Medartis Holding AG (MED) Earnings Call Transcript & Summary

I would like to welcome you to our conference call in connection with the 2019 results of Medartis, which we have published this morning. My name is Chris Brönnimann. I'm the CEO of Medartis, and I'm here on the phone together with my CFO, Dominique Leutwyler. And we also have the Head of Investor Relations, Patrick Christ, on the phone with us as well. It's our pleasure to have you all in our call today. In this session, we would like to walk you through our full year results presentation, which is available on the Medartis website. You can also follow it online if you have joined this call via the link we provided in our invitation. After the presentation, we'll be happy to answer your questions. Please also note the disclaimer on Page 2. Furthermore, I would like to inform you that our call is being recorded, and the replay will be available on the Medartis website later on. After my start in Medartis in the beginning of September 2019, which was based on technology and innovation leadership moving from a large American corporation to Medartis, it was with the option and the opportunity to develop Medartis to a leader in the extremities business. And in my first months, I had very positive reactions from surgeons all over the world, who were very positive about the technology and the ease of use of our systems, which led me and confirmed the positive impressions I have of the company at the very beginning. Let's move on to Slide #3. I will lead you through the highlights and then will turn it over for the financial review to Dominique and then will get back and lead you through the focused priorities and outlook for the coming and also for the midterm. Just as a reminder, precision in fixation, we have -- as Medartis, we are focused on the fixation of bone fractures and osteotomies. The company was founded in 1997. We are active in direct markets. There are 13 markets, and we are about 600 employees as of today. Our products are used in the extremities, which is from the fingertips to the shoulder, foot and ankle and including the head. In 2019, we have continued to execute our strategy, continued the growth path above the market levels and made further investments into growth. If you look at our markets, there are a few highlights. For example, the U.S. business has grown at above market pace. And we have, for the first time, introduced a wrist spanning plate for the U.S. market only, which demonstrates our focus for the region needs in particularity for the U.S. market. Last year, we have also started our direct sales in the lower extremities in Japan and have achieved product authorization in China. So we are now ready to start our sales in China in the course of this year. We have also established a new leadership team in Brazil and also in the Mexico subsidiaries. And in Brazil, we are now fully ready to fully integrate the formal distributors in the course of this year as well. Also, we have continued to expand our product portfolio, and we are proud to have strong sales in our most important revenue line, which is the distal radius and wrist. Thirdly, we have developed new product areas. Shoulder has grown at a very low level but according to our expectations, and we are pleased about the accelerated growth in the elbow segment. From my perspective, we have completed a smooth handover from my predecessor. And on the Board level, we have established a Strategy and Innovation Committee, which is fully operational. On the next slide. Those strategies have driven the following results. We have a sales achieved of CHF 130.1 million, which is a growth of 7% in Swiss francs and 10% in local currencies, which reflects the foreign exchange evaluations. The sales result is at the upper level of the guidance that we have given back in August between 8% and 10%. The EBITDA performance, we achieved CHF 20.3 million, which is an EBITDA margin of 16% reported and 15% adjusted, which exceeds the guidance of 13% by 2 percentage points. From an employee perspective, we have created another 48 jobs, which is an increase of 9%, and we are now at a total employee of 609. With those numbers, I would like to hand it over to Dominique, who will give you now a more detailed view on the financials.

Thank you, Christoph. And also from my side, welcome to this telephone conference for the closing 2019. Before we start into details of the key financial figures, I'd like to give you some overview of items that are [ special to the ] closing process. First of all, we have informed in an ad hoc information the 9th of December that we [ will bring ] a CHF 3 million provision for a legal case in Brazil. We have also IAS 19, the pension, that were the conversion rates reduced and give us an additional CHF 3.4 million in earnings. In the IFRS 16, the leasing, we have a positive impact of CHF 3.6 million. Now I'd like to go into the details of the key financial figures. The net sales adjusted for 2019 was CHF 130.1 million. The gross profit ended at CHF 110.6 million. The costs were CHF 103.6 million. That's additionally 13% I can detailed later in a slide. The operating profit EBIT is CHF 7 million. And as mentioned, the EBITDA is CHF 20 million adjusted, with an EBITDA margin of 15%. The operating cash flow sits at CHF 8.1 million, and the capital expenses at CHF 19.4 million. We have there a special fit-out of the building that is onetime for the sterile packaging, warehouse and 3D printing. The net working capital is increased to CHF 55.1 million. We have [ there special ] stock for new products. Christoph will show you the new products that are coming. This also in relation to the MDR, medical device regulation, introduction in May this year. Now I'd like to give you the overview of the sales number by region. The biggest region is EMEA with CHF 17.3 million (sic) [ CHF 70.3 million ]. That's a growth in local currency of 9%. Asia Pacific ended with CHF 23.7 million. That is 9% growth in local currency. North America is CHF 21.7 million. That's 11%. And the smallest region, Latin America, is grown by 16%. Now some more details by region. As you can see, as the arrows, the subsidiaries overall had a good performance over the market level. We have seen a dynamic growth in U.K., France and Poland that was achieved. The other subsidiary has also a solid growth in all markets. At the distributor level, we see a mixed performance at the distributors due to the limited investments ahead of the MDR implementation. Italy and Spain are below our expectation but had a better second half year in 2019. We have seen a dynamic investment in Netherlands that is a pioneer market in the sterile products. Now we go to the region of North America. In North America, we had a strong growth over the market but under the expectation of the management. We have to -- implemented the new wrist spanning plate especially for the U.S. market. Also, we expanded the collaboration with the distributors and started regional collaboration with the IBRA within the U.S. Asia Pacific. We had a strong growth in Australia. As already reported in the half year 2019 figures, the government reduced the prices on market level by 7%. Also, in 2020, the prices will be reduced by another 5%. Japan completed the first year as a subsidiary, in line with our business plan. The distributor that covers the upper extremity is under our expectations. In China, we had the product released from the CFDA in the second half year 2019. And we are right now in preparation for the launch in 2020. In South Korea and Thailand, we have a dynamic growth in the distributor markets. Latin America. We have there a double-digit growth over the organic growth 2018 but behind the management's expectations and dynamic growth in Brazil despite a challenging market. Mexico is behind our expectation. We have implemented a new general manager in Mexico and Brazil. On the distributors, we have a dynamic performance in Chile. Now the view on the segments. The biggest segment is the upper extremity with CHF 92.6 million. That is a growth in local currency from (sic) [ of ] 9%. The market is there at 6%. The lower extremity ended with CHF 18.3 million. That's a growth by 16% and the market level of 7%. The CMF, maxillofacial market for the head products, ended with CHF 19.2 million. That is 10% growth in local currency. Now some words to the gross margin. The gross margin was elevated by 1.6% to 85%. The main driver there were that we were growing in higher-priced markets. Our product innovation, we were able to put on a high market level. Also, on the cost side, we implemented a new lean manufacturing and automation program. We were also able to reduce the purchasing prices from the suppliers due to the higher volume. On the other hand, we also feel a price pressure from our customers and purchasing organizations. Some words to the costs. The biggest part is the selling and distribution with CHF 66.9 million. We have there some future investments into our sales force. Also the new markets Japan and China were costly. And we invested into our end-to-end supply chain. The administration part ended with CHF 21.3 million. So there, we invested in our customer service in the subsidiaries. And also, after 10 years, we needed to invest a onetime maintenance in our building here in Brazil. The research and development ended with CHF 15.4 million. We invested there in the MDR processes to be able to deliver after May 2020. Also, efforts in education with IBRA were included in there. All this ended with the mentioned EBITDA of CHF 20 million that is 15% as in sales. The double digits grow in local currency and OpEx investments reflects our growth strategy. We have also a positive effect of CHF 3.6 million due to the first-time application of IFRS 16. Now I hand over back to Christoph for the focus and priorities.

Thank you, Dominique. I would like to lay out to you now our strategy, starting from the market, talking a bit about our midterm priorities; and give you an outlook as to what goals and results we are going to expect over the near and midterm. Medartis plays in a very attractive market. We estimate the extremities and CMF market worth about $10 billion, with an expected growth rate or CAGR of 4% to 6%. One of the main driver of the growth is the demographics, the aging population above 65 years old, which has a significant increase, almost doubling from 2015 to 2030 and a similar increase towards 2060. It's not only the activity level of those population. It's also an increasing prevalence of comorbidities, which are diabetes, obesity or osteoporosis. Those high-risk patients which show more complex fractures are high risk for operations and demand more specializations of the surgeon and hence more sophisticated and innovative implants and treating methods. So there is a continuous growth of demand for innovation. The question now is, who is going to fill in that innovation? And if we take, as an example, the number of market introductions as a indicator, we see that the major -- the large competitors over the years are reducing their innovation strength. And this basically creates exactly the gaps that we want to position Medartis in: to fill that prevailing innovation gap, to deliver new technology that has potential to become standard of care and also provide our surgeons solutions to treat their patients and meet their clinical needs beyond just plates and screws. So what are the success factors that we believe we need to meet in order to move into that space and position Medartis as a leading extremities company? It takes innovation strength, but it also takes innovation speed or time to market. The third one is proximity to surgeons across the regions as innovation is still created close and in close collaboration with our surgeons in the OR, understanding his needs but also understanding the needs of the patients to assure a good outcome for -- including high-risk patients. At Medartis, we are very well positioned with a track record of innovation. If we look at the launch and the string of innovation, we see that almost every single year, Medartis has been able to launch an innovative system or innovative product at least once per year in almost every single year of its existence. So now what is it going to take Medartis to go forward, building on that strength of innovation and technology? We have grouped it in 3 priorities that we want to focus going forward. We need to combine the strength in technology and innovation with more focus on sales addressing regional needs. The second priority is, for us, the U.S. market. The U.S. market represents about 40% of the global market. And as you can easily see from our sales numbers, in that respect, we have a lot of opportunity to grow building our U.S. business. The third priority is the acceleration of our time to market and the expansion of and the strengthening of the innovation pipeline. Let me go through those 3 priorities in a little bit more detail. Enhance the sales focus and addressing regional needs. What does that mean? We have announced in the end of last year that we are not going to replace our global sales position. We're going to move our sales organizations into 3 distinct areas or regions, which is EMEA, North America and Lat Am, APAC region. And we will also include the leader of those regions into our executive management team. This makes sure and should ensure that we have more market and more sales representation in the executive management team as well. What does it mean to become more sales focused for us? More sales focused means that we want to achieve a market penetration as, for example, we have in Germany, with market shares beyond 30% in our key segments hand and distal radius. Sales focus means our sales force needs to get well trained and very well set up to convert new accounts to generate new business. It's not enough for us to grow in the existing accounts. Of course, we need to give great support from a technical perspective to incumbent accounts, but the key for us to win in the market is to acquire new accounts. And we also need to make sure that we have an over-proportional incentivation for additional growth for the sales force. Those indicators will be part of our executive management key scorecard that we are going to establish and follow on a monthly basis. The third point for us is we need to simplify the structures and get more efficient in our processes entire the -- and along the entire value chain in order to support the future growth. We have seen double-digit growth for the past years. Now it's also the time to consolidate, to simplify the processes, to adjust the organization structure in such a way we can get more innovative, faster to the market and continue to support the growing and expected growth of sales. It is our ambition to become the top 3 supplier in hand, wrist and elbow in our direct markets. I also want to build and focus on the foot and ankle business, especially with the new portfolio that we are about to launch in the course of 2020. Along with the expansions and the buildup, especially of the U.S. business, it's important for us to also expand the network of key opinion leaders that we have around the globe. The second priority, the U.S. business. We have started to recruit a new leadership team, and we are undertaking the sales force an in-depth analysis focusing on the direct and also the indirect sales channels. With this analysis, we will continue to expand our go to market, and we will selectively expand either through direct or through the indirect distribution channels. In addition, we are going to build a dedicated sales force for the lower extremities. In order to become successful in the U.S., we are -- firmly believe that we need to establish ourselves as a full-fledged company and not only just as a sales organization in the U.S. This means the proximity to the market, the proximity to the surgeon needs to be combined with locally focused product development capabilities. We have successfully launched the wrist spanning plate, which you're seeing on the bottom right a X-ray picture, which is a very particular treatment of distal -- complex distal radius fractures in the U.S. which are using a spanning plate in order to immobilize the wrist for about 6 weeks. And then the plate is removed, and the patient will be available to move the distal radius and his wrist again. That's a very particular U.S.-specific requirement. We have already now certain requests from the U.K. surgeons as surgeons talk to each other. So we'll also CE mark the spanning plate and eventually launch it in Europe as well. But this is a very good example of being close to specific U.S. market needs. Besides building local development capabilities, it is also important to continue to build professional education, which we're doing with our IBRA partner. So we want to establish a U.S.-based faculty so that we have U.S. surgeons training U.S. surgeons and, by doing that, want to expand the KOL network in the U.S. on lower extremities but also in upper extremities. Last but not least, our mergers and acquisition focus focuses on innovation to complement the Upper and Lower Extremities portfolios. So we're looking for U.S.-based companies, at least from a technology perspective; and second, also from a sales perspective. All those initiatives, we expect a quadruple of our current sales until the year 2024 in the U.S. Our third priority, we have consistently developed our products and systems in-house, with a strong focus on plates and screws, and added some staples. We are going to continue to focus on our core competency, but we are organizing ourselves in such a way that we can reduce the go-to-market time for line extensions to 4 to 6 months; and for the launch of new systems, less than 24 months. We have a couple of systems that demonstrate the capability of the organization. The CCS extension screws will be launched in May, with a full launch in June, which is less than 5 months development time. Also the spanning plate that I've referenced before is an example not only for a U.S. product but also for a product or a full system that has been developed in less than 24 months. But we do not want to limit ourselves to the internal capacity. We're also going to extend our innovation efforts by undergoing partnerships, especially when it comes to complementary technology which goes beyond the screws and plates. Also in these partnerships, we strive to innovate and develop products within less than 24 months. And we have now, the beginning of the year, signed 2 projects, which are now underway in partnerships in complementary technologies. Our third pillar for innovation is M&A. As I mentioned before, we're looking for U.S.-based companies, upper, lower extremity technology with the potential to become standard of care in the future. We have looked at and are working on a long list of 200-and-plus companies, and we have engaged in 5 due diligence at the time. So what are the results that those 3 priorities are expected to drive? We expect for 2020, and that's our guidance, a continuum of the growth on the level that we have seen for 2019, which is 10%, at a stable EBITDA margin of 15%, which is based for that those 3 initiatives will have a limited impact in 2020 but will set us up on a strong basis to accelerate growth into the coming years. In the midterm, we expect growth beyond 15%, with a gradual increase in the EBITDA margin. Our growth investments are, first priority, the U.S. business buildup. Now the investment cycle for building up the subsidiaries in China and Japan are coming to an end this year. We continue to invest in the portfolio extensions and in the partnerships and potentially into M&A. Let me comment quickly on our investment criteria. We focus on additional solutions for existing customers, for existing surgeons, focusing and being -- becoming specialized in the extremities business. And from a financial perspective, we want to be accretive to growth and margin over maximum of 5 to 8 years, which is depending on the pipeline and technology, we're looking at more towards 8 years. If it's a more common technology or includes an existing portfolio that is already being sold, it's going to be at the lower end of maximum of 5 years. On our path to become a global extremities company, we are launching this year a series of key systems for us, which includes the forearm fracture system, which is in full launch in June. The clavicle system, which complements our shoulder portfolio, will be started in a limited release in June as well. I've already mentioned the CCS compression screw extension will launch in June, full launch. And we are already in a limited release of our mid-foot correction auto system and our distal ankle fracture, trauma system, which is going to go into a full release worldwide in July. The ongoing introduction of the new CMF MODUS 2 system is going to be complemented by a 3D planning software and cutting guides in April as well. If we look beyond 2020, in innovation, for us, we're going to continue to build the portfolio, a comprehensive portfolio going beyond just screws and plates for the extremities, with a special regional focus on the U.S. And we're going to partner for complementary technologies with specialized companies, looking into building and expanding our core competence beyond just plates and screws. Let me come to the summary and outlook. As a summary. We continue to execute our growth strategy. We're going to continue to invest building our business. In 2019, we achieved a solid growth of 10% in local currencies, above market levels, and an adjusted EBITDA margin of 15%. We have set clear midterm priorities, enhanced sales focus in addition to our technology and innovation focus, accelerate the U.S. business and accelerate our go-to-market and pipeline strength. The 2020 outlook. For full year sales, we expect 10% growth in local currencies, considering the mild winter with lower case numbers, and an adjusted EBITDA margin expected around 15%. The cash flow will be reinvested to drive further growth. This brings me to the end of today's presentation. And Dominique Leutwyler and I are now happy to take any questions.

[Operator Instructions]

So maybe I can first take the question that we have received from e-mail from Bryan, Garnier. We have received 3 questions. The first one, can you help us understand your tax expenses of this year and give us more color about what we should expect in terms of the tax rate going forward? The second question, in terms of EBITDA margin guidance for 2020, given that your EBITDA margin reached 17% during half year 2019, shall we have to consider that 15% target is conservative? Or does it implies your willingness to invest significantly? Finally, regarding M&A, can you explain us what will drive your acquisitions? Is it the technology that is missing from your current portfolio or a way to reinforce your sales force in the U.S.? I will take over the first 2 questions and will give to -- the third to Christoph. About the tax rate: Our tax rate as with this closing is 49%. The main influence there is the deferred taxes that we have different to the prior year. Going forward, including the tax changes that we have here in the region of Brazil, we are expecting a tax rate of 17%. In terms of the EBITDA guidance, we are expecting that the 15% is a reasonable target. Our invests from the cash flow are going to support the current business. And we are expecting, as mentioned, a continued increase over the years of this EBITDA number. I will give over to -- the question about mergers and acquisition to Christoph.

Thank you, Dominique. The question regarding M&A: We are certainly looking in first priority for additional technology which complements the portfolio. So it is the idea to give a complete portfolio to our sales rep as normally, especially in the U.S. The sales rep is covering about 75% of the cases. So it is important that the sales rep has the entire bag that the surgeon needs, covering the entire operation. So first is technology. And the second criteria then, of course, is establish sales. And if needed, we will certainly also take and consider additional sales force in order to expand our U.S. sales force. Do we have any other questions?

No.

[Operator Instructions] There are no more questions, so far. Any e-mails?

No.

Okay. Okay. If there are no more questions, I would like to thank you all for your attention and interest in our company. Thank you all again. And in case of questions, do not hesitate to contact us. And with this, I would like to close for today. Thank you very much.