Medacta Group SA (MOVE) Earnings Call Transcript & Summary

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Medacta First Half 2023 Preliminary Unaudited Top Line Figures Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Francesco Siccardi, CEO of Medacta. Please go ahead, sir.

Thank you very much, and welcome to our first half top line figure presentation. I'm here with Corrado Farsetta and Giorgio Botta, our IR. And I'm happy to go over the highlights of the first half. We have seen a very strong growth in terms of revenue, more than 21% at constant currency, 20.8% reported. The geographic performance was very strong, both in APAC and U.S., with an even stronger performance in the EMEA segment. All our business lines were contributing to this performance with really a stellar performance in Knee and Shoulder. We have seen an overall strong market demand sustained by the so-called backlog recovery associated with some of the COVID slowdown and hospital staffing slowdown we've seen in the last years. We have been able to capture the accelerated growth, thanks to a robust supply chain. And our medical education and sales force expansion continued very strongly in all the business lines and geographies. On the next slide, we can see the revenue bridge by geographic area, where you see how strong EMEA performed with 24% growth. North America, which was slightly impacted last year, especially in the first quarter by hospital staffing and still some COVID-related issue did perform very well as well, close to 18% growth. And the APAC region, especially again, where Australia last year was struggling with hospitals not able to treat patients and Japan doing extremely well, we had a 22% growth. And the small distribution segment channel grew around 10%. So the FX effect was relatively small, and you see the difference between the reported and constant currency. If we can go to the next slide, we're going to see the revenue bridge by product line. The Hip, which remains our #1 segment, had a very robust performance of close to 16% while Knees and Extremities did grow even faster. We are talking about 27.7% for Knees and close to 39% for Extremities. Spine had a good performance as well, with a 15% growth. The product lines are really focusing on some of the specialty products of Medacta. On the Hip, we continue to push on our anterior minimal invasive surgery. We continue to gain market share in the U.S. on the ASC segment. And in general, it remains a very, very important aspect of our expansion in Hip together with some expansion of our revision product line. On the Knee side, the performance is clearly driven by our GMK Sphere, with the kinematic alignment offering. While on the Shoulder and Sports Med, clearly, our product line is gaining market share, thanks to the completeness of the offering on the implant side and a very strong support from our technologies, in particular, MyShoulder and NextAR. On the Extremities side, we are happy to report as well that our Shoulder has been finally cleared in Australia, and we're going to start to introduce this product in Australia in the second half of the year. On the Spine side, we continue to grow in a very good way and, again, driven by our MySpine and now by NextAR on a global scale. We can differentiate our screw cage and fusion product much more and much better. We wanted to give you, again, a trend by product line of our performance in the last 4 years to show how positively we have been able to manage the postpandemic situation. And it is really something we are very proud of and happy to present to you across all the business lines and across all the geographies. So our H1 2023 revenue is up 66% at constant currency compared to prepandemic level of 2019. It's all volume-based. There's still actually a little bit of price erosion on average, so it is something that is clearly representing of a gain of market share. At CAGR level, we are up 13.5% at constant currency. In terms of the remaining-of-the-year outlook, based on the positive performance, we recorded in the first semester, we update our guidance to full year revenue growth at constant currency in the range of 15% to 18%. Previously, it was 10% to 15%. And in terms of adjusted EBITDA margin at constant currency, we expect to remain largely in line with the 2022 subject to any unforeseen events. I think this was the last slide of the presentation, and I'm glad to take questions from you and give back to the operator.

[Operator Instructions] The first question is from Chris Gretler with Credit Suisse.

I have maybe 3. First, just on EMEA, I was quite surprised by the strong growth -- continued strong growth from the second half last year. Could you maybe detail by country and by product lines, what's driving that growth? That will be my first question.

Yes. I mean, we are not reporting by country by line, but I can qualitatively say that we are really growing very fast in the vast majority of the big markets. So we're talking about Germany, France, Italy, Spain, U.K., as well, percentage-wise is contributing a lot, although we are starting from a small base. And we continue to grow at a decent pace as well in those smaller markets like Switzerland, Austria, Belgium, where we are already very strong in terms of -- stronger in terms of market share. And this is coming from Hip and Knees a lot. Shoulder and Spine, we're always, if you want, growing at a higher pace in any case. So the acceleration is definitely coming from our AMIS and our sphere and kinematic alignment, offering plus the technology, plus the single-use instruments on the Knee side, which are still very unique and very differentiated. But if you go on the product lines, you really see how both the Hip is very strong and the Knee is extremely strong. And this is true in Europe and across all the geographies. But I am very proud and a bit surprised as well on how we are performing in Europe. There is another maybe aspect, which is an external factor that we probably captured more in out of the U.S. market. I think the orthopedic market is bouncing back in general, including in the U.S. faster than we all anticipated as an industry. I know that some of our competitors -- most of our competitors are struggling to keep up with the demand they have globally, and probably, they prioritize more the U.S. in terms of supply chain. And I know they have more issues still today in out of U.S. market and recapture those extra opportunities.

Okay. That's interesting. It's a nice problem to have, but still a problem. And then the second question is just directionally, if you look at Q1 versus Q2, was there kind of a substantial slowdown, because you had easy comps in Q1, for example, in the U.S.? Or is it fairly kind of consistent, the outperformance? Let's put it that way.

I would say it's fairly consistent. Each month was different than the previous one. But on quarterly days, I think it was pretty consistent. As you said, in the first month last year, especially U.S. was soft, Australia not yet, so negatively impacted was the opposite in Q2. So -- and Europe was basically not really impacted anymore in terms of comp from previous year. So not a big difference between the 2.

Okay. And then the last question is just on FX. It's obviously kind of a volatile world as usual. Maybe if Corrado could give a quick update on what kind of margin impact now you would expect at the current rates prevailing for the rest of the year? If I remember right, if my notes are correct, I think we talked about a 50-basis-point impact back in March, a negative impact. And I guess maybe that has changed.

Yes, I think -- yes, yes, sure. Correct. So I think that the -- what we can expect in terms of FX evolution is a negative impact on EBITDA on a full year basis in the region of 1%. This is what we expect today. Slightly higher, but the same. .

The next question is from Thando Skosana with UBS. .

Thando here from UBS. Congratulations on the first half results. I've got 2 questions, please. Just on the first one on the full year guidance for 2023. Are you able to share what the growth looks like by product line, please? Obviously, you've had good growth in Hips and Knees on tough comps, and then on the smaller businesses, you've quite tougher comps coming in the second half. So some color there would be appreciated. And then my second question is just on -- obviously, you've upgraded your revenue guidance, but kept your margin guidance unchanged. I just want to get a sense of what has changed between the time you gave your full year guidance until now between the tailwinds and headwinds that you expected? I'll leave it there.

Yes. I think on the product line, you can expect to see the same trends and the same mix of growth between Hip, Knees, Extremities and Spine in the second half as well. It would be lower than the first half, because the second half of last year was, in general, a little bit more robust. So the overall percentage should slow down a bit. And this is why we guide on the high range of the guidance around 18%. But in terms of trends across the business line, we expect to maintain the same mix of growth with a lower overall percentage growth. So I hope I addressed this first question. The second question concerning tailwind there and some face wins is -- and why the EBITDA margin will remain largely in line, which -- largely in line for us is a small variability within 0.5%, let's say. It's mainly linked to the fact that we are growing significantly faster than what we have anticipated, which, as usual, comes with some additional cost in terms of both fixed cost, variable cost, of course, sales force expansion cost, overhead cost on the logistics side, and those are all impacting the second half of the year. The general macro effect in terms of cost of goods, raw materials, inflation and salary, pricing, geographic mix, I think is something we will discuss much more in detail together with our full P&L. But I can ask maybe Corrado to just update everybody on the few elements and how we see them coming into -- impacting our P&L and margins. Corrado?

Sure, sure. Let's say, I would like just to add a couple of points on what you say, Francesco, for sure, growth costs, as you mentioned, inflation. I would mention also new business lines. We are investing in new business lines, which are generating either a dilution of EBITDA or, in certain cases, a pure loss, and this is included in our guidance, of course. And I would say the last point is the geographic mix. As you have seen, the source of growth is still less favorable in terms of pricing. And this is, for sure, a bit of headwind. So I would say that in conclusion to me, I think that the marginality -- this marginality while delivering such robust growth and diversification, it's a good performance.

The next question is from Robert Davies with Morgan Stanley.

My question is just following up on some earlier comments you made about some of the larger global peers maybe focusing more on the U.S. names. Is that where you feel like you've made quite a kind of market share gains in Europe rather than anywhere else in the quarter?

Yes. I mean if you're asking if we're taking market share from the large U.S. companies, when we take market share as they have probably close to 85% market share, we mainly take market share from them. If it is JNJ, Stryker, Zimmer or Smith & Nephew, it varies quite a lot geographically and as well in terms of business lines. JNJ tends to be stronger on the Hip than on the Knee. Stryker is exactly the opposite. Zimmer Biomet, especially in Europe, where they are clearly the dominant player, we probably take more market share from them. And Smith & Nephew is probably, at the moment, from the 4 companies, the slowest, and we are definitely taking market share from them as well. So it's a bit from everybody without any particular focus on one of them.

I see. And then, I guess, looking into the sort of second half of the year and next year, you mentioned incremental investments to drive new business growth. Can you quantify those additional investments? Just when thinking about, obviously, the margin progression sort of the back half of this year and into next year, I guess, this year has been more of a kind of sideways movement on the margin in terms of the guidance. So just kind of thinking about this during 2024. Is the growth that you're kind of posting going to result in more sort of spending that's going to dampen margin progress through first half of next year, and it will be more back-end loaded? How should we think about the margins as you sort of roll into next year given your stronger-than-expected growth?

Again, I think it depends on the top line evolution as well. So 2024 is a bit far away. I don't expect to be able to continue to perform at this pace in 2024 as well. It's difficult. We have this year in certain markets, the U.S. and Australia, clearly a recovery that I don't know if 2024 will still be the case. Definitely, we're going to have a very much more tough comparator in terms of H1 and H2. So I don't think this will be as strong as it is. But I'm always surprised by our own performance. So I would be more than happy to keep the margins the way they are and continue to perform at the way we are performing in terms of top line. If we slow down a bit, we should see an expansion of our EBITDA margin. At the same time, as Corrado was alluding, we are expanding our Sports Medicine line, creating a dedicated sales force. So this is clearly something diluting our profitability, but it is a good investment to have another important source of growth in the years to come. So definitely not going down, margin-wise, potentially slightly improving in 2024, but it's very early to talk about it.

That's great. And then maybe just one final follow-up, if I could. Just in terms of the dynamics you're describing in the market with this backlog kind of catch-up effect, post-COVID. When you have a conversation with kind of customers and hospitals and surgeons, how much more kind of runway do you see to that kind of dynamic before things start to sort of stabilize/normalize, because it's been going on for a number of quarters now, the sort of building momentum from elective procedure volume recovery? I just wondered, are we kind of like 95% of the way through that? Are we 75% of the way through that? Is it going to take another year before things are kind of more back to a normal level? Just getting a sense of where you think we are in that kind of catch-up effect.

Yes. I think in general, it's difficult to say it because as you can tell from the fact that most of us have changed guidance during this year, we were not expecting such a bounce back so fast. And this is true for the big companies for us. So we were -- they were even caught by surprise on the supply chain side. So this is clearly something they were not really expecting. Then for how long this is going to stay, we think probably by the end of this year, this will mostly be absorbed, with few exceptions, especially in the U.K. As we know, the NHS system is really not always able to absorb this extra demand fast. Australia, France, U.S. for different reasons, there are programs in place in Australia. There are ASCs in the U.S., are probably able to absorb those backlog faster. So probably this year. You see it as well from the overall performance of the bigger players. We estimate around 3 points of their growth, which is our growth as well, to be associated with the general base recovery of business. So the market is -- we have no data, but we see it probably around 5%, 6%. Well usually it's 2%, 3%. How long? I think 1 semester at least.

[Operator Instructions] Mr. Siccardi, gentlemen, there are no more questions registered at this time.

Then if there are no more questions, I would like to thank you all for participating in today's call. And once again, I would like to make congratulations to all our employees worldwide and to continue to thank our customers for their support in allowing us to have such a great performance in H1 of this year. Look forward to stick with all of you on the first half results later in the months to come and to continue to update on the progresses of Medacta. Thank you again, and have a nice weekend.

Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones. Thank you.