Medacta Group SA (MOVE) Earnings Call Transcript & Summary

Dear, ladies and gentlemen, welcome to the conference call of Medacta Group SA. At our customers' request, this conference will be recorded. [Operator Instructions] May I now hand over to Mr. Siccardi, who will lead you through this conference. Please go ahead, sir.

Thank you. Thank you very much. Welcome to this H1 '21 preliminary unaudited top line figures call. We will go through the highlights of the first semester. With me there is Corrado Farsetta, our CFO; and Gianna La Rana in case there are questions. After the presentation, we're going to have the usual Q&A session. So starting with the highlights of this first semester, we have to say we have been very pleased with the revenue increase. We reached EUR 177.5 million which is 35.4% at constant currency versus last year. We all have to remember that last year, semester was, of course, highly impacted by COVID, which explains as well those very high percentages partially. So the growth was driven by a significant carryover and new customer acquisition. This was coupled with faster-than-anticipated normalization of surgery activities, especially, I would say, in Europe and in the U.S. The carryover and customer acquisition was very much linked to the last year H2 activity in medical education. So I'm very, very pleased that we finally see the results of our last year effort. The contribution in terms of growth was coming from all our business lines and from all geographies, as we will see in a few slides. And it was supported as well by a significant -- again, a significant amount of new products registration across all our business lines, Hip, Knee, Shoulder, Spine and Sports Medicine in several geographies, mainly CE marking and FDA clearances but as well some very key products cleared in Australia and in Japan. We managed to continue our marketing and education activities, which is of paramount importance to continue to fill our pipeline of new customer acquisition. And since June, we have restarted our international traveling activity and some of the third-party congresses have restarted with an acceleration expected in H2 '21, provided the COVID restriction will not be lifted again or increased. Last pillar of growth, which is extremely relevant, is hiring and the expansion of our sales force continued as planned across all geographies at different pace as well for the different business lines. Moving to the revenue bridge by product line. We have been able to grow not only the fast-growing portion of our business, which are typically Extremities and Spine, but we managed to have a very strong growth as well in hips with a 30-plus percent growth rate versus H1 and even a stronger acceleration in Knees with 38.4%. This was associated with our most recent strategy in Hips with AMIS and as well the expansion in our revision product portfolio. On the Knee side with our GMK Sphere platform and our personalized solutions. And within the Extremities, we continue to expand our platform, sales force and personalized solutions as well. Finally, Spine, which is again driven by a product range expansion, new technologies and sales force expansion. So this was extremely successful in H1. We are very pleased with all the business line contributing significantly to the top line performance. If we analyze the revenues by geography, we have seen a very strong contribution from Europe. Once again, Europe was the most affected region last year. So it was to be expected a very good bounce back in Europe. U.S. was actually even stronger with 44.3%. Again, some slow months last year, but still a very, very good growth rate across all the lines. Asia Pacific, we were all particularly pleased because Asia Pacific was not as impacted as all the other areas last year. So this top line revenue was mainly driven, of course, by Australia and following by Japanese colleagues. And finally, the rest of the world that went back on track on the growth path with almost 50% growth, of course, comparing with a very, very weak H1 last year. Very important factor on the next slide, a quick update on the NextAR deployment, our augmented reality surgical platform gained very important clearances in Europe with CE marking of our Knee, Shoulder and Spine applications in last weeks of May. This has translated in some very good introduction. The first cases in Europe are going extremely well, both for Knees, Shoulder and Spine, a lot of interest across our customer base. Shoulder application was cleared as well by the FDA in the U.S. where our Knee application was already cleared in 2020. And the NextAR is really leveraging our experience with MySolutions Ecosystem, which is exactly the same 3D planning and platform and data sharing solution we have been using now for several years for our other personalized medicine application, the PSI, the personalized solution. So this is drastically increasing our holistic approach to personalized medicine, which has a very strong potential to improve surgical accuracy and improve at the same time the economic impact of those solutions in the healthcare system. This is particularly true for our surgical platform, which has a very limited upfront capital investment compared to our main competitors in the market. And another very important feature is that we have in 1 solution application not only for Knees, or Hips, but as well for Shoulder and Spine. And this is particularly interesting in certain markets, definitely in the ASC market in the U.S., but as well in markets like Europe or Japan, where volumes are potentially smaller or reimbursement opportunities are completely different from the U.S. market. Based on the strong activity and strong performance of H1, we have been able to review our 2021 outlook. And we have updated our guidance in terms of top line, increasing it to range from EUR 355 million to EUR 375 million at constant currency. While we left our EBITDA margin in terms of guidance in line with our 2020. All those assumptions are based on hoping that the COVID-19 pandemic will allow us to continue to work at least in the same way we were able to work in H1. Numbers are not are not giving us very good night to sleep, but we really hope that September, October will not come with additional restrictions linked to COVID. This was a short update on our half year top line figures. As you know, we will have additional information on profitability in September, 10th of September. And I think we would be more than happy to go through any Q&A you might have. Thank you very much.

[Operator Instructions] We have a first question. It's from David Adlington, JPMorgan.

Just on the profitability side. I know you might want to make too much for the comments given in reporting those numbers later on. But given the sales beat and the upgraded sales guidance obviously, you decided to keep the margin guidance unchanged. Just wondered which areas you're investing in more than you expected at the beginning of the year and maybe some further color as whether the vessels are going to be great, please.

Thank you, David. So we have a very, very good momentum in H1. We are extremely keen in keeping this momentum moving forward. We see quite a lot of opportunities as well in the market in terms of hiring sales force in different regions and for different product lines. And we want to capitalize on those opportunities. So I would say, mainly in the sales and marketing expansion opportunities. It is as well not 100% clear in terms of third-party events how many of those events will actually take place, how many will not. And this, of course, is outside of our control. So we are currently budgeting to participate, let's say, in a more or less a normal way to those third-party events. This might materialize or not. But at the moment, we are budgeting for both an expansion in sales and marketing and the normalization of our marketing activity in terms of third-party events while, of course, we continue to invest in the medical education, I would say, at the same pace or slightly higher compared to H1.

Our next question is by Aisyah Noor, Morgan Stanley.

I have 2 questions, please. The first one is on surgeon recruitment. Where are you at, at the moment with progress on the surgeons recruited for the year? And how does this compare to the annual rate pre-COVID levels? And then the second question is just a quick one on the exit rate you saw in June and perhaps in July, if you could provide that, that would be helpful.

Yes. So surgeon recruitment went back to normal already at the beginning of the year. In certain areas, we even actually accelerated compared to original plans. We have changed quite a lot in terms of medical education, as we highlighted several times due to the experience we made during COVID and as well somehow linked to the current limitations in international traveling. We have made quite a lot of regional learning centers, surgeon-to-surgeon visitation at national level rather than international. This has slightly lower cost at the end and a much faster conversion rate. So the time to convert a surgeon has shortened. So in terms of overall number of surgeons, we are perfectly in line with our plans or slightly ahead. In terms of acceleration, June has been a very good month. Of course, we're not guiding month-on-month, but is very much in line with our non COVID-related budget or numbers. We will not, of course, comment on July, our expectation moving forward, on top of the guidance -- guidance update we provided. But we are confident that if no restrictions are coming, we would be able to deliver a very good H2 as well. Maybe an important factor, we did not comment yet is the source of growth. We mentioned it's very much coming from carryover business, existing business, of course, and new customers. we did not see or we did not count yet a significant pent-up demand recovery. And this might be an additional surprise on which we are not really betting, but it could come on top of what we are expecting for H2 at the moment.

Our next question is by Chris Gretler, Credit Suisse.

Just kind of question on kind of upgraded guidance and relative to your original plans. Maybe could you break out what, in particular, kind of in terms of geographies and business lines are outperforming your expectation or is it not just broad-based?

Yes. I would say, in general, is a faster normalization in Europe. So even in the, let's say, COVID months of, for example, April in France, we did not see the same drops we did see in March or in October last year. So this, of course, increased our level of activity even in those, let's say, difficult months. This was mainly the dynamic in Europe. U.S. normalized pretty quickly. The second quarter was basically back to normal in the vast majority of the U.S. territories. And what really surprised us and really are ahead of our expectation is the performance in Asia Pacific, which is, of course, more than welcome as we all know the pricing in that segment is stronger than in the other geographies. So this will help us not only in terms of top line, but potentially if it stays like this at the end of the year, maybe potentially on the profitability side. So the overperformance in the Asia Pacific, Australia, in particular, was a very, very good surprise.

Okay. And I wanted to ask on that -- anyway, I will come back. But the other question I had was on the Extremities business. Is it basically, could you indicate kind of how significant is actually the sports med business is already? Or is it basically majority is still kind of a Shoulder in here, the large majority...

Large majority is Shoulder. Sports Medicine is in the final stage of having many, many products in limited market release. So we will start to invest in expanding our Sports Medicine products in the different key geographies in basically end of this year, beginning of following year. But at the moment, top line, when we talk about Extremities is Shoulder.

Okay. Actually, no. The other question came back on the outperformance relative to expectation. And subsequently, is there already kind of an indication that some capacities basically become a bit more constrained. I mean you mentioned Australia, and it looks like they're going into at least in some states, back to lockdown mode. And also do you already see something from this latest kind of spike in infection rate. And in general, kind of is the business still very kind of diverse in terms of momentum?

So again, very differently from the last lockdowns in Australia, we did not see a negative impact yet on our daily business. As you know, there are lockdowns in place at the moment, both in Melbourne and especially in Sydney. But they are very different from the previous lockdowns, where most of the activities were impacted. Some hospitals have limited again surgical theater time for surgeons, but much, much less than in the previous lockdown. So far, so good. And of course, we keep our fingers crossed, and we will see. But it's slightly different than what we have experienced in the last lockdowns in Australia. Japan is a big question mark, the Olympics, the numbers, but they have never been really very, very strongly impacted by COVID and when it does, it usually picks up again relatively quickly. So different experience, but so far, the existing lockdowns did not really impacted negatively in a significant way, maybe a few hundred thousand here and there, but that's it.

Okay. And maybe the last question, just now going back to sales force expansion alone. And maybe could you give us an update on the latest priorities you have there at the moment?

No. Yes, we are expanding across all the product lines. And of course, in a market like Europe, we would probably prioritize more the less mature segment like Spine and Shoulder, in the near future Sports Medicine. But of course, we take every opportunity to improve our territory coverage in Hip and Knees as well. In the U.S., it's definitely across all the product lines. We are -- we actually have a delegation of U.S. colleagues here in Switzerland to discuss the acceleration of H2 across all the business lines, both direct and through collaboration with distributor agents Australia and Japan, mainly in Hip and Knees in Australia and across all the lines in Japan. So depending on the key areas, there are some focus, but whenever we see opportunities and talent available, we go for it.

[Operator Instructions] Our next question is by Daniel Jelovcan.

Yes. It's Daniel Jelovcan from Mirabaud. Just to understand it a bit better. I compared your first half sales growth to the first half sales growth of '19 and my calculation is that you are up 17%, 1-7-, so pre-pandemic, which I believe is a very, very strong result. Is it fair to say that this is your true underlying growth? Or do I do some miscalculation with backlog pent-up? I mean, as far as I remember from the last calls, you explained that you always have a kind of backlog irrespective of COVID or not because if I have a hip surgery, I have to wait 6 months or whatever, anyway. So is the backlog still -- does that still play a role? Or is it mostly over? That's the question.

Yes. I would say we did not see a significant contribution from, let's say, pent-up demand meaning with the pent-up demand, existing customers that would be able to do much more than what is usually their baseline. It was very different last summer where we have seen customers doing 120%, 130%, 140%. So in a few weeks or a few months, they were able to recover 1 or 2 months of lockdown effect. In H1, we did not see that contribution almost anywhere. So the growth you mentioned is a very good growth. I'm very happy with it. It's probably our base intrinsic growth with the exception of some extraordinary contribution provided by some new countries like Saudi Arabia, other distributors that did start in H1. But as you can see, the rest of the world bucket is not a very large bucket. So -- but this is maybe the only exceptional item that would have a spike rather than a constant growth. I hope I answered your question in this way.

Yes, very clear.

There are no further questions, so I hand back to you.

Thank you very much. I don't know, Corrado, if you wanted to further clarify any additional items we highlighted in the last few weeks with the DACH release, et cetera. But if there are no specific question, I suppose it's fine, just for you maybe.

Yes, I think that the only comment we can do maybe to make a bit a bit more clear about the accruals on the MicroPort litigation, which was finally completely settled. Basically, as it was disclosed in our earnings report, there was already a provision already recognized in our accounts for EUR 10.3 million. So basically, given the size of the assessments, we have a limited effect on the accounts that we are going to publish in September with an additional accrual in the region of USD 5 million, something more than USD 5 million. So basically, that number will be adjusted as usual, but the additional impact on our accounts will be limited to less than EUR 6 million. I think that there will be full disclosure in the numbers, but that is something that can be worth for the investor to be known.

Thank you, Corrado. I would pass it over to the operator if there is any additional question. And otherwise, I would like to thank you all for your time and attention. And of course, we are available for any additional questions with our Investor Relators.

At the moment, there are no further questions.

Thank you very much then, and I look forward to speaking with all of you soon again. Thank you very much to all.

Thank you.

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