes. So let's say, I would take your guess/estimate as a relatively accurate estimate as a group. But of course, this comes from different regions, different countries. And so the momentum is very different. If you go back to the growth rate of the different region, you see how APAC was accelerating significantly while Europe was decelerating and U.S. was almost flat. But then I have data, of course, within each state, each region. And it's not a momentum that is generated in a homogeneous way, it's just a consequence of the up and down and stop and go, I would say, that we see constantly in our regions. So we have seen in July, August, September, when most of the market, with the exception of Australia and Victoria were not affected, that's the growth momentum that we would expect as soon as the situation would normalize. That is why going back to Alex's question about the 19% in 2021, of course, it is very challenging. But if the condition normalize, it's attainable. So that -- those are the numbers we have in front of us. We have put a lot of efforts into the generation of new customers, and we'll do our best, given the situation, to transform them into revenues.

At the moment, we have no further questions. [Operator Instructions] And we've received another question. It is from [ Daniel Astrom ] of [ Mirabaud ].

Sorry for sneaking in, in the end. Just one question. I mean, why was the Hip business stronger than the Knee business in the second half? I mean, no big difference, but in the past, the Knee business was significantly better than your Hip business. So why was that trend slightly changing in the second half? That's my first question. And then the second question, the augmented reality launch, in general, which will be key this year, next year. How difficult is it currently to make such launch in a COVID environment where you don't have, I guess, many physical meetings to explain research? I would be curious about that.

Yes. So first of all, on the Hip side. I think you have to consider that because the Hip business was the most affected one in H1, that's where you should expect the biggest jump or the biggest recovery as well in H2. Second aspect was probably related to the fact that APAC, Australia and Japan, have been impacted a little bit less. And in those markets, historically, our Hip business was stronger than our Knee business, which is exactly the opposite in the U.S. So I think our dynamics, which are linked to both the geographic mix -- or mainly to the geographic mix and its contribution to the overall results. In terms of product launching, of course, COVID is making it much more difficult. For example, to have first surgery in the U.S., almost 5 months after a 510(k)approval is suboptimal. It took us more time to organize first training on cadavers with the surgeons. We managed to do it. And then to have clearance for having specialists in the hospital to assist during the first cases, it took time. But I was surprised to see, for example, in Australia, a very good acceleration already in the last few weeks of 2020, in the utilization rate of the system. So once the know-how is transferred into the country, within the country, it's relatively reasonable, the possibility to organize physical meeting and training. So in Europe, of course, it's not cleared. But as we are waiting and we wanted to anticipate those problems, we are working on the training side ahead of the clearance in order to try to minimize this -- those difficulties and hoping that by May, June 2021, those will be resolved. But yes, it's an additional challenge. It's not easy, but it's going pretty well. So I'm not particularly worried about its full release, especially because it was, in any case, planned with a slow introduction in H1 and a full release in H2.

Okay. And the last question for -- just for Japan. I mean, in general, your Asia Pacific reach was 12%, up in the second half. And it was already up close to 19% in the second half '19, so you already have a very strong comparative base. I mean -- and this is -- for me, it's quite amazing how quickly you grow and you said you won market share. But what do the Japanese better -- you also said that the pandemic had less of an impact. So what is so different in Japan? I mean, if you have watched TV, Tokyo was shut down because of the virus and so on. What are the Japanese doing better in the hospitals than the other part of the world?

I would say -- first of all, they don't shut down the hospitals. They have organized very few hospitals to be the COVID centers. That's something that, frankly, has been done as well in other countries. They probably have an excess of ICU. And I was shocked, if you look at the mortality rate in Japan, it's extremely, extremely low. So they probably protect those patients in a different way. Using mask has been always, of course, in their culture since many, many years. We were laughing at them when we travel with them on the plane. But that's -- if you look at the mortality rate in Japan, it's very, very, very low. But I would say the most important aspect is that hospitals have never been shut down. So we have seen some delayed procedure, for example, in Spine, in big deformity cases or adolescent cases, which can be planned and maybe those have been slightly postponed. But in general, I think they managed pretty well. And I think under cultural point of view, they cannot force people to do things in a very strong way as they can do in China or they have been doing in many countries in Europe. On our side, I think what we continue to do in Japan and frankly, in all the markets but you see the results only in Japan and Australia this year, is that we are expanding our sales force. And our products continue to be convincing. And so if we have good products, good solution, minimal invasive technologies and products that can deliver better results, you attract good salespeople and they bring their customers and they convince more customers. And that has been the story of our growth in the last years. And we hope to continue to show those results in the other regions as soon as this situation normalize.

The next question is from [ Brooklyn ] [indiscernible] of [ Finance and ] [indiscernible].

30-plus products have been approved last year, more shall follow H1 this year. What do you think is the contribution for your growth this year and beyond of those new products? And specifically, what role will the augmented reality system play?

Yes. So when we talk about new product release, the important impact is always 1 or 2 years after the full product release. But strategically, it is very, very important. For example, to have a complete revision product line on the Hip side is very important because there are centers that would not consider to use your primary implant if you don't have a strong revision product line. In Spine, we are entering new segments, the cervical segment, the minimal invasive segment, the big deformity segment. So reinforcing our product line in certain segments of our business is absolutely vital to increase as well the revenue per case, that's particularly true in Spine. On the Shoulder, again, it's very important to have a complete product portfolio. So maybe you had some products which are not extremely impactful in terms of revenues per se, but they reinforce the overall product line because surgeons and hospitals want to have a supplier, a partner, that is able to serve them across all the different needs they have. So different products have different contribution. And again, it's very important as well to constantly renew your products in order to gain from the feedback you receive on the clinical performance and you come back to the market with new features to reinforce your clinical performance. That's what we've been doing, for example, on the Hip side or on the Knee side. Back to the NextAR. We do expect NextAR to become an important flagship product when it comes to technologies. There is a technology battle as we speak, in the market with a robotic solution coming from all our competitors. And we prefer to take this sideroad, betting on the surgeon's preference on simplicity, lower cost and lower capital requirements. This is definitely a requirement in most of the European markets. It's an important aspect in the ASC market in the U.S., the surgical center markets. And in general, I think if you can do something in the same way at the lower cost per case, with lower investment, with the same results, you have a good asset. So that's what we expect from NextAR across the different regions. And the fact that it's going to become a platform covering all our needs is very, very important.

Thank you. As there are no further questions. I would like to turn back to you.

Thank you. If I understand well, there are no additional question. Is that correct?

Yes, that's correct.

Then I think we can probably close the call. And I would like to thank all the participants, and we're going to keep in touch for the full year results presentation expected at the end of March.

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.