Medacta Group SA (MOVE) Earnings Call Transcript & Summary

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

Thank you. Thank you very much, and welcome to today's call. We're going to go over the full year '21 financial results. We have reported already our revenues at EUR 363 million for the year with a growth above 21% versus previous year. Our growth was significantly higher than the prepandemic level. And here, we reported as well versus 2019 with a growth rate of 18.9%. All those growth are at constant currency. In terms of margins, we have, for the first time, passed EUR 100 million mark in terms of EBITDA, EUR 107.1 million to be accurate, with a margin of 29.5% adjusted, which, again, is very much in line with prepandemic level and an increase compared to 2020. In terms of profit, we had a significant growth reaching EUR 51.5 million, equivalent to 14.2% on revenues. Free cash flow reached EUR 33.8 million, up 5.8% compared to the previous period. We did expand our employees sales force, and overall numbers reached 1,341 employees, 158 more than 2021. If we go to the next slide, those are the comments. The additional comment I would like to make would be to distribution proposal of CHF 0.54 per share that I believe will be proposed to the Annual General Meeting in May. If we go to the next slide, we can see some of the key elements that have been part of our success in 2021. We have prepared the deployment of our NextAR surgical platform, which is the Medacta answer to the technology battle in orthopedics. It is a platform that has application in the joint replacement and in the spine procedures and is exiting the limited market release as we speak for some of our applications. It has some advantages and differentiating factor versus the current solution in the market with a lower upfront capital investment and cost per case, which make it particularly suitable for many markets around the world and the fastest-growing segment in the U.S. market of the ASC orthopedics. A lot of new products, which is another important aspect of our growth. I would say the second pillar of our growth is our product range increase and product innovation across all our business lines: in the Hip, in the Knees, in Extremities and in Spine. We went over those important product families in the previous calls. So I would probably go to the next slide already. Very important pillar as well of our growth is our support that we provide to innovation through the medical education programs and marketing tools. We have been able to go back to normal in 2021 in terms of number of surgeons that we were able to get in touch with and exposed to our product courses and medical education in general, with a significant increase in terms of overall numbers compared to 2019. We had to redesign significantly our programs in order to reach this target. And we mainly decentralized our courses in order to reduce international travel, increase our flexibility and go closer to our customer rather than asking our customers to come to our courses. We did, of course, leverage some of the experiences we made during COVID by strengthening our M.O.R.E. in Touch program. So all the web-based experiences are complementary to our in-person offering. And on top of that, we have launched a new platform for remote proctoring, which is as well empowered by augmented reality. So now for Medacta, augmented reality is not only navigation tool, but as well a tool to deliver medical education. I would like now to ask Corrado to present you the results in terms of P&L and the comments associated with it. Please, Corrado?

Thank you, Francesco. Very briefly, I -- we have already discussed the top line. You see here the solid strong contribution from all our business lines to reach the 21.4% growth. If we move to the next slide, you see here the evolution and the composition of the growth by geographic area. I think that it is important to note that every country has registered a very good result, but it is also important to note that the geographic evolution in 2021 was less favorable than in the past. In particular, you see that the APAC area, the growth in that area was below the average, while the growth in Europe was very strong and very similar to the U.S. market. So this, we will be better this when we speak about marginality has reduced the natural offsetting effect that we have seen in the past coming from the negative trends in the selling price that we have seen in almost all our countries. If we move to the next one. Since the 2020 cannot be taken as an appropriate baseline to measure the effective growth of the company, given the basically negative results in 2021 in terms of revenue -- revenue growth, I mean, we analyze the growth of the last 2 years taking as a baseline the 2019. And you see here the 20 -- the 18.9% growth, '21 versus 2019, this is a solid performance, we think, that shows how we recovered the negative impact of COVID-19 on our top line and that we actually continued in our path of growth over the last 2 years. If we move to the next one, we see the profit and loss of 2021 compared to 2020. Just a few comments on the most important lines. We say that the margin pressure continued in 2021 primarily due to price cuts in Europe and in U.S. mainly. On the positive side, the increase in volumes had a positive impact on the usage rate of the surgical instruments we have in the market. And the -- what you see here is also a corresponding reduction of the depreciation and amortization of surgical instrument as a percentage of revenue. This is -- largely explain the improvements that you see here in terms of gross profit from 70.8% to 71.9%. The -- if we go to the OpEx lines, the first is research and development. You see that there is an increase. We continue to push our research and development activity, and we completed a significant number of projects as a key pillar of our growth, and this is the result in term of numbers in the profit and loss. The biggest increase, if you go to the line sales and marketing, the biggest increase composed by sales and marketing costs, of course. And this increase is almost entirely represented by sales force expansion, both direct and indirect, and by the recovery on the sales and marketing activities and travels in 2021, further to the, say, release of some COVID restrictions. G&A, the increase in this line is almost entirely attributable to the expansion of our operation staff in our subsidiaries further to increase revenue over the last 3 years. I will skip comments on other income and expenses. You see very limited amount, and this has basically allowed the company to increase the profitability up to 29.5% adjusted for [indiscernible]. The financial results is basically this year, EUR 3.3 million and is composed by interest we pay on our debt, very low debt and bank charges on activity in the countries. A few word on income taxes. As you may know, the average tax in Switzerland, in Canton Ticino is around 17%. Let's say, the after -- the tax benefits on research and development activity that we have here in Canton Ticino, the so-called Patent Box deduction. Our midterm tax rate would be around 12%, 13%. This year, thanks to some one-off positive tax effects, in particular for the MicroPort settlement in the U.S. and from the recalculation of deferred tax liabilities accrued in the past, the effective tax rate was exceptionally low and equal to 7.1%. If we move to the next slide, we see here the pie of the investments. As always, the biggest chunk is composed by instruments. You see EUR 35 million, and this is the amount we had to put in the market to feed new customers and to sustain the growth we expect in 2022. The rest is composed by expansion of our production capacity in terms of new machines, research and development costs capitalized and other minor intangibles for registration costs and patent. If we move down, we see here the cash flow of the company. Basically, the cash flow from operating activities was equal to EUR 54 million, less than last year, which was EUR 59.6 million. And this is because of some extraordinary expenses we had, in particular, the payment of EUR 18 million of 2017 and 2018 income taxes already accrued in the past, the settlement of the MicroPort case and the legal -- and associated legal costs. Adjusted for this extraordinary cost, the cash flow from operating activities was EUR 81.2 million. Deducted the CapEx, EUR 52 million of CapEx we had in 2021, the adjusted free cash flow was equal to EUR 33.8 million. This result, say, we started last year from EUR 83 million of net debt equal to 0.95x the adjusted EBITDA. This year, thanks to the evolution of the cash flow, the leverage is down to 0.87x the adjusted EBITDA and EUR 93.6 million of total net debt. I think that was it for the -- this year number. Francesco, maybe you want to continue?

Thank you. And thank you, Corrado. So I would like to give you our current view on 2022 outlook. We remain very committed to our growth trajectory this year again, focusing on the 3 main pillars of our growth that remain the key focus for us moving forward: number one is the continuous expansion of our distribution, particularly on the sales and marketing in the U.S. market, but as well, of course, across all our geographies and especially on the newer business line; we do have, as a second pillar of our growth, the product innovation and the expansion that we'll provide to our fast-growing sales force, more products in their bag; and last but not least, our continuous focus and effort around medical education, which will help bring safely to our patients these new products in the year to come. A very important aspect will come as well with new products in terms of NextAR technology platform, which will be fully released with the first application on the Shoulder. And in the second part of 2022, we should see the Spine application and the Knee application fully released in the market. Thanks to this strategy, we are targeting for 2022 revenue in the range of EUR 400 million to EUR 414 million at constant currency and an adjusted EBITDA equal to 29% within a range of 100 basis points, very much in line with our historical marginality. Of course, the persistent impact of COVID pandemic and the related hospital staffing shortage, which was still strong at the beginning of this year, together with inflation, the supply chain and unfortunately, the current geopolitical issue may negatively affect our performance. This is the last slide from our side, and I would be happy to address any question you might have.

[Operator Instructions] We have a first question. It's from Daniel Jelovcan, Mirabaud.

I have 3, and I take one by one, if it's okay. The first one is that what is very eye-catching is that the growth between Hip and Knees was similar, as you said, in '21 compared to 2020, but compared to 2019, there was quite a big delta. So 10% for Hip and 20% for Knee. What was the reason? Is that product launch timing? Or is that in relation with strong recovery pent-up elective/nonelective, different patterns between the 2 categories?

Yes. There are a couple of factors. First of all, historically, data was stronger on the Hip than on the Knee. So if you look at prepandemic values, we were growing already faster on the Knee compared to the Hip. Because of this difference between Hip and Knees, of course, when we had some negative impact on our sales, we did have higher impact, if you want, on the Hip side than on the Knee side. That was one aspect. And the second aspect was probably as well associated with the difference in the impact in Australia, where we have a significantly higher portion of our sales associated with the Hips. And as we are missing in the second half of 2021 sales in Australia, this has probably impacted more our Hip sales than our Knee sales, which further increased the difference between Hip and Knee recovery and performance overall if you compare it to 2019.

Okay. And the second question is you mentioned marketing and sales, you pushed both the distribution and -- with distributors and direct sales. I'm not sure if you can disclose now the mix of your total sales, which is done with direct sales and with distributors.

Yes. So just to be very, very clear, there are stocking distributors, which are typically representing Medacta in less strategic market, if you want, or outside of Europe, U.S., Australia and Japan. Those are properly to be considered stocking distributors. This is roughly 5% of our revenues. And then within certain markets, in particular in the U.S., there are agents which are -- very often are referred to even by our peers as a distributor, let's call them agents, just to reduce the confusion, and direct sales force. Outside of the U.S., we basically have only direct sales force. Within the U.S. in the joint side is roughly 50-50.

Okay. So in Europe, you have direct -- only direct?

Yes. Basically, yes. Yes.

Okay. And the last question is just for the CapEx. As a percentage of sales -- I mean, you mentioned, of course, the instrument is a big part. But as a percentage of sales, it increased from roughly 11% to 14% of sales. Is that a sustainable figure, which we can model in the future? Or is that very volatile because of instruments can be less or more?

Yes. Maybe I can take this, Francesco. So the 14% of this year, of course, is the result of a combination of new surgical instruments put into the market. But in a particular period like this one that is still in the market, some demand, which is not entirely expressed and captured by the revenue. So basically, we have more instruments than what the standard average would require if the situation were normal. So let's say, in the future, we will continue to add new instruments and to invest because we are growing, we want to continue to grow as fast as we can, of course. So this average could be a sustainable number in terms of cash because we are able to generate cash even with this so high level of investment. But of course, it will be always driven by the new customer that we have in plan to acquire.

So just as a last comment on that aspect. The faster we grow, the more instruments we need because these are needed to serve new accounts. And as you can imagine, 2021, we had a tremendous growth. So it's all CapEx driven by growth, mainly instruments. And the second biggest chunk, which is completely driven by growth, is the adjustments of our manufacturing capacity, which requires, of course, additional plants or additional machines. Those are the 2 growth-driven CapEx.

The next question is by Chris Gretler, Credit Suisse.

Francesco, Corrado, I have a few questions actually. Just to start off with a simple one on FX. What is the budget rate you used to get to this EUR 400 million to EUR 414 million because things are fairly volatile, just to give kind of an idea on a very -- what's based on.

On the 2021 numbers, you say -- you mean?

No, for the guidance. So the EUR 400 million to EUR 414 million because you're guiding absolute in Europe. It's a -- so it's basically...

So revenue on [ constant ] currency basis 2021.

On the '21 FX, right? Okay.

Yes. Yes, correct. Yes.

Okay. Okay. Because things are fairly volatile these days. And then secondly, just if I look at your margin in the second half relative to the first half, it was fairly down, somewhere kind of on adjusted EBITDA, somewhere around 400, 500 basis point. And yet your sales were maybe roughly EUR 10 million more. Is this basically kind of -- and gross margin was a bit down. But is the operating expense base now kind of the normalized level that we can assume? And is this basically now kind of the starting base, kind of this, let's say, 27% we had in the second half?

Absolutely, yes. That's the reason why you see marginality in the second semester dropping compared to the previous first semester. Because in the second semester, there was a recovery of the activity with the marketing, travels. So that is a spike compared to the first semester, and that's why you see the profitability going, as you say. So that can be taken as a new long-term level of activity for the future.

Okay. Yes. Actually, that gets me to the other question. I think remembering vaguely a few years ago already the IPO, I think we were kind of hoping to be able to keep margins grow to in the low 30s, if I, again, remember right. So basically, now it seems like you seem more comfortable around the 30% level and just basically not to grow hard the company. Essentially, that is basically the model we should base our models on. Is that correct?

Yes. This is Francesco. So I think there are a couple of key factors we need to consider. First of all, we are growing probably slightly faster than we anticipated. And of course, when you grow, you don't manage extremely well your cost optimization and you always have some inefficiencies because of the new hiring or a higher portion of new hiring. And at the same time, unfortunately, we are all seeing significant changes in the world in terms of inflation, in terms of raw material cost, energy cost, salary cost plus price pressure. So those are all conflicting aspects that would not allow us to expand on margins. But at the same time, we are targeting even this year, growth rates which are slightly higher than the previous plans. So this is -- those are the key variables that would probably change the big picture moving forward in the next few years.

Okay. Got it. And then maybe the last question is I'm sure you have seen kind of [ MedActiv's ] boost at business earlier this week, which was an interesting move in as far as this was essentially kind of a seasonal contract development and manufacturing business. I just wanted to see if you had any thoughts if that was something that you might consider as well to broaden your pipeline, to get a second manufacturing site. If there was any attraction, let's say, for such a proposition for -- from a Medacta perspective.

Yes. As you know, M&A is an alternative way of growing. I think I wouldn't comment too much on our colleagues at [ MedActiv. ] They are in a different segment. I think they did pretty well in order to increase or breakthrough in a difficult market like the U.S. where it's not always easy. We do have probably a stronger presence and a stronger base on which we can leverage our future growth as we are doing in the U.S. Manufacturing expansion in different site, it is something we always consider. Additional opportunities in terms of M&A to enlarge in areas where it would be difficult to potentially develop directly faster. It is as well an area that we always monitor, especially for the new business line. When and where it will make sense, we would definitely potentially take a look. But so far, we are monitoring. We don't see short term anything to announce, but we always keep an eye open, yes.

Our next question is by Craig Mcdowell, JPMorgan.

Just 2 questions, please. The first one, on the sales force expansion that you pointed to this year, I'm wondering if you could give some indication on the phasing of the additions for the year and also how long it takes for new sales force to begin to contribute to the top line. And also on that point, just where -- which sort of franchise these additions will be contributing to? Secondly, on gross margin, obviously, a sequential step-down in gross margin and also year-on-year. Consensus when I look at it is looking for a pretty significant step-up in FY '22. I'm wondering whether you could give us some kind of indication of what we should expect for gross margin for FY '22. Is the H2 level that you've just posted an appropriate one to model for full year '22?

Thank you. I would take maybe on the sales force expansion and leave Corrado elaborate on the gross margin. So sales force expansion is a constant effort we are doing. This year, in particular, we would focus a little bit more than usual in the U.S. market because we see very good opportunities in the short term. We are already executing this as we speak, and we started already at the end of 2021. In terms of business line, we would, of course, locate probably more employees to the core businesses, so Hip and Knees. But of course, the newer lines would continue to benefit from significant addition and, if you want, even more as a percentage of their current dedicated sales force than our core businesses. So we are in particularly focusing on our Extremity and Sports Medicine business line, which is -- especially on the Sports Medicine side, starting basically from scratch, and we have identified key employees to be hired and to build local structure in all the key markets from U.S., Europe, Australia and in the second half as well in Japan and to differences linked to the regulatory path. And on top of those direct employees, there is -- especially in the U.S. Spine segment, constant research and increase of our agents in the market that, of course, is on top of the direct employees you see the numbers for. But overall, our trajectory of growth is very much linked to the trajectory of sales force expansion, and it will be very much in line with our previous additions in terms of percentages to our sales force currently employed in '21.

And just so we're clear, the number of heads added, it's a big number of sales force expansion. Is that -- should that mainly begin to show up in H2 this year? Or is it -- should we see some kind of benefit in H1? I'm just trying to gauge how quickly that should begin [indiscernible].

I was going to address the ramping up of their contribution to the sales which was, if I remember well, the second aspect of your question. Unfortunately, it depends a lot on the quality of the people that you hire. But on average, usually before a salesperson reach saturation, can take between 6 and 18 months. So let's say, 12 months on average. Unfortunately, some of them would -- do never reach saturation, do not perform as expected. And you end up having to face cost without revenues, which is sometimes the fluctuation you see as well on margins when you make too much of those mistakes. In the last years, we improved and increased even more, given the external circumstances, our vetting system. But in general, yes, you see a total contribution that really becomes relevant roughly in 12 months. I will leave, if you agree, the gross margin comments to Corrado.

Yes. Craig, Corrado speaking. So let's say that with regard to the margin, gross margin of the company, honestly, there are different scenarios that you say and you should -- you can imagine with regard to next year. Because, let's say, the best we have in mind is to keep the marginality at least stable at the current level. But you see this year, you can see how revenue is -- the increase in revenue is key to drive the profitability also at this line. So let's say that if we will be able to grow as expected and we will be able to saturate all the instruments in the market because of a continuous trend in terms of growth, the customer acquisition, which means depreciation and amortization of new instruments to be in line with last year, and we have no FX effect on the top line and we have no very big unexpected increase in terms of price for raw materials and transport costs, then the mix could allow to stay at the same profitability of this year. And that is the best -- I would say, the best scenario. The worst scenario is a level of activity lower than, let's say, in the low end of the guidance with the price pressure on industrial costs higher than expected and not, let's say, continuous growth and acquisition rate of new customers, which will generally require an extraordinary amount of instruments with extraordinary level of depreciation compared to the revenue generated in this year. That will be the worst case. And in the worst case, I would say that it is easy that we move down of 1% compared to this year. So let's say, 1% can be considered as a variability in this line in the best and worst case. But again, it is important to understand that there are several aspect this year for 2022 that are not under our control, namely FX effect, as always, but price pressure in industrial costs, supply chain disruptions, increase of cost for transport due to the situation, as you know, for petrol and gasoline, all other increasing costs. But I think that the range can be considered as a reasonable range.

[Operator Instructions] We have another question. It's from Daniel Jelovcan, Mirabaud.

Just one last one. You mentioned the hospital shortage of staff like many other companies. I guess that's primarily in the U.S. And also, is it more for the nurse or for the operating room staff or even the surgeon? And how does it affect you? I mean, is it more difficult to get new clients because there is not enough staff at the hospital level to receive you? Or is it that there are too little -- not so many surgeons that they come to as many surgeries as planned?

Yes. So first of all, it is very much a U.S. problem. We do have a few centers in France that had unfortunately -- bigger centers, but very few that had staffing issues. The staffing is mainly associated with nurses. So it's not about the surgeons. But it means that the ability for the hospital to go back to pre-COVID level in terms of volume is not always there. And as we all know, there is probably still a stock of patients, which are there in the waiting list. And the hospital should and have been able in the past to not only go back to the prepandemic level, but as well, they should increase in order to recover some of the pent-up demand that is there. So if the staffing issue is not resolved, which we do see some positive aspects there as well in the U.S. as we speak, it means that they will not go back to the prepandemic level, and it will take much longer to fully recover the stack of patients that are waiting. On the positive side, as I said, there is -- there are some variables. So some of the nursing -- traveling nursing agencies have less work because of the pandemic crisis is hopefully coming to an end. The trend to move patients from hospital to ambulatory surgery centers where there is significant smaller amount of staffing issue is there, especially in the U.S. And those 2 factors could hopefully address the staffing issues in the months to come. It's very geographically localized in a few areas in the U.S. So it's not a very, very general problem. But in the big cities in particular, where the big hospitals are, it is definitely a problem that they had to face in the last 12 months, at least.

There are no further questions for the moment. And so I hand back to you.

Thank you very much for your participation in today's call. And I would just like to once again thank all our employees and all our customers for their support in 2021. Thank you very much to all, and speak to you soon.

Dear, ladies and gentlemen, this call has been concluded. You may disconnect.