Medacta Group SA (MOVE) Earnings Call Transcript & Summary

Good afternoon. Good morning. This is the Chorus Call conference operator. Welcome, and thank you for joining the Medacta First Half 2024 Top Line Results 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, and good morning, everybody. I'm very happy to share with all of you the H1 top line performance of Medacta. Those results are unaudited, and we will report positive results in September, together with our profitability. In terms of highlights for the first semester, we posted a very solid growth, 14.3% at constant currency with a strong contribution from the European segment, which grew over 16%, 16.6% in constant currency and a very good progression both in the APAC region and in North America with a 12.6% and 11.1%, respectively, all within local currency. On the product side, we had a very, very strong performance in Knee around 18.6% and Shoulder with close to 40% constant currency growth. While the other contribution was solid as well from Hip and the Spine lines. This year, as many of you know, we have celebrated and we are still celebrating our 25th anniversary and we did organize several larger medical education events. Australia, Europe, North America, they all had those celebration in H1, while we still have a big event in Tokyo for our Japanese colleagues in October which means we are really filling up on -- in terms of pipeline of new potential interested surgeons for the second half of the year. This growth is really requiring further expansion of our manufacturing units, which are ongoing. All of them are here in Ticino. We have almost completed the building and actually the starting of our activities in our main headquarter in Castel San Pietro and we are progressing according to our schedule in the other manufacturing site in Rancate and for those that are going to join us at our Capital Market Day in September, they will see firsthand what's going on here in Ticino. On the next slide, you can see the bridge by geographic area. We mentioned we are extremely satisfied about the performance in Europe which is all, of course, volume based, and this is true actually for all our geographies. We are gaining constantly customers across all the product lines in Europe with the growth, as I said, of around 16%. In North America, 11%, slightly slower than the group average, very good contribution here on Knees and Shoulder in particular. And I think it's important to mention, and this is probably true for all the lines that the success of our Shoulder and Knee is supported by the same salesforce studies selling Hips, while Spine, of course, has a dedicated salesforce, and we will comment on next slide about the potential implication for that. But particularly in the U.S., we are going through reorganization, I would say, it is probably too much. We are changing slightly our distribution model is doing exactly what we've been doing on European, sorry, on the joint side in the U.S. years ago. So we are adding more of a direct channel. And this has resulted in a slower growth on the spine, which is probably the main reason why North America is growing at 11% and not slightly faster as you know. Asia Pacific, around 12.6%, very good performance. We're very happy about both Australia and Japan, which are the main contributors here. Latin America smaller segment, very solid growth, all markets, which are covered by distributors. And this is the geographic mix contribution to our 14.3% constant currency. If we go under a product line point of view and the product mix, you can see the Hip growth around 7.5%. The Knees at 18.6% and the Shoulder at 39.6%. And this is what I was mentioning before, having same salesforce with the management of 2 products growing at extremely fast pace is somehow negatively impacting the focus we used to have. So I think the salesforce is leading their daily effort with 2 very, very strong and unique proposition, which are Knees and Extremities. Hip has a very strong pull-through effect that we still see and it's probably I guess, still at 2x the market growth and we will see at the end of this year. But this is one of the dynamic we probably have to keep in mind when we look at this. Spine, 10%. Probably the growth rate is reduced mainly due to the U.S. Spine contribution but overall double-digit growth in market, which is very competitive and where Medacta is really repositioning our product offering to focus more and more about technology and differentiation of our product lines, which is one of the reasons why we really want to make sure we have as much as possible control over our messaging and our proposition by going more and more closer to the customers, especially in the U.S. market. And this is the bridge by product that brings again at our 14.3% constant currency. I wanted to highlight as well the 5-year trend of our product lines to show that this semester is very much in line with our excellent, I would say, historical growth rate across all our product lines, as I said, with only Spine in H1, let's say, reflecting a lower growth rate compared to historical rate, but we remain quite confident in the overall performance and history growth of our Spine line as well this year and in the year to come. I think this is the last slide, and I would be more than happy to address any questions that might come from the audience. Thank you very much.

[Operator Instructions] The first question is from Aisyah Noor at Morgan Stanley.

I have 2, please. The first one is on the Hips business which we're seeing a sequential deceleration in the first half. Can I ask what was the exit rate for the Hips business in June? And I noticed that your delta versus some of your peers, for example, JNJ did something like 7% in the first half as well. Could you just elaborate the drivers of the growth in Hips, maybe U.S. ex U.S., if there was any development there to point out. The second question is more a clarification question on the guidance, which I noticed you didn't mention in the press release. Do you confirm the guidance of 13% to 15% growth? Or given that the constant currency growth this first half was closer to the upper end of the range and you are expecting an acceleration in the second half. Would you think the lower end of that range is less likely at this point?

Yes. Thank you for your question, Aisyah. So on the Hip side, we do see still the same type of appetite for anterior minimally invasive surgery, which is now more and more complemented by additional offering. We highlighted a couple of times on our Revision product line, which is increasing in each region, allowing Medacta to really cover all indication and becoming a sole vendor or a one-stop shop as well as many of our larger competitors, which was not the case, we were much more focused on primaries anterior minimal invasive Hip only. I think anterior approach continue to be very relevant in the U.S. with the ambulatory surgery center, very relevant in many other markets where we continue to outgrow the market. You have to consider. When you consider Medacta performance that we probably have much more tough competitors, especially if you were referring to JNJ, which is the only one that did published so far. We will see the rest of our peers. But as I mentioned, having a salesforce selling Hip, Knees and Shoulder, I think somehow you pay the extremely high success that we have in Knees and Shoulder with a little bit less focus on Hips. But on the product side, product offering, it remains very solid and actually stronger than the past because our offering is becoming more and more complete. I hope I addressed the first question and then jumping on the second question. We didn't mention guidance because this is just top line and unaudited and the guidance has 2 elements, the top line and the profitability. We didn't change it. We didn't touch it. We are going to talk about guidance, which is at the moment, confirmed and reiterated eventually again in September at our Capital Markets Day. But we do see a very good pipeline coming from our efforts that we did in H1, especially those large events that will require additional medical education events, surgeon-to-surgeon visit at other labs, which are all ongoing as we speak and are really full. So we will see in the months to come, but we remain very positive on our current guidance. And as you said, the lower end is definitely more far than the upper end of the guidance.

Perfect. Just one quick follow-up, if I could, Francesco. Just on the Hips comment. Could you maybe then comment how the first quarter compared versus the second quarter? So was it a slowdown from first quarter to second quarter? Or was it an acceleration? Just to understand where the growth ended at the end of the semester.

No, there was no significant differences. I have to say that if you look at the quarters, actually, if you look at the monthly sales this year, there were several months, January, February were extremely strong. March was extremely slow, April was extremely strong, again, May, June extremely weak again. So -- but this was mainly a calendar situation. July is a perfect month in terms of calendar days. So we have seen a lot of ups and downs with double digit, with a 20% type of growth rate on a monthly basis compared to the previous year month and then single-digit growth. But you -- let's say, if you look at the average daily growth, not a big difference. So there was a big, big swing on a monthly basis. And as well, you could see it on a quarterly basis, but it was mainly, I would say, calendar. Overall, it's quite stable and not a major difference there. So it's not slowing down in the second quarter versus the first one, and we don't expect this to be a negative trend if this is the question, which I believe was the exit from the semester.

The next question is from Graham Doyle of UBS.

A few from me on the kind of the broader market firstly. So have you guys got any sense as to where you are in the backlog in the U.S. If there's still much left and I expect it's probably difficult given how much share you're taking to work that out. And then another one just on supply chain. So it feels like some of your competitors are still probably struggling in terms of supply chain. How are you guys feeling about that? And do you think that, that is now a little more of a sustained advantage? And then one last one around capacity. So you obviously got quite a bit of capacity expansion coming through. And is that coming through fast enough that you're not supply constrained on that side of things?

Yes. In terms of market, as you said, we have to go and check our historical customers in order to see if there is a tailwind or not, and we don't see significant tailwind anymore in the vast majority of the market. So if we talk about the big areas, the backlog was accumulated mainly in the large metropolitan areas, in the large hospital. As you know, we have a strong focus on ASCs, and that's, in my opinion, a tailwind that was already fading out at the end of last year. And definitely, we don't see it in the ASC segment anymore in the U.S. And even the nursing staffing issue that was negatively impacting in the past and creating backlog is mainly and mostly addressed in the vast majority of the market due to internal reorganization. And so in general, we don't see a major tailwind in the U.S. or in Europe. So it's more market share. In Europe, you mentioned supply chain which is, I would say, the main region that struggled, simply because I would say that if you have to pick regions in the moment of scarcity, you tend to focus on the high-margin regions. So U.S., Australia, Japan, that's where we are seeing less impact on supply chain, issues from competition. This is mostly addressed, not by everybody across all the lines, but is again another tailwind, the fact that is fading. We did not have any supply chain issues so far, and I'm touching wood, while I'm saying that, we are still ahead of our needs in terms of capacity. And we are always sitting with a little bit of an extra buffer in terms of net working capital and CapEx because otherwise, we cannot take advantage of those unexpected and not forecasted opportunities that do come from lack of products and instruments from competition. So this is what we call the opportunity stock which has been present and very useful to fulfill our opportunistic growth in the last, I would say, couple of years and still in the first semester.

Great. Can I just follow up on the ASC dynamic in the U.S. It's been a big tailwind for you in terms of the share gain there. But what we're seeing now is more of the large hospital chains start to buy or set up ASCs. Is that helping you then to get into those hospitals, which may be more challenging before because they can see the impact you're making on that specific ASC market just in terms of the next leg of growth in the U.S., good to understand how you're driving into a hospital as well?

Yes. I mean we are -- we started in the hospital environment. It was basically 100% a few years ago. Then with the trend of ASC, as I mentioned a couple of times, to enter into an ASC is simply faster. So there is less bureaucracy, faster decision-making process, et cetera. And then we typically, if we're doing well in an ASC with a surgeon, then in parallel, we work through the processes in order to enter in the hospital environment as well, and this is constant. The fact that some hospitals are opening their own ASCs in collaboration with some of their key producers, which is often the case, is definitely helping us in this process to go from ASC to hospital. So definitely is helpful. But another very important element, which is helping us in the U.S. is the good progression we are seeing in entering to the historical relevant large academic centers, which are generating the next generation of surgeons. And very often, they don't start right away in ASCs. They continue to be employed in hospital, and it increase, of course, the overall brand of Medacta in the hospital segment as well. This is a general comment that I think is important because it goes together with the overall branding, improvement of Medacta in this important market, which is the U.S.

The next question is from Daniel Jelovcan [ ZKB ]

You hear me?

Very well.

Okay. Just one question on the new Knee kinematic alignment GMK SpheriKA, it's now in the market, I think, for 7 months or so. So full impact in the first semester, I guess, as you described. Can you describe a little bit the uptake in the major markets, I guess there are some difference depending on the country.

Yes. Just to make sure SpheriKA has been in limited market release phase in Europe, in the U.S., in Australia for over 2 years. So as we typically do, we have those limited market release phase where we make sure that the product is performing in line with the expectation. And when we present the product to the market, we come with good preliminary clinical data, which was the case. We started the introduction in H1, mainly in the U.S. market. And now we are preparing the release, the faster release in Europe mainly. And then at the end of the year, we will -- or beginning of '25, we will see the uptake in the introduction in Japan. And then finally, in Australia, which is both linked to regulatory path, slightly longer and reimbursement slightly longer. The uptake is excellent, it's massive. We're just managing, again, the supply chain because the growth on the Knee side is very strong to begin with. And on top of that, we are introducing not only SpheriKA but as well the cementless version, which is part of our offering. So we are managing quite a complex new product introduction with a very, very strong demand, which is driven by the rapidly growing data supporting why those products can actually benefit patients. And I'm personally very, very excited about finally being able to move the needle in terms of patient satisfaction in Knee replacement because we've been trying many, many things for many, many years. I would say the sphere type of concept did provide some element of patient satisfaction improvement with stability, with much more of a natural feeling but now combining this concept with kinematic alignment with an optimized implant is a really, really good offering, which is changing patient outcome very rapidly. And I'm very keen to share with you as soon as it is fully published some preliminary results in terms of patient satisfaction which are bringing Knee patients very close to Hip patients, which is something never seen before. So it's very, very positive, very good uptake. We just need to produce as fast as possible as many sets and as many kits as possible.

So I guess you already had some significant new customer wins, right?

Absolutely. Yes.

The next question is from Sam England of Berenberg.

And the first one was just again on the strong performance in Knee. I was just wondering how much of that was driven by the first half marketing push that you called out back at full year results. And then looking ahead to second half, how are you thinking about marketing investment going forward given the ongoing rollout of SpheriKA? And then second one is just around the geographic revenue split. Obviously, EMEA grew well ahead of North America again, I suppose, was that growth in line with your expectations? And should we be expecting a sort of negative impact on margins from mix effects in the first half given the faster growth in EMEA? Or was it pretty much in line with what you're expecting when you gave the guidance?

Yes. On the marketing side, we definitely had a significant concentration of marketing budget in the first half of the year. That's for sure. It's not the first time, in 2020 was very similar. We do have, therefore, quite a significant pipeline of new customers that will have positive impact in the second half of the year. In terms of -- and it was very much focused on Knees as well, not only on Knees, arthroplasty. We did couple it as well with Knee sports medicine, which is starting to accelerate as well, much more scale. But we took advantage of the synergy having a lot of Knee surgeons in those events, and we did couple it with as well some Knee sports med efforts. The U.S., EMEA performance, I would say, is exactly in line with our expectation EMEA slightly ahead in terms of performance. And our direct markets, in particular, are really exactly in line with our expectation. We have some delays in our indirect market distributor channel, mainly from a regulatory reason or some delays in registration or tender but nothing major. So we're pretty much in line with our expectations with a slightly different mix more from direct and slightly less from indirect, but nothing major.

The next question is from Dylan van Haaften, Stifel.

So just firstly, on Spine, could you just tell us a little bit more about that Spine direct, indirect phasing and what we should expect in second half? Does that mean second half maybe we get a bit better growth and we get some better EBITDA drop-down from the better direct split? And could you remind us what roughly the direct indirect split is there? Secondly, just on APAC. Could you split up price volume? Because if I'm not mistaken in Australia, you had some negative pricing coming through also this year and next year. Just interested to hear if volumes are maybe a little bit better than we can see at first glance. And maybe thirdly, could you just give us some flavor for what you're thinking in terms of, let's say, the general backdrop in the U.S., where I think consumers that are at least exposed to some co-pay dynamics, if you're seeing any hesitancy or something like that with the people you're talking about to, is there any worry that maybe some orthopedics co-pay ability will fade out in the second half?

Yes. Let's start with the Spine. Direct, indirect is only U.S. Today, Medacta is 100% through agents in Spine in the U.S. And we continue to work with agents, of course, but we have started to invest on direct salesforce as well and we focus our efforts in terms of growth on the direct channel, which means simply that we go directly to smaller agents or agents that serve directly the customers, we basically drop in half the overall compensation, if you want a variable compensation, which is then potentially impacting our overall marginality. I think it will take actually, a little bit of time before you see a group impact of this strategy, but we know that this is, is the right direction not only because of marginality, but mainly because of product positioning within the market that, as you know, has more than 200 competitors selling screws and cages, while we can focus much more on technology. And Medacta then is in a group of maybe 10 to 12 companies that are able to offer technology. So that is the shift we want to make and this should, according to our plan result in more control, more potential growth and definitely better overall margins as well in the midterm. At the beginning, this might actually be slightly dilutive because you have overall margins as well in the midterm. At the beginning, this might actually be slightly dilutive because you have more of an investment in more direct salespeople that require some saturation. But this is, again, small on the large scale of the business. Australia is 100% volume. The price cut you're referring to is impacting our product lines starting from July 1. So it's going to be second half is a marginal price decrease, we estimate around 1% this year max. And so it's not something that we should be particularly worried about moving forward, is impacting Spine, some elements of the Hips mainly but again, it's 1%, no more. The last element was about the co-pay. The co-pay dynamic in the U.S. is actually often supporting the second half of the year versus the first half because many patients that have potentially already paid or maxed out their co-pay, they actually push for having the potential procedure done in the year, they have already maxed out their co-pay contribution. So we see very often very strong November and very strong December, which is quite a unique U.S. dynamic because of this co-pay type of dynamics. So we did not have any strong feedback about this but I will dig into it again and potentially come back to you in September if this changes. But usually, the co-pay problem is more first half potential headwind.

The next question is from Anja Pomrehn, Mirabaud.

So there are just 3 questions for me left. First of all, Francesco, could you provide a rough split in terms of sales in North America between hospital and ASCs at the moment. The second question would be, I mean, you mentioned the change in distribution or sales in Spine, are there -- are we sort of have to expect further changes in distribution or sales reps effort going forward, not only in North America but also maybe in other regions? And if yes, so, could you kindly share with what the current plans are? And my third question would relate to pricing. I mean, usually, Medacta has sort of pricing pressure of 2% to 3%. Also, of course, depending a little bit on reimbursement and so on. But would it be fair to assume that this year, the pricing element would be less so maybe around 1% to 2%?

Yes. Let me start maybe with the last one. I think slightly less pricing pressure is correct. So we are seeing a range, let's call it, 1% to 2%. And again, with Australia, potentially having an impact of 1% in the second half only. So this is probably the range you could consider. In terms of Spine, we are not changing our distribution model anywhere else, and we're not changing our distribution model in the U.S. either. We are adding or we are focusing more in terms of growth into a direct channel in order to do what we said. But it doesn't mean that if we do find a good, well-performing, well-motivated distributor, we will not take it. So we are doing exactly what we did in the joint side where, when we started, we had 100% distributors variable commission-based type of salesforce Q in which is the classical way that everybody is doing. But as soon as you have more of a specialty product, we see some value in having another layer of direct salespeople to go closer to the customer and make sure that the best offering is pushed forward and not a me-too relationship type of business gain or service. It's really the product that makes the difference, the technology that can make a difference, and we've seen in the past that this pays back after a couple of years of push. There are -- in all the other markets, we are only and always direct, Japan, Europe, et cetera. So there's no change there at all. And first question, I think, was around our ASC portion. We remain relatively high, let's say, around 45% of our revenues today in the U.S. are in ASCs. Both segments are growing fast ASCs, as I mentioned, are always growing a little bit faster, and then we go back and collect some of the hospital-based business that is attached to the same customers provided they are happy and fully satisfied and we do have access to their hospital purchasing group or supply chain as well. So 45% roughly ASCs.

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

Excellent. Then I would like to thank everybody for participating to this call. Always, I would like to thank all my colleagues at Medacta for this excellent performance. And I would like to invite all our investors and analysts to our Capital Market Day in September here in Lugano. We will show firsthand what's going on, how we are expanding and most importantly, how we see the future moving forward. So thanks, everybody, again, and see you soon.

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