Medartis Holding AG (MED) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the publication of half year results 2022 conference call and live webcast. I'm Alice, the Chorus Call operator. [Operator Instructions] And the conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Fabian Hildbrand, Head of Communications. Please go ahead, sir.

Thank you, Chorus Call. Good morning or evening, ladies and gentlemen, and welcome to this audio webcast on the Medartis 2022 half year results. We appreciate that you have taken the time to dial in despite your busy agenda. I'm joined by our CEO, Christoph Bronnimann; and our Chief Financial Officer, Dirk Kirsten. We will use the presentation slide deck, which was published this morning on our website, together with our press release and, of course, our half year report. On the following slide, you can see today's agenda. At the end of the presentation, we will look forward to answering all your questions. We will start taking questions from attendees on the phone, and then we will move seamlessly to the webcast participants. And with this, I would like to hand over to Christoph for his opening remarks and the key highlights of the first 6 months of the year. Please, Christoph.

Thank you, Fabian, and good afternoon, everyone, on the phone and in the webcast. Really looking forward, and thank you for taking the time to joining us on today's call. Let me start with the key facts and figures on Page 5. We have closed our H1 with CHF 88.4 million, which is a growth of 20.1% in constant exchange rates versus prior year comparable period. The underlying EBITDA margin resulted in 16.3%, and our headcount has grown to 832, which is a plus of 8, 28.2% versus prior year, which also includes the NSI employees that joined in May, which were 98 headcounts. Going to highlight on Page 6. I'm very pleased and particularly pleased with the performance in EMEA and our Lat Am business, especially that all markets in the EMEA region have recorded strong double-digit growth, meeting or exceeding our expectations. And we have gained market share in all of our business line, which is equally important. The APAC region was the region that was most affected by COVID still in the first half of this year. Particularly the lockdowns in Japan and also the restrictions of the elective procedures in Australia and New Zealand have resulted in a gap versus our expectations. We continue to see shortages in the overall staff, mainly driven by COVID infections or isolations, which results in cancellation of cases, most of them elective, which applies to almost all the countries on a worldwide basis. Following our strategic review and the assessment of the Chinese market and our Chinese -- the U.S. market did not perform to our expectations -- to our internal expectations. We have lost some of the growth momentum that we had during the initial phase of the integration of NSI. But also keep in mind that at the same period of this year, the U.S. market has grown at a very high level of 46% on constant exchange rates. I'm very happy and pleased with the new management team that has taken over, and we are very confident that I will get back to you on the rationale. I am confident to regain the sales momentum in the course of the second half of this year and beyond. Based on the U.S. and also Australian shortfalls in the first half of this year and despite the anticipated acceleration, especially in the U.S. market, we have also slightly revised our full year 2022 outlook. The next page gives you an overview on the development of our headcount, which has strongly grown mainly through the acquisition of NSI with 98 employees. But still in the first half of this year, in a worldwide basis, we have hired 85 additional employees. Most of the investments done in the market, the headcount in Switzerland has slightly grown to 284. With those opening remarks, I would like to hand it over to Dirk to guide you through the financial business review.

Thank you, Christoph, and good afternoon also from my side. Let me give you an overview on the regions and the segment phase before going into the full P&L and the cash flow. Page 9 gives you a summary of our year-on-year sales development. As you can see, net sales rose to a level of almost CHF 90 million, which is 20% more at CER levels versus prior year. With that, let me directly go to Page 10, summarizing EMEA and APAC. In EMEA, I'm very happy to present a very strong performance from the entire region. EMEA reports 21% growth for the first half of the year. This has been achieved by delivering double-digit growth from all direct markets. Specifically, strong year-on-year growth came from the U.K., and France after H1 '21 have been materially affected by COVID in both countries. Germany, our largest European country, was once again growing consistently despite mild winter, and thus, less trauma business in Q1. It has further fostered its market leadership in upper extremities also by strongly pushing KeriMedical products. Spain, on the [indiscernible] the U.S. hospitals. The lower-than-expected sales momentum is also due to the transition phase in which the U.S. currently is. As already stated, after the acquisition of NSI, a new leadership team has taken over and realigned some responsibility for the organization. At the same time, new management strongly supported by the CEO personally have done extensive traveling throughout the country and visited customers and KOLs to explain the new U.S. strategy, which will shortly include the launch of several NSI lower extremity products. First clinical cases have been conducted as part of the limited release with excellent search and feedback. The full launches of Lapi Guide and CalcShift are planned for Q4 and are expected to generate sales as from '23. The new team will systematically expand our own franchise and invest in onboarding of new independent sales agents. Together with our own sales force and the improvement of sales execution and productivity, we expect to reaccelerate our momentum already this year. We remain very confident regarding the growth potential ahead of us in the single largest market. Page 12 shows the performance of this segment. As you can see, upper extremities is still the largest product segment for Medartis, which will change specifically in the U.S. after the acquisition of NSI. We've grown at similar growth rates for upper and lower extremities across all countries. In hand and wrist, we've clearly gained market share, especially in Europe. KeriMedical products were systematically leveraged by our German, Austrian and recently also the U.K. franchise. Our newly introduced clavicular system is also making good progress in various countries. The progress of these products shows that Medartis can even hold its high market share by delivering new innovation to our existing customers. Lower extremity growth was slightly behind our expectations in H1. Reason for this is the ongoing OR restrictions for elective procedures due to capacity shortages at many hospitals. This was specifically tough in Australia. It was also observed in many European countries as well as in the U.S. It affects our lower extremity business more than the upper extremity business as lower extremities are most driven -- or more driven by elective procedures. Nevertheless, we remain confident on the growth potential ahead, specifically in the U.S., where we will launch shortly NSI's new innovation. We intend to be systematically momentum in this very sizable market. The other business segment has mathematically grown 44% CER. This also includes the legacy business of NSI, CMF and our screw business, which is including -- included in this category as well, grew solidly in the reporting period. Nevertheless, also CMF was somewhat affected by hospital capacity restrictions. In Japan, our MODUS 2 launch was successfully introduced throughout the year and has won strong initial market appreciation. With that one, let me move to Page 13. Our reported gross margin was 83.7% in H1 '22, which is the first glance looks unchanged versus prior year. However, this year's margin was temporarily diluted by the initial consolidation of former NSI and also by China exit-related product returns. Excluding these effects, the underlying gross margin improved by circa 60 basis points, mainly through higher product -- or production efficiency. The country mix impact was negative as countries with specifically high margin, for example, Australia and the U.S. grew below the average. This should revert in a future again. On Page 14, we find some information on our OpEx development. Medartis has established a clear cost management program already during the difficult COVID times, this program has been maintained until today. On the other hand, we have intentionally continued to invest into markets, which, during the COVID crisis, needed to reduce their customer activities. In Europe and Lat Am, this spending has been rewarded with very good growth. In Australia, we're convinced of the recovery to come, and therefore, didn't slow down spending so far. Some countries, such as Germany, for example, are already very efficient and are delivering rich profitability. Other countries being younger with the Medartis portfolio, for example, Spain or Japan, has still relatively high OpEx rates relative to the smaller side. If you exclude the U.S., the aggregate of all of our countries delivered a contribution margin of somewhere around 40%/45% of sales. Almost all of the country costs are related to sales and marketing, training and education. These ensure G&A is kept at lowest levels wherever possible. The U.S. is currently in a specific situation. First, we are expanding the organization to fuel our anticipated growth. This is increased costs for sales management, marketing and logistics. In addition, our '22 spend level is higher as it includes also cost of product development, regulatory, quality assurance from the former NSI. For an interim period, the combined cost base is too high on a relative basis in sales. However, once the absolute sales that is revised, we will have implemented some efficiency gains from the combined U.S. organization, margins are expected to normalize also in the U.S. again. First half of '22, we additionally had to book some extraordinary costs, which are related to the M&A transaction and the technical NSI implementation. These costs are for legal, for financial audit, IT and similar. We expect that most of these transaction-related costs have called through the P&L and will not materially increase in the second half of the year anymore. And as a result of all these points, our regional costs have increased CHF 11 million year-over-year at the same time. And with the exception of R&D, all of the central costs have been kept on the same level or even slightly higher or lower. If one excludes the NSI specific factors and it also takes off some China-specific exit costs, our year-on-year OpEx ratio was almost unchanged versus prior year despite higher absolute spending in all regions. On Page 15, you see how the aforementioned gross margin development and the OpEx management came down to an EBITDA level. Our reported EBITDA was CHF 9.9 million for H1. EBITDA margin as reported was 11.2%, about 600 basis points lower than last year CER. This is in line with our guidance, which we have given earlier this year. As mentioned before, the year-on-year variance can be fully explained by the NSI direct cost as well as the NSI-related transaction and integration costs. Like-for-like, our underlying core margin was 16.3%, including, and even 17.3%, excluding China. The latter is almost the same level at CER as in H1 '21. And now moving to Page 16. The aggregated financial result was 0 for the first half of the year. We still reported some asset gains despite FX headwinds, mainly driven by a weaker euro. However, our interest expense has increased in H1 '22 and are expected to further increase for the next 3 years. Background for this. It's a transaction structure of NSI, which includes the so-called contingent liability for future milestone payments, this liability gets discounted, and noncash interest expense go through the financial results. After-tax, which this year also included some deferred tax elements, we reported flat net profit for the first half of 2022. Besides the impact from the financial results in tax, the balance of this last year's net profit can be fully explained by the recent NSI acquisition. My final slide is on cash. As you can see on Page 17, cash has come down to CHF 33 million at the end of June. The main variance is '21 year-end comes from the cash outflow for NSI due to increase slightly our stake in KeriMedical, of which we hold almost 30% now. Next to this M&A-related cash outflows, we continue to invest in inventory and debt also to hold or even increase our customer delivery promises in times of increasing supply chain challenges. This and a temporary increase of account receivable have led to a higher cash outflow from operations. We aim to revert this number to a positive result as from '23, which together with our existing cash reserves and some existing credit lines fully backs up the planned growth ahead. And with this, let me hand back to Christoph again.

Thank you, Dirk. Let me comment on the outlook for the update on the '22 priorities and then to the outlook. And important that our strategy and our key priorities 2022 remain unchanged. We continue to play in a very attractive market that is expected to grow 4 to 6 percentage points per year, mainly driven by demographics. Medartis still aims and has the ambition to position itself as a CMF and pure extremity play company that differentiates itself through innovation and technology. We're focusing on becoming the innovation leader in key indication while we also address the reach and needs in our solutions and technologies, investing and continue to invest in the expansion of our sales force and in the training of our sales force to deliver high-quality service to our surgeons, and targeting investments in key markets or investments in key indications with a high potential, which leads to the priorities that we have set as innovation, the acceleration and the broadening of our R&D platform, top line growth and winning in all our business segments in all our markets with the priority on the U.S. market, and third, the cultural journey to build, as we believe, a strong foundation for the mid- and long-term success of the company. Some selected highlights and priorities in the second half year, we have started and made some first clinical experiences with the disposable Lapidus Cut Guide that received excellent feedback from the first clinical cases, mainly in regards to accuracy and efficiency as it allows the surgeon to continue with this procedure without any changes. We focus on growing market share on the recently launched products, mainly clavicle, ankle trauma and also the CCS screws. And we're very pleased also that we have reached now the EU MDR certification and in the meantime as well the certification for the newly established UKCA certification as a result of the Brexit of U.K. We are also rapidly expanding our digital CMX platform with the launch now of the orthognathic and distal tibia osteotomy indications and also looking for the better launch to start in the second half year for the LapiPrep and also the StealthFix. In product development, the collaboration between Basel and Warsaw has already started to yield some synergies. We have spent times together with both teams to consolidate the pipeline, the project road map. And I'm stunned and very pleased with the number of innovation projects that we are being delivering to the market over the next 12 to 18 months. The collaboration between Warsaw and also Basel has yielded synergies in terms of leveraging technology competence, competence indications. And the collaboration drives an innovation fund, which has been significantly enlarged. During the second half year, we are expecting to continue the better launch and then going into the full launch of the Lapidus Cut Guide. And as I mentioned, the better launch of the StealthFix, the LapiPrep and also the CalcShift, which we will gain some first clinical feedback on some of the key technologies that we have been acquiring through the NSI acquisition. On Page 22, we have spent quite some time in the initial phase of the integration to bring both organizations, the former Medartis and the former NSI organization together under the leadership of Rod K. Mayer, the former CEO of Nextremity. We had an opportunity to assess the talent that we have in both organizations. We have appointed new leaders, and we have built capabilities in almost all functions. And I must say during my travels and interaction with both teams, I've been impressed by the talent and also by the motivation that both organizations bring together. For the integration going forward, in the U.S., we are focusing on the organization development, commercial activities and the operational processes. Going from left to right in the organization development, of course, it's testament of the people, the talents bringing and onboarding of the new management and the NSI team, but we are going to continue to expand our sales network. And we have built some additional capabilities, especially in the marketing and in the commercial activities. In '23, the focus will shift slightly towards an improvement of the cost efficiency of the North American organization, will further improve the sales execution and sales force productivity, and accelerate and continue to accelerate the innovation process to faster deliver innovation in our innovation fund to the market. The commercial activities, Lapidus Cut Guide is in the preparation for full launch. We have also received FDA clearance on the KERIFLEX, that's one of the joint prostheses in the finger for the finger joints that is now also approved for marketing in the U.S. This launch is planned for the fourth quarter of this year. We are also expanding and focusing on expanding our contracts, especially with larger health care institutions across the U.S. market. In '23, we will be fully dedicated and focused on the launch of the foot and ankle product pipeline, as I mentioned before. We have invested and will continue to invest and leverage the training and education of our sales reps and our surgeons, mainly focusing on fellowship centers and align the education and professional education activities with IBRA. In the operations and process, we continue to work on the integration, especially IT, the ERP system, bringing together the regulatory and quality processes and talk on NSI to the Medartis supply chain network, which are important prerequisites for the launch of the products then beginning of '23. The ERP integration in '23 of manufacturing will basically be an integration of the third-party manufacturer Lakeland. And we've also designed a know-how transfer to start the design transfer for the local production of domestic plate and screw production earliest in '24 in Warsaw. On the next slide, you can find an overview of the U.S. market opportunity, which accounts for about USD 5 billion. The total market that we are playing in amounts to about USD 11 million. On the left-hand side, the breakdown in the U.S. upper extremity market accounts for about USD 3.7 billion market. The shoulder part includes also the shoulder arthropathy, which is the biggest part of the upper extremity market in the U.S. So our focus will be to gain -- continue to gain share, especially in the hand and wrist, but also in the elbow segment, where we have a competitive complete portfolio, where our focus will be to continue to build the sales and expand our sales network and increase our training and education activities in order to drive the market share gain in the upper extremities. The lower extremity market accounts for about USD 2.2 billion. Our focus in the lower extremity addressing this market will be continuing to build sales force, launching the new NSI technologies to complete our lower extremities portfolio, focusing on key indications like fracture fixation, hallux valgus/bunion, flat foot, and over time, also hammertoe. I have spoken about my confidence of accelerating and regaining the sales momentum in the U.S. I would like to comment on why and where I built my confidence on. First of all, I'm impressed by the leadership team that has taken over. They have assessed the roles and responsibilities, and we have also done an assessment of the leadership across the organization, also addressing underperforming and strengthening our commercial capabilities. Rod has clearly shifted the focus and sharpened the focus on sales execution. By reviewing the performance of the independent sales network. We have made some changes in the independent sales network. We have partially aligned, but also continue to onboard new fully dedicated independent agents in order to continue to build our network of sales independent agents. We have also started to focus on the sales productivity and surgeon conversion. So the team has clearly sharpened their target list for surgeon conversion given -- led by the priority indications that we have. And we also have set large -- made large investments in the rollout of additional sets, which we expect to be delivering and supporting the growth and acceleration in the second half year of this year. And when we look at all the leading KPIs, I think Rod and the team are working on the right levers. They're all pointing in the right direction. And this is the foundation of my conviction that we will see the acceleration to our expectation in the second half year in the U.S. market. Let me talk about the culture journey. We have now rolled out and -- our modified values, which start that everyone counts that we embrace a collaborative and inclusive environment, foster and eager to learn environment by learning not only from experience and from each other, but also learning and bringing new capabilities into the organization, excellence in our DNA in terms of technology and high-quality solution. Speed and agility, we want to remain that we can adapt flexibly to the environment and that we keep a high sense of urgency. And the fifth value is make it happen, leaving a can-do attitude, maintaining our entrepreneurial spirit as we grow the company. Those are the 5 values that we build the entire culture journey on it where we have rolled out and started to have the same terminology, what and how do we understand our values, how do we live our values. We have started to roll out tools supporting learning, giving feedback and also coaching. And we will incorporate all those values also all the way from the hiring, the onboarding of employees, the development of employees during the time at Medartis, and we will also link it to the performance management, so that we have a building that we built a strong growth mindset and the high-performance culture within Medartis. And this is what we believe is the basis for our mid- to long-term success. The outlook in '22. We have slightly modified and changed our outlook, which is basically due to the gap that we have seen in the U.S. market and the Australian market due to COVID. And given the economical environment, we feel that despite the acceleration that we expect in the second half year that we'll reach the run rates that we have planned for this year we believe that we may not be able to compensate the gap that we have experienced now during the first half. And this is the reason why we have slightly adjusted our guidance for a full year sales growth at constant exchange rate in the high teens range. We plan to optimize and adapt our cost structure to the reduced top line. And the lower sales level will impact reported and underlying EBITDA margin by about 1 to 2 percentage points. In the medium to long term, we still believe and hold up to our plans that we have communicated earlier in terms of growth and also profitability. With that, I would conclude my presentation, and I would suggest we open it up for Q&A.

Thank you, Christoph. Thank you, Dirk. It concludes the presentation part. As customary, we will now first answer the first question from the webcast line and then transition to the telephone line. [Operator Instructions] So operator -- or because we established the web implies a slowdown. So as we bring down the guidance from 20% to 17% to 19%, the high teens, while at the same time, and Christoph elaborated on that, we see a positive momentum in the U.S. coming through in the second half of the year. What are the underlying assumptions?

Do you want me to take up this question?

Yes, please.

Thanks very much for the question. It's Dirk here. I think you should distinguish between absolute and relative. The absolute sales, we are planning for same or even higher run rate for the second half of the year. So we're increasing. Relative sales, please keep in mind that the second half of last year was a much stronger comparison based in the situation in H1 last year where it was very affected by COVID. And then that normalizes towards the second half of the year, which means technically speaking and on CER terms, year-on-year percentage points, the growth from a comparison basis come slightly lower. So this is the explanation for it. And it's due to Europe, it's Lat Am. On the flip side, we see upside from the U.S. Christoph has talked about it where we think that run rate will increase significantly, and we also do have a little bit of upside potential from Australia because that was already affected in the second half of the year last year. So I hope that explains the question.

Thank you, Dirk. The next question comes from Dylan van Haaften from Bryan Garnier. Actually has 2 questions. So let me start off with the first one, and that's there's a technical part and business-related part, which I would like to address this crystal. So on the CMF business, on our Craniomaxillofacial business, is it right to assume that there's an elective backlog through the COVID phase? And as we enter the more normalization phase, will that stimulate the growth in the future period? And then, Dylan, for the related question to this particular half year, the first 6 months of the year, you should bear in mind that the growth rate actually was also driven by -- because the line is called CMF and others, and we booked a CHF 1.5 million contribution from NSI into that line. So on a reported basis, in -- at constant exchange rate, growth was 44%. On an organic basis, or excluding NSI, was 28%, but still above the group level. Christoph, what do you see in the business for CMF?

Well, I take the CMF part. It's true that we have certainly last year seen that CMF was almost a business unit most affected by the elective procedures. So therefore, the comparable basis is certainly a smaller one. So there is some pent-up demand on a lower basis that drives the growth this year in CMF. What I would also would like to mention CMF is we are now in the rollout phase of MODUS 2, which drives growth in the markets where we had started last year, which is mainly the tough markets. And in addition, we have also started with CMF in Japan with a new distributor, which also adds to the growth. So overall, it's a combination of pent-up, but also entering into new markets and the launch of MODUS 2.

Thank you, Christoph. And the first question from Dylan is related to also the momentum and the phasing throughout the year. So if you look at the growth trends and the adjustment growth outlook that we communicated this morning, can you read into this that we have seen some weakening in the exit rate in June, July? Dirk, Christoph, who wants to answer the question?

I can answer very shortly. No. We're not seeing any softening in June, July. I would even say the opposite that the first signals, which we get out of the U.S. now on the late summer are positive. That makes us confident.

Okay. And maybe, Christoph, do you think that the COVID stuff-related shortening or the backlogs that we have or the lack of personnel in ORs, is that going to last? What's been in your assumption for the guidance?

Well, unfortunately, I afraid COVID is going to remain. And we will see personnel shortages in the OR going forward. We have built -- and we expect actually that Australia now comes out of the more restrictive environment so that more and more electives will be done as well. I think that's certainly the upside. But I think going forward, we will see postponements of cancellations of ORs due to the staff restrictions, but maybe also due to patients being sick. So I think there will be a continuation of the situation as it is.

Thank you, Christoph. Just looking through the Q&A line. There are no more questions from the Internet. Maybe Chorus Call, can you remind people how to ask a question through the telephone line? .

[Operator Instructions]

We understand this is a very busy day with several companies reporting at the same day, even some at the same time. We'll wait for another a few seconds and see if there's any other questions coming through. Otherwise, we will -- yes, there's another question from -- yes. Good morning or good afternoon. [ Edouard Riva ] from the Zürcher Kantonalbank, ZKB. I'm reading off his question. So could you give an update on the number of the sales reps hired in the U.S. in '22 for 6 months?

I think as we shared in the full year presentation of last year, back in March, we have reached a sales force in the strength of about 160 sales reps in the U.S. The goal of the plan is to slightly continue to expand it towards roughly [indiscernible] new independent agents, but we are on track on our plan.

Thank you, Christoph. Maybe the next question for Dirk. How much does China represent in your APAC segment? How much revenue do we generate in China?