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] I now hand over to Mr. Siccardi, who will lead you for this conference. Please go ahead, sir.

Thank you, and welcome to this H1 '21 Financial Results Call. I am together with Corrado Farsetta, today, company's CFO; and Gianna La Rana, our Investor Relations. I would start with the highlights of the first semester. We already commented on the revenues for H1, which was strong with a growth of 35.4% at EUR 177.5 million. Reporting now a strong EBITDA margin, almost 32% and an adjusted EBIT margin of 21.4%. The profit for the period is close to EUR 30 million or 16.8% on revenues and a good free cash flow of over EUR 13 million. In the first semester, we managed to further increase our number of employees with 63 jobs added in the first 6 months of '21. In terms of additional highlights on the following slide, you have some details about the contribution on this very good growth that was coming from all our business line and geographies. Once again, those have been in detail reported in July already. And the gross profit margin improved as well at 72.5%, with as we said, an adjusted EBITDA up to EUR 56.6 million. This was, of course, significantly better than last year. And of course, we compare ourselves with a period that was significantly and negatively impacted by the first waves of COVID. Free cash flow was positive. Adjusted free cash flow, EUR 13.4 million. And very important on sales and marketing side, we managed to introduce more than 50 new products across Europe, U.S., Australia and Japan, for all our business line, Hip, Knees, Shoulder, Spine and Sports Medicine. We did manage to increase our sales force, which is vital to support our growth. And all the new customers have been supported with additional surgical instrumentation, which is, again, something you would see more in detail when we analyze the CapEx and the nature of the investment, which are always related to our growth. In terms of marketing and medical education, which is one of the pillars for Medacta's success, we managed to be extremely active in all the semester. And since June, and hopefully, in the months to come as well, we have restarted some international travel. Some of the congresses have restarted as well, like the American Academy even in August this year. We do expect some potential restriction to come and we will see it and discuss it in the outlook. One of the key products in key technology is our NextAR. Our augmented reality surgical platform. We started with the first surgeries in Europe after receiving our CE marking for all our application, total knee, total shoulder and pedicle screws spine application. The Shoulder application has received as well our FDA clearance. So it is now entering the U.S. market following the Knee application that was already cleared in mid of 2020. NextAR is an important portion of our MySolution ecosystem, which is based on a platform that Medacta has developed internally over now 10 years that include pre-op solution, per-op solution and post-op solution. This is part of our personalized medicine aimed at improving surgical accuracy and patient engagement. What's very different about the NextAR is limited upfront capital investment and reduced cost per case when compared with our competitors, which makes the system extremely flexible under a commercial point of view and extremely fit on not only the hospital segment, but as well the ambulatory surgery center in the U.S. And of course, on top, the European markets, the Japanese market, which are much less keen in investing in significant capital equipment. So far, we are extremely pleased with the deployment of the NextAR, especially considering the difficult situation of deploying new technologies with COVID limiting quite a lot of our ability to support certain countries such as Australia or Japan, where in the last 18 months, we have not been even able to -- to be physically present. If we go to the next slide, I will -- we will go more in details of the P&L and financial results, and I would like Corrado to present you with the data. Thank you.

Yes. Thank you, Francesco. The -- let's have now look at the numbers of the first semester. I think that the top line was very well discussed in July, so I will go very quickly. I would like just to underline that the growth was in all our business line, as you can see here. And if you move to the next slide, we can also notice that every region contributed to this growth. If we move to the profit and losses line. Here going through the numbers, I think that the first comment should be on the gross profit margin evolution, we see that there is a remarkable increase from 69.7% of last year to EUR 72.5 million this year. And this primary is reflecting the leverage on the depreciation and amortization cost of surgical instruments due to the higher level of revenue registered in this semester compared to last year. If we move down to the fixed cost area, we say -- we can say that we continue to expand our sales force and this is reflected in the increase in sales and marketing cost line, you see here. It is fair to say that we also realized some savings in travel and congresses costs due to continued travel restrictions for COVID-19. And these activities and the related costs will start again in the second semester. With regard to G&A expenses, this number include EUR 4.5 million provision for the final settlement of the MicroPort matter. I think that the rest with regard to fixed cost is in line with last year with no need to give any other comments. As a result of this number -- these numbers, we can see that the adjusted EBITDA margin raised to 31.9% coming from 23.8% last year, which is a good result. And I will give you now some comments on the bottom part of the profit and loss. The first comment is on the financial results, you see 0 this year, and this is thanks to the EUR 1.5 million foreign exchange gain, we realized in this period, which offset the financial cost of the semester coming primarily from the revaluation of the intercompany receivable in U.S. dollars. The second comment I would give you -- would like to give you is about the income tax. You see the effective tax rate was about 6%, which is very low and below the average, let's say, the average normal tax rate, which is in the region of [ 30% ]. And the reason of this extraordinary low tax rate is the tax deductions that we can register in the U.S. for the MicroPort cost that emerged in the semester. Given the higher tax rate in that country, we can -- we had a positive effect on the average effective tax rate in this semester. We ended with EUR 29.7 million of profit for the period. Moving to the next slide. Here, we see the investment, investment of the semester. As always, the biggest part of the investments have been in new surgical instruments, which is the blue slice of the cake. And this is to follow, of course, the revenue growth of the period and the customer acquisition and the revenue growth expected also for the future. Other investments, tangible investments are always related to growth and basically our expansion of our production capacity in terms of machines and space. Research and development, capitalized costs reflect the activity of the company in developing and improving our product range and is in line with the average performance of the last year. Moving to the next slide, which is the free cash flow. We say that we -- the adjusted free cash flow was EUR 13.4 million, adjusted for abnormals. A few comments about the abnormals of the period. First of all, as always, we adjusted for the extraordinary legal costs in the U.S., EUR 40 million. But the biggest adjustment is the payment of ordinary income tax for the years '17 and '18. It is important to understand that this is an amount which was already accrued in the relevant financial statements of '17 and '18 and was paid this semester after having received the relevant tax assessment from the tax authority. The last adjustment was EUR 1.9 million, and this is related to the extra ordinary investments we are doing to expand the Rancate facility. I think that's it about the free cash flow, and we can move to the last slide for my section, which is the evolution of the financial debt. We see we started from EUR 83.3 million of last year. And the evolution is, as explained, cash flow and investments, free cash flow from operating activities and investments. Some IFRS treatment of repayment of lease and other debts for right-of-use payment and for technologies. And the net debt at the end of the period was equal to EUR 97 million. I think that this is the last slide from my side, I will leave you to Francesco for the final part of the presentation and the Q&A session.

Thank you. Thank you very much, Corrado. So we would take a look at the current outlook. We -- as you remember, updated our guidance already in July. So we are confirming at the moment, our outlook with the second semester that is expected to normalize compared to 2020. In terms of growth, we had, especially in quarter 3 last year, very important pent-up demand recovery in many of the European and U.S. markets, followed by third wave, I would say, in quarter 4 last year. So 2021, we hope this will be more of a stable outlook, but I think we all agree, it's very difficult to forecast the future in this current environment. In terms of guidance, we confirmed our revenue guidance to be between EUR 355 million and EUR 375 million at constant currency with an adjusted EBITDA margin in line with our 2020. It is clear that this guidance is based on the evolution of COVID without any particularly negative impact from the pandemic and related lockdown. If we go to the next, I believe, is going to be focused hopefully, our Q&A on how we see the future, but I leave the floor to the Q&A and happy to address any question you might have.

[Operator Instructions] We have the first question, is from David Adlington, JPMorgan.

So just one really to start off with. Some of your orthopedic larger competitors, I think, have become incrementally more cautious in terms of the procedure outlook for the third quarter and potentially the fourth quarter given what's going on with the COVID areas. So obviously, that differs a lot not just country by country, but individual state by state. I just wondered with respect to what you're seeing on the ground in July, August and into early part of September. Is there any areas of course, of particular concern? Or do you -- it sounds like you remain relatively relaxed. Just to get some further color there.

Yes. Thank you, David. I think you cannot be very relaxed in this period in general. In particular, we have seen -- or we are seeing in Q3 some negative impacts and headwind in Australia, where, as you know, Melbourne and Sydney, in particular, they are back into a severe lockdown. We are pleasantly surprised by the fact that the impact on elective procedure is significantly less than what happened in the past. But still, we see headwind we were hoping not to have in quarter 3. We have seen it -- is not the first time in Australia, it's happened in the past as well. What we have experienced is a swift recovery in that market. So we hope to be able to recover what we are losing in Q3 immediately in Q4, but that's the hope. U.S. is another area where we see some COVID-related issues, some regional impacts, both in terms of elective procedure canceled. And more in general, something that I believe is becoming more and more of a problem, which is a scarcity of nursing. So the nurses are becoming a reason to cancel elective cases, and this is somehow associated with post-COVID stress and the phenomenon of agencies hiring nurses at significant higher salary, which are pulling from the hospital environment, quite a lot of workforce. So those are the 2, I would say, key areas where we have some negative impact already and some concerns moving forward. Europe is going pretty well. We do expect some potential negative impact from the Delta variant and hopefully not from additional variants that we started to see on the news. But so far, the impact is relatively smaller than what we've seen with the third, the second and, of course, the first wave.

That's great. And maybe just in terms of -- on the NextAR launch. In terms of when we might start to see that coming through in terms of revenues and I suppose any sort of initial feedback, what serves you really like and maybe what they would like to see some things improve still?

Yes. We are extremely pleased with the launch of the NextAR, especially given the external circumstances if you think that we have never been able to physically go in Japan or in Australia, and we just went to the U.S. for the first time physically in person in August this year. Of course, you can imagine that launching such a complex technology overall and train our partners in the U.S. through WebEx, et cetera, is suboptimal. Europe is -- Europe launch is going extremely well. I hope to be able to announce an important milestone of passing the 100 system installed in the market before the end of 2021, which is, in my opinion, a very important milestone across Knees, Shoulder and Spine with different level of maturity. We are extremely pleased on the early feedback on our Shoulder application. The Knees is -- it's a little bit more mature and more platforms are delivered on the Knee side. But as it is a common platform, there is a very good synergistic effect between the lines and very positive so far. So you will see some implant sales increase, thanks to the NextAR and we have started to sell the capital equipment as well in certain markets, and this is usually after an initial period of evaluation. But as we said, having a significant lower industrial cost, we can be much more aggressive than most of our competitors, and much more creative under a commercial point of view.

[Operator Instructions]

Gianna speaking. I can address a question submitted by Aisyah Noor from Morgan Stanley. I'm reading the question. We have seen your competitor launch a robotic solution for the anterior hip indication. What do you think of this product? And could it impact your volumes in those hospitals that have installed this robot?

Thank you, Gianna. Yes, of course, I've seen this competitor launch. It is something we knew it was coming. I would say they are -- we are talking about the [ ROSA ] system and the Hip application. They are following Stryker's Mako Hip application, particularly focused on anterior approach. I, of course, have a lot of respect for all of those technologies. We picked a completely different path, especially on the anterior hip side. We did not see a significant pick up with Mako hip application or say not enough to worry us in a particular way, and we don't expect this to be any different on the Zimmer side. We will see and we continue to monitor and try to compete with our solution on the Hip side, and we are happy with the Hip results so far.

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

Thank you. Thank you very much. If there are no additional questions, I would like to thank all the participants and look forward to report additional results in January. Thank you very much, and have a nice day.

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