Medartis Holding AG (MED) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the full year 2023 Results Conference Call and Live Webcast. I am Moira, 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 Corporate Communications. Please go ahead, sir.

Thank you, Moira, and good morning or evening, everyone, and welcome to this webcast on the Medartis 2023 full year results. We appreciate you taking the time to dial in. As usual, I'm joined by our CEO, Christoph Bronnimann; and our CFO, Dirk Kirsten. As customary, we will use the presentation slide deck, which was published this morning on our website together with our press release and our integrated annual report. In particular, I would like to draw your attention to the disclaimer on the Slide 2 regarding forward-looking statements. On Slide 3, you can see today's agenda. And at the end of the presentation, we will look forward to answering the questions you might have and do an active participation. And with this, I would like to hand over to our CEO for his opening remarks and the key highlights of the year. Christoph, please go ahead.

Thank you, Fabian, and good morning, everyone. Welcome, and thank you very much for taking the time to join us on our full year 2023 presentation of Medartis this morning. It is my pleasure to announce that the full year 2023 was a successful year for the company. We have delivered on almost all of our strategic priorities, delivering innovation to the market, reaching profitable growth and also protecting our gross margin. We have achieved a total net sales of CHF 212 million, which is a revenue growth of 12.5% at constant exchange rates. Our largest region in EMEA was the key growth contributor, while the U.S. was the fastest-growing region. Excluding the NSI third-party manufacturing revenue, the internal sales growth was 17.4%. The underlying EBITDA margin increased strongly by 3.6 percentage points to 15.9%, as also the gross margin improved in the second half of 2023. The strong results in 2023 make us optimistic for the coming year. On the next slide, I'm pleased that we not only achieved a strong internal growth at the upper range of the guidance, but gained market share in all the regions and business segments as well as substantially improved profitability and cash flow. Our KeriMedical business, which is mainly the TOUCH prosthesis, continued its growth trajectory and doubled again in '23. It develops into a significant growth driver and accounts for almost 20% of our business in those markets where we distribute the KeriMedical portfolio. The EMEA region has exceeded our expectations and surpassed the CHF 100 million mark for the first time. The U.S. organization was strengthened in the area of sales support, training, education, and we have continued to expand the sales network for the upper as well also for the lower extremities. The APAC and Lat Am region are further gaining market share in all segments. Australia, however, had to absorb the authority imposed price cuts. Brazil was a bit soft as an isolated market, but we have achieved, again, a strong growth in Mexico and the distributor markets performed very well and compensated for the entire region. The opening of the IBRA Institute in Basel in the third quarter of last year has marked a milestone for training and education for us. Last but not least, we have made progress also in our culture journey and I was proud to see that Brazil and Mexico have reached the certification for the Great Place to Work. We have continued to build our momentum in the U.S. market. The key factors were the sales expansion or the sales force expansion, existing and new product portfolio, which we have gained market shares. We have onboarded 11 new distributorships across 6 states. Their revenue contribution is indicated in the yellow line in the chart on the left side. The distributors that we have onboarded the year before in '22, indicated by the light blue line in the chart, accelerated in '23 and the share of growth of our new distributors, which we have onboarded over the last 18 to 24 months, has now increased to a share of growth of 30% almost. I'm optimistic that the sales force expansion will continue to accelerate our growth in the U.S. also in this year. With the expansion of the sales force, we have intensified our training efforts and we'll continue to invest in training and education for our sales reps and U.S. surgeons. Our key segments in Hand & Wrist has grown in the high 20% range, also, the successful CCS product group has posted strong growth. The lower extremity business has also developed very well. However, the complexity in training efforts for the treatment of the Hallux valgus with the Lapidus procedure with our new jig system has been underestimated. We are in the execution of the national HPG contract, which provides access to more than 3,000 ASC and hospital facilities, and we expect the contract to continue to support our future growth. Also, we have initiated our production technology transfer to Warsaw, and we have produced our first Medartis screws in Warsaw locally in February of this year. With these opening comments, I will hand it over to Dirk, our CFO, for the operation and financial review. Dirk, please?

Thank you, Christoph, and good morning, everyone. Before I start with giving you an update on the regions, here are the financial key highlights for 2023. Christoph has already mentioned, we grew 17.4% in our core business, which reflects market share gains in all regions. Our core gross margin is almost 83%, which is unchanged strong. The reported dilution comes from opportunistic third-party manufacturing. The OpEx ratio has been improved back to levels before NSI acquisition, mostly generated by headquarter cost discipline. The reported EBITDA margin is at 15% or slightly upper, which is at the upper point of our guidance. Last but not least, the balance sheet has been improved with respect to the employed capital, and as a result, the cash flow before M&A and financing was positive for the first time since IPO with only one exception. I will give you more color on these financials later. Let me now first give you an update on the regions, moving to Page 11. In EMEA, we grew, once again, circa 20% in '23. Remember, for 2022, I showed you 17% CER growth. And for '21, I showed you 22% CER growth. Europe continuously holds and further builds the momentum year-by-year. For '23, the very strong growth from Europe comes jointly from all countries. The German-speaking countries, although having market share in distal radius of above 30%, while growing in the mid-teens, fueled by own products, but also by KeriMedical. The U.K. grew in the high 20s. France grew in the low teens but about 2 to 3x of the market. The relatively smaller businesses in Spain and Poland grew massively again and are now starting to gain weight in the European portfolio. This all was additionally supported by strong distributor growth of above 30%. This stunning top line performance was above our own budget expectations. And in early '24, we see that this is continuing and the momentum is still -- was again, very strong. In the U.S., we grew 21% in our underlying business. H2 was in line with H1. During '23, we have continued to optimize our existing sales channels and also reviewed some distributor relationships based on their prior performance. This process takes time but we have made a major step forward over the last couple of months. We have invested in product experts, training and education to support our internal sales and independent agents growth. In Hand, we grew 20%. In Foot, we even grew 30%. First sales have been generated with the new NSI products. However, we did not just push this innovation into the market but followed a slower, more training based approach. More visible uptake is expected during '24, which also gives us confidence for our U.S. growth plans. In the first 2 months of '24, the U.S. had a very strong start again and as of February, we had 99% on track of our budget. Now Christoph will certainly give you more insight into our thoughts and initiatives with respect to the U.S. later. APAC may look disappointing at a first glance, but we mentioned already in H1 '23 and even in for year '22 that the Australian market has faced mandatory price cuts of about 15% so far. Another general cut of 5% is expected this summer, and in addition, some products were reclassified by the authorities and prices will have to be reduced even more. You can imagine how challenging the situation is for our team as the value growth achieved was only low single digits. However, the underlying volume growth in '23 was about 16% to 18% across all products. The team won further market share. In order to compensate new pricing realities we have started to make some costs more bearable and also change towards a hybrid business model with own sales reps and independent agents. Australia remains one of our top 5 countries worldwide and also here, they're generating good growth also with the Foot and Ankle portfolio. This makes us confident going forward to visit the goal again, once the upcoming price cuts have fallen to our P&L during the next 12 months. At the same time, we are building continuously our business in Japan. We will also enforce our presence in upper extremities during '24. According to Japanese market expectations, our product portfolio offers also increasingly sterilized solutions. '24 will be an important year for us to execute our ambitious growth plan going forward. And to round up the APAC distributor markets have reached strong growth again. To conclude on the regions, Lat Am has grown circa 20% in '23. While we appreciate this growth, we had to accept that Brazil was behind plan, mostly due to delayed registration from new products. The regulator on Visa changed their processes and as a result, some registrations have been delayed for 12 months and more. We're expecting these to come only in Q3 this year. As a result, the Brazilian growth has temporarily dropped back to low teens. On the flip side, Mexico showed very nice growth above 20%, and the distributor markets grew even above 40%. Such as APAC, the Lat Am region remains an important growth driver for us going forward. On Page 12, we have updated you on the '23 growth per segment. Please note that the lower extremities has been growing more than 30% and thus double than our traditionally strong upper extremity business. The latter, which already existing very strong market shares has been supported by our partner products from Keri and Field Orthopaedics. Both product lines are fully integrated into our existing comprehensive portfolio. Especially the partnership with Keri is strategic for us as we intend to further increase our stake into the successful company. In lower extremities, we just recently launched a variety of new products for foot. In addition, the portfolio from former NSI will be systematically introduced to the American market. As lower extremities is more elective than upper extremities, our portfolio should get more and more balanced and risk diversified going forward. Elective procedures are better plannable both from a resource and set management perspective. This should also allow us to improve our costs and capital efficiency going forward. Not to forget, CMF with 15% year-on-year it supports the over-group growth, MODUS 1 has been readily replaced by the new MODUS 2 in many European countries. In Japan, we already had introduced MODUS 2 last year. In the U.S., we are not selling CMF yet. Finally, in Lat Am, we will continue to sell MODUS 1 until 2025. Now moving back to the P&L, starting with the gross margin. Slide 13 highlights that the core margin, gross margin from our own products increased to almost 83%. In H2 '23, it was even strengthened as we were able to increase prices in some countries and compensated for the adverse effects in Australia. Our sales from Keri products have a small, diluted impact on the overall gross margin. This has been more than compensated by significant efficiency gains in Basel manufacturing in the second half of the year. During '23, we generated higher-than-planned sales from the third-party manufacturing products in Warsaw. While these products are dilutive to our overall gross margin, we accepted additional manufacturing orders to fill our existing capacities. In late '23, the first Medartis owned screws were produced in Basel. This is an important milestone and now allows us to gradually increase manufacturing volumes with our own products. I guess, in 2, 3 years, the dilution from Warsaw should mostly disappear. In the meantime, we'll keep our focus on stabilizing or increasing our core gross margin in both plants. On Page 14, you see the efforts of our cost management during '23. As you can see, we were able to bring down the overall OpEx ratio from 83% to now 75%. It is now back to levels before the NSI acquisition, already one year earlier than originally expected. Most cost improvements come from rigorous saving discipline in headquarters, while the regions continue to invest into customer-facing activities. After the NSI integration, the U.S. also started to become more cost conscious. However, at the same time, enforced their strategic investments into channel building, marketing, medical education. Only once we have achieved our sales milestone of USD 80 million at the end of '25. We will shift towards more emphasis on the cost efficiency. Just to give you some figures on the potential here, if the U.S. had generated margins comparable to all other regions, our current OpEx ratio would already have been 5% lower. Slide 15 shows the EBITDA year-on-year improvement or development over the last 12 months starting from '22 and adding back all the extraordinary factors, which were related especially to the NSI acquisition. I think a fair prior year comparison would be 12.3% at CER or slightly higher as reported. During '23, we were able to increase this margin to almost 16%, excluding the formerly reported IT hack in May '23. Unlike some of our dynamic and innovative competitors, we believe that profitability has even become more important in the current financial markets. On Page 17, I've summarized our net income starting from the doubled EBITDA year-on-year minus depreciation, amortization, financial income and tax. While the tax rate on the operating profit remains low, financial expenses have been high again been affected by approximately CHF 4.5 million mostly unrealized FX gains. Just to explain these numbers, I have more than CHF 200 million, CHF 250 million intercompany loans in the group. This is to finance accounts receivables, sets anothers. If the U.S. dollar, the euro and also the yen and the Australian dollar have an average weakening of 7% to 8%, you can easily calculate the FX risk in the same period. Only prudent FX management made it possible to minimize these losses. In '24, we will review our transfer pricing concept to find further FX risk mitigation potential here. Let me also make some quick comments on Page 18, which is showing you our recent efforts on balance sheet management, including the employed capital. This consists of our inventory level, the accounts receivables and our set investments. All three elements are driving growth on the one hand but they also have a strong impact on the cash flow. As you can see, we have been working on all three levels during the last 12 months. This success is visible. Inventory was reduced by the new COO without creating any back orders. Our set of investments have focused only on where they drive visible growth and our accounts receivables were also collected slightly better than in prior years. All these measures have materially improved our cash flow. As you can see on the next page 19, which shows the result of a combined cost efficiency and capital efficiency, and I'm delighted to report to you that this was only one exception for the first year -- for the first time since our IPO, the group has generated a positive cash flow before M&A and financing again. This could be achieved despite the fact that we continue to invest into sets to fuel growth. We built a brand-new [ cath ] lab in IBRA in Basel, and we have further invested into IT infrastructure and IT security, especially after the successfully defended cyberattack in May. At the end of '23, we had CHF 25 million cash on our balance sheet. The group doesn't have any financial debt, besides stronger operating cash flow. The cash increase versus '22 also results from a small rights issue, which we had done in early March in context with the increase of our KeriMedical Holding towards 47%. Going forward, we are strong enough to finance all operating investments with internal cash flow generation. Of course, if we plan to do any additional M&A, external financing would needed to be considered. And with that, let me close my comments and hand over back to Christoph.

Thank you, Dirk. So please let me update you on our business and our business outlook for 2024. I would like to focus on some of our key success factors, which you see on the left side, which are the foundation of our strategy and also culture. I will elaborate on innovation, our expansion of indications to become the partner of choice for our surgeons as well as training and education. In 2023, the ratio of new product sales as part of our total sales has further increased, which is expected for an innovation-driven company. Also for 2024, we have planned for new product introductions in all our segments. Our first focus is to replicate the success of the Hand & Wrist segment in the entire upper extremities and become the provider of choice. With the launch of the CCS extension in the second quarter of this year and the extension of the elbow system plant for the fourth quarter, we are going to increase our share in trauma indications and hence, have opportunities for cross-selling in especially dedicated trauma accounts. The scaphoid plate are a rather small volume indication but as a specialized company in the hand, we offer now multiple solutions to our hand surgeons for the treatment of this particular fracture in the hand. The launch of the CMX Orthognathic application planned for the second quarter is a significant step forward in the patient-specific solutions for the CMF business, as a speciality Orthognathic interventions are a high-volume indication. This launch will primarily target the DACH and also the French market. The introduction of the new foot and ortho system beginning as we speak in the first quarter of this year, expands our specialty players for mid and high end foot corrections that can also be used along with the LapiPrep in the U.S. market. This launch provides the opportunity to further strengthen our position in the upper limb and providing the foot and ankle surgeons the fixation method of their choice. Let's talk about the bunion jig market. In the U.S., about 450,000 Hallux valgus are surgically treated per annum, of which about 20% or 80,000 procedures outperformed as the more complex, but more sustainable Lapidus bunionectomy procedure. The market is estimated to be around USD 400 million. We still see the trends towards smart instrumentation. It makes the procedure more reproducible and also more predictable as the main driver for the anticipated strong growth [Audio Gap] compression and the first on and last off option is very much appreciated by the surgeon. In addition, our procedure allows the surgeon to choose the fixation method of his preference. However, we have most likely underestimated the training effort that it takes for the Lapidus procedure as it still remains a complex procedure for the surgeons. While we are pleased with the system itself, we're going to increase our focus on medical training and education, starting at the sales reps but also continue to focus on the training for the surgeons. The KeriMedical portfolio has become a significant growth driver in our hand portfolio. Since the distribution start in 2021, the revenue has doubled year-on-year and has reached approximately 20% of the share of our total business in the markets where we sell the KeriMedical portfolio, which is Austria, Germany and the U.K. The main driver, as you all know, is the TOUCH prosthesis for the treatment of the osteoarthritis in the base of the thumb. The so-called CMC-1 arthroplasty provides a highly underserved market with significant potential. While in the age group of 55 to 74, the osteoarthritis is prevalent with approximately 20%. The Trapeziectomy, where part of the trapezium is cut off, is the most common surgical treatment. Joint arthroplasty for the thumb in the CMC joint has proven over time its reliability as an alternate procedure. KeriMedical has a total of over 50,000 TOUCH prosthesis implanted and has longevity data, which is now reaching 5 years that proves the reliability of this procedure. The patient benefits from a more rapidly restored grip strength, mobility and some function while preservation of the thumb length. The history of the CMC-1 arthroplasty dates back into the '70s and further generations were developed back in the '90s. The dual mobility prosthesis of KeriMedical represents the latest and third generation of this type of prosthesis. As many prosthesis have been developed in France and Belgium, the arthroplasty of the base of the thumb has already become the gold standard in those two countries. This means an estimated about 70% to 90% of all the patients that undergo surgical treatment of the osteoarthritis in the thumb will receive an a arthroplasty device in France and Belgium. In all other countries, this adoption rate is significantly lower as displayed in the chart to the right. We currently estimate the adoption in Germany to be around 25%, which means that 25 out of 100 patients that undergo surgery are receiving a prosthesis, most likely a TOUCH as we estimate our market share in Germany around to be -- around 70%. We have experienced a very fast adoption rate in Germany in the CMC-1 arthroplasty. What we see the potential is if we receive -- if we achieve in Germany and other markets like the U.S. as an example, a similar penetration rate like in France, the market volume could easily triple if not increase up to 35-fold, respectively, especially for the U.S. In addition, we see the limited competition in this segment and new indication also presents cross-selling opportunities for our sales force in the upper extremities and hand surgeons costs in the base. In Q3 of last year, we have reached another milestone in professional education and training. We have opened up the IBRA Institute in our headquarter in Basel. In a very short period of time, a total of 39 educational events have been conducted, which provided an excellent training experience for more than 500 surgeons. We have also run several design search and labs, which facilitates the collaboration between surgeons and our engineers and hence, significantly accelerates our development iterations. Please let me comment on our outlook for 2024. The focus area for '24 remains very similar to what they have in this year. Our #1 priority is to remains the U.S. where we focus on continuing to expand our sales channel in the upper but also the lower extremity, which also comes with a significant increase in educational and training events for the sales force but also for the surgeons. We have a huge a potential still in the Hand & Wrist segment, where we focus on driving penetration and market share gain with a very complete portfolio while we continue to build the sales force and expand our portfolio in the lower extremities, especially put in focus on the NSI Technologies. In the Latin American region, we have probably a bit of a backdrop in the new product registration and launches due to a change in the approval process in Brazil. Now we're getting ready and expecting more product registration in '24 than we had last year. CMF, we're still in the transition phase on the old MODUS 1 system towards the MODUS 2 system. As you can imagine or realize the Brazilian market has been a very strong market for CMF for us. But also the first priority is continue to gain market share in the Hand & Wrist segment. In Europe, the priorities, even with a very high market share in the upper extremities, remain on KeriMedical products, drive penetration, especially in the TOUCH prothesis, but also focus now also with the new launches, gaining share and more traction in the elbow and the shoulder segment while continuing to expand to lower extremities and building more dedicated sales force in the European markets. In Asia Pacific, Australia has started to adapt the go-to-market model as a result of the government-induced price reductions, but we're going to continue to focus on driving market share in the upper and lower extremities, and we're looking forward towards the end of this year to initiate the launch of the TOUCH prothesis in Australia. In the Japanese market, the focus is to continue to build up the upper extremities business. Please let me comment now on our outlook. As you may have heard and read that Antonio -- Anthony Durieux-Menage, our CHRO, has decided to leave the company at the end of March. I would like to take the opportunity to thank him for his significant and various contribution. And I'm very pleased now to welcome our new CHRO, Inge Maes, who has officially joined yesterday. Igne has worked previously as Global Head of People and Organization at Sandoz, and was part of the Executive Committee of Sandoz. She brings a broad experience in HR operations, business partnering, has served in various international leadership roles and has a passion for cultural transformation. Today, we're also announcing the change or changes in our Board of Directors. Dr. Daniel Herren has decided not to stand for reelection anymore at the upcoming AGM. And the Board will propose Ms. Martha Shadan and Mrs. Jennifer Dean as new members of the Board. Ms. Shadan has previously served the CEO of the U.S. Medtech company, Miach Orthopaedics and will bring extensive experience in the U.S. orthopedic market. Together with Ciro Roemer, she will support the further expansion of the U.S. Ms. Dean is currently CFO at the Swiss-based medtech company, Medmix. With her wide international financial experience, she will be a natural addition to our Finance and Audit Committee. Based on the strong results in 2023, we are confident also for continuing our strong growth journey in '24. And we are guiding barring unforeseen circumstances and in internal sales growth at 15% -- until 17%. And we are also guiding for a 1 percentage point improvement in our underlying EBITDA margin all at the constant exchange rate. With those comments, I would like to conclude and hand this back over to Fabian.

Thank you, Christoph. Thank you, Dirk. Excellent. We now move seamlessly to Q&A session. We have several questions coming in. As usual, we now first answer the question from the audio participants. We have reserved enough time for all the questions, so please go ahead. And operator, although we have very experienced group on the conference call, could you please remind us on the technical details of the Q&A queue. Please go ahead, Moira.

[Operator Instructions] The first question is from Sandra Dietschy from Octavian.

This is Sandra from Octavian. My first one is on KeriMedical. Can you confirm that the TOUCH prothesis is on track for FDA approval in Q1 2025? And you highlighted the immense market opportunity for TOUCH in the U.S. What are your thoughts on the pace of the uptake in that region? Would you expect a similar pace of adoption as seen in Europe? Or what is the best comparable there? And also, if you could share how you are preparing for the launch, any learnings from previous launches where you have underestimated training efforts that would be much appreciated?

Thank you for the questions, Sandra. At least, I mean, comment on the approval process, it's in the responsibility of KeriMedical but the information that we have it's nothing not being on track. On the potential, yes, of course, that's a market that needs to be built, of course. And I would say the experience that we take is basically the markets that we are active in, it's Germany, it's the U.K. and also Austria. We're following a rigorous training concepts that KeriMedical has successfully installed in France and also Belgium. So we are prioritizing the education over a fast acceleration in the top line. So I would say we're going to be implementing in every single market that we would take the TOUCH prosthesis. And the first one now this year will be in Australia, it will be a no-trade-no-use concept, which means surgeons need to undergo an intensive training in the lab to learn the procedure, to learn about the important step, and also having an opportunity to then go through the learning curve once they go back in the clinic. So there is follow-up training again. So I think the most important and also what is the key success factor is certainly the implants per se but equally important is the rigor in training and learning for the procedure that the KeriMedical has implemented. We did follow exactly the same protocol in all the markets that we started. It has proven to be very successful and that will also be the guiding principle as we go forward. So training will come first before we accelerate the top line.

Very helpful. And if I may, a second question on the U.S. sales growth to reach the target of USD 80 million by 2025, you need to further accelerate the growth, obviously. Should we expect kind of a [indiscernible] acceleration of the growth? Or is it rather a hockey stick into 2025? I mean, is the -- and also maybe on the growth driver, is it mainly market share gains in the Hand & Wrist segment? Or the newly launched NSI products are more important to accelerate that growth? That would be my second question.

Yes, for the -- to reach the USD 80 million, which we confirmed. We are confident about to reach next year. It's certainly going to continue to accelerate the momentum that we have. So we are now above 20%. As you remember, my expectation was slightly a bit higher for last year in the second half of the year, to be very honest. We have seen a bit of a weakness in the market in October, beginning of November, but the momentum is back and continues to accelerate. Why is it expected to accelerate? It is, as you have seen, and that's what I tried to show is the onboarding of new distributors, they are accelerating through the annualization in the coming years. So the more we start adding, the more we onboard, the more of an acceleration we will see through the new distributors. So therefore, confident that we're going to accelerate. My expectation for this year, again, is getting into the mid-20% and then slightly into the higher percentage probably than in '25. From then, what I'm seeing now as we started the year, we're absolutely in that growth rate right now. So that's what I can confirm. For the segments, I mean, we gained share in every single segment in the U.S. I think it's certainly strong driven in the Hand & Wrist because we do have a very competitive portfolio. We have sufficient options that we can provide to surgeons, where the BDF of Field Orthopaedics and maybe the KeriFlex of KeriMedical or the extensive hand system screws, CCS screws in the upper extremities. So that's certainly driving. That's the stronghold that we have strongly driving the growth in the upper extremities. But also in the lower extremities. And it's not only the NSI Technologies, which accelerate absolutely as but it's the entire portfolio with the plate and the screw system. StealthFix has a coolness factor as well. So looking at the lower extremities is equally gaining share but it's still on a low level.

Next question is from Edward Hall from Stifel.

Christoph, Dirk, just a couple here. Firstly, on the working capital. It's a very, very different picture from last year. And I was just wondering what was the result of this? And maybe sort of honing in on more mature geographies, such as Switzerland or Germany. And what does working capital look like in these mature geographies? I'm just trying to get a sense of what it could look like in the U.S. in 3 to 5 years, for example? And then my second question would be on the general price increases we've seen within orthopaedics in the last 12, 18 months, talking across all orthopaedics here. Typically, this hasn't really been the case. So looking at your -- what are your working assumptions on pricing increases this year? And then honing in on the Australian market, obviously, with the price cuts we saw last year, is this likely to remain a constant theme? Or is it a one-off in '23? And what has the result in volumes been in this market as a result of the price cut?

I would suggest Dirk, could you start with the working capital, and then I will succeed.

Yes, I can do the working capital and then you can [indiscernible] if you want. So working capital, I think the idea was also to compare what is working well in Europe, especially in the German-speaking countries then and how that transforms into the U.S. going forward. But you have to know, which is that the Germans and also here in Switzerland, but also the Austrians, they're managing their sets extremely tightly. They're using a lot of what we call loaner sets. And when we look at what we call the pattern [indiscernible] means they're looking what's a hospital, which generates some sort of size. If the size is according to our expectations, those hospitals get a consignment sets. If the size is not sufficient, they would give a loaner set and then the loaner set is being provided to them through our logistics, but just for the one elective procedure. Now this is working extremely well. And in the U.S., I think the same model didn't exist in the past. Also, we have to know that in the U.S., we have a slightly different business model where we even call them [indiscernible] have the sets in the car, and they have to be much more flexible also given the huge distances. We're getting extremely more behind the set efficiency in the U.S. especially now for the large indications, which is just the radius but which also goes in Foot and Ankle at some point of time. And we're trying to also educate and measure people in the market on the set efficiency, which they generate. This is a process that will take 2, 3 years. I don't believe that you will see similar figures as we've seen in German speaking countries just because the model is a different one and also because the country is much bigger but I'm seeing some upside potential if I look at patterns of 30% to 40%. This is the one thing. On accounts receivable, also here, we have a country if you compare it with Germany, which has very low [indiscernible] and the [indiscernible] to U.S., which traditionally hasn't put a lot of focus on collection . We have put the KPIs in place that also the U.S. will shorten their [indiscernible] significantly. We're growing step by step. So it's also a process together with our customers. We don't want to lose any customers. But also here, the process improvement, I'm confident we can do that over the next 2, 3 years, yes. The question is, do we get to German levels? Definitely not because in Germany, we have what we call discounts or Skonto, this doesn't exist in the U.S., but in the U.S., you can work also with credit cards and some mechanisms, and we should also get it down significantly. Also here, it's the time of 2, 3 years, we will not come from 1 day to the other. Now if you want, I can also say a couple of words in Australia because then the question was, what's the underlying growth in volumes? The growth in volumes was somewhere between 16% and 18%, as I think I said in my comments. The Australian team has gained market share. That's what we believe if we compare it also with both of our competitors, especially in the upper extremity business, but also increasing -- they're gaining in the lower extremity business. We've seen two cuts, one of 10%, which was 1.5 years ago, another one of 5%, which came last July. There would be another one of 5%, which comes this coming July and also there are some specific -- platform specific products which have been recategorized also mid-year. So what I feel is that we will have an impact in 2024 until we get to normal conditions again. From there, you should see hopefully value growth equals or is even better than volume growth, and it will be at the mid-teens, at least that would be my estimate.

Yes, maybe to add on Australia. I think it's not unusual. Australia has a history of reducing government induced pricing on a regular basis. So every 3, 4, 5 years, Japan, for example, is a similar market but the reduction -- the size of the reduction is significantly higher than it used to be in history, which was probably 1%, 2% or 3%. And now we have seen the cuts that Dirk has elaborated on, which was significantly higher, which were also driven by the price differences between the public and the private sector. I think at the end, it's going to be sustainable. The prices are not going to come up and we're certainly not in that range in Australia. So this is all [indiscernible] the go-to-market model. For price increases, you're absolutely right. I think we have situation going into last year and already started in '22 to increase our pricing in terms of -- as a result of logistic costs, energy costs, inflation and so on and so forth. And that was a process that has been started for the first time for a long time in the fall of '22. So the way it works, we have increased our pricing and we have continued to do that. It will have an effect over time in the list pricing. And any time, as you can imagine, when contracts are renegotiated starting at the higher base, at least protects the further erosion. But in many cases, also has allowed us to ask for higher pricing, especially in the U.S., where the pricing -- where the prices have been updated over proportioning compared to Europe. So that means in Europe, we're probably looking at somewhere at the range of 1% to 3%, which is certainly higher in the U.S. But the question is always not about where you increase your price, the question is always how much of the price increase can you realize? And that's a different story.

Next question is from Edouard Riva for ZKB.

I would ask two questions. And the first one is regarding Warsaw. You mentioned that first screw has been produced. Could we take a step back and could you maybe just quickly explain what is the benefit of producing in the U.S.? Is it regarding transportation as you were producing in Basel? Or is it for other reasons?

Okay. Yes, you're absolutely right. We have started now the technology transfer into Warsaw. There is two reasons for it. Here in Basel, we still manufacture all our implant but we have an infrastructure capacity constrained as we have two floors that we can manage that we can produce. There is no more space. So we are working and living on capacity increase through efficiency gains to smaller machines. So with the growth that we project, we would probably have for another sufficient capacity in Basel for probably a rough cut another 3 years round about. So that's for us now also an opportunity to expand our manufacturing capacity with the production site in Warsaw that came with the NSI acquisition, first of all. Second of all, the intent may be that we can produce for the U.S. market, that's could also be in the context of sustainability but that's certainly not the driver. But more of the drive results, it's going to provide us going forward with a hedge in the dollar. So I think that's basically the main drivers for transferring the technology into Warsaw.

Great. That's very clear. And my second question also regarding Warsaw is, when would you expect the plant involved to produce the whole portfolio? Is it the goal? And when should that happen?

As you can imagine, the technology transfer is not an easy thing to do. So I think we have now started with screws, and we're going to continue to run and produce the screws for this year. We will also prepare for manufacturing plates, but that will not be before first quarter next year. So there is no emergency or there's no urgency, let's say, to move the plates over to Warsaw as well. I think we also want to maintain the capacity that we have for the NSI technologies to be produced locally but we would be ready as early as the first quarter to also move some plates into Warsaw manufacturing.

Next question is a follow-up from Sandra Dietschy from Octavian.

I have a quick follow-up on pricing. Maybe I also missed it. But did you talk about Japan? Are there any planned price cuts in that region this year as well? And then a quick question on the third-party business from NSI. I know it's a noncore business for you and you expect it to decline in 2024. But for modeling purpose, is it fair to assume sales from this business will halve this year and then go to zero as of next year?

Okay. Thank you, Sandra. Yes, I did quickly mention Japan on the price cut but not as a price increase. I just mentioned that Japan is known as once in a while experienced government instituted price cuts. You're normally in the range of 1% to 2% to 3% maybe. But this year, we don't expect any price cuts from the Japanese government. So therefore, we expect to have fairly stable pricing in Japan.

Sandra, I'll try on this one. Although it's difficult one. Just give you the background when we acquired NSI, we were assuming that we would lose some of that business relatively quickly. And I think you're referring to stating the [indiscernible] at that point of time that over 3 years period, it should clearly paid out. By the way, also the planning which we did also for the gross margin last year was assuming within something like CHF 5 million with this third-party business and it got a double. So extremely difficult for us. Why did we take these orders because currently, we are not filling all capacities. We're doing exactly what Christoph has said. So we move the technology in our production skills as fast as possible to Warsaw. However, we need to get the volumes. And as long as we don't have the volumes, we do have fixed costs. And there's two ways of getting rid of them. The one would be to cut them but then you need to refill them in a couple of years again or alternatively, you keep this cost and that means that you also take more orders once they arise. Now you've seen it more than CHF 10 million [ sales ] came from the third-party business, which was a surprise for us, which had an impact on the gross margin, difficult for us to guide and exactly that's the reason why I'm not guiding you for this year. It is so difficult to assume that it's going to be less. How much less it will be? I don't know. But there should be a strengthening effect on the gross margin on the -- at the same time. We will transfer our technology and we have some costs related to that. So I can't tell you what the volume for the third-party business this year will be and especially not for next year, I wouldn't be brave enough to make any assumption here. Sorry.

The next question is a follow-up from Edouard Riva from ZKB.

If I may, if we have the time. I would have still two follow-up questions to ask you. The first one would be, could you give us a bit more meat on the bone regarding the positive performance at the EBITDA level. I was quite surprised to see that there was approximately 40 FTE less than last year. And my guess is NSI double positions. But could you explain a bit more?

Yes, most of that is certainly related to that. We also gave up China, as you've seen last year, so comparing it. We have also -- I think Christoph has mentioned that in Australia, for example, we moved some of the former sales [indiscernible] Asian contracts, which then if you look in FTE statistic, also miss a point. But yes, a lot of that is referring to the U.S. It was on the one hand, the transformational time, which we had building up double resources in '22. We're moving from [indiscernible] to Warsaw and then also reducing some of [indiscernible] again. We've also slightly streamlined our production in Basel given the volumes -- not in Basel, sorry, in Warsaw, given the low volumes that we have there. On EBITDA or cost management, it is not so much a FTE or personnel costing if you look at our annual report but it's been especially a consignment third-party costs. Christoph mentioned it, things which were related to inflation and which we were able to compensate. So we've gone really to the entire P&L looked at where do we have not saying that, but some potential to further drive them down but not mainly on the FDA side but on everything else.

Great. Very clear. And my final question would be what you have mentioned regarding the level of complexity on the LapiPrep and the fact that you underestimated the time of formation of surgeons. Is it something -- a lesson that you will have -- that you will take with you for the launch of the Keri TOUCH? Or is it another level of complexity, I mean, that probably less complexity? Or is it similar? Could we expect the same thing?

That's a great question, Ed. As a learning organization, yes, we're going to take learnings forward. I can assure you. I think there is a difference between the Lapidus and the Keri. Because the Keri, we have now already 3 years of experience in markets like Germany, U.K. and also Australia. So we know how much training it will take. I think the complexity in a joint replacement is less than in a Lapidus procedure. It's less because at the end, it's a procedure that removes the joint and replace it by an implant to be very simplistic in this statement. On the other side, the treatment of a Hallux valgus with Lapidus procedure, it's not only about getting the first ray of [indiscernible] into the right direction and into the right rotation. The source of the instability, the source of the deformity could also be much more up in the TMT-1 joints, where maybe a hypermobility could be a root cause. So once the surgeons diagnose and go intraoperatively, they may also choose to stabilize the hypermobility in the joint, which goes beyond just the clear [indiscernible] and fixation of the Lapidus correction. So I think it's -- when I talk about the complexity, it's about the diagnosis. It's the complexity of additional options in order to stabilize hypermobility and the root cause of the deformity. And I think that is a complexity, which we need to adopt also our over procedure but it's an integral part of the training of the surgeons how to standardize and how to run that procedure is using [indiscernible]. I hope I was not too technical in my response.

A very interesting point, Christoph. Thanks for sharing that. And we have finally two questions that came through the Internet or the webcast interface. The first question is related to KeriMedical. The person would like to know, did you gain -- in order to capture the 75% market share in Germany in a relatively short period of time, did you gain share from existing? Or did you sell it to existing customers or new customers?

That's a very good question. It's probably, most of it is new customers. It's a procedure that formerly has been conducted and was called the trapeziectomy, which is the resection of part of the trapezium. That was the gold standard or is the gold standard depending on what position it takes. So anyone moving to a TOUCH prothesis is basically a new user adopting a new procedure and a new treatment for the same osteoarthritis in the base of thumb. On the other side, the prosthesis is not a completely new treatment method. There has been first and second-generation prosthesis in the market, all of them not very successful. Once in a while, surgeons have good results, they stayed with them, but also as a result of MDR, many larger companies have decided to remove first-generation, second-generation prosthesis from the market. So we may also have picked up some of those procedures but that's certainly not the majority.

Good. Thank you Christoph. And the last question is on the NSI portfolio. Can you disclose the sales you achieved in '23? And how much you expect in '24?

No, we don't disclose sales on individual products or technologies. But we have last year already said that we have taken down the forecast that we focused on, as Dirk has mentioned again on [indiscernible] rather than just a quick update while we certainly expect now an uptake in especially the Lapidus procedures for 2024.

So thank you very much for your engagement, excellent questions, and also thank you for your interest in Medartis. This was last question. We are going to close this out. But before we terminate the webcast, let me draw your attention to the IR calendar on Slide 34. We hope to meet as many of you as possible in-person during the roadshow or any of the listed conferences. And with that, I would like to hand over to Christoph for maybe a closing remark.

No, again, I thank you very much for taking the time. It has been a great pleasure. I think it is a successful year that we experienced in '23, not only the top line but also significant performance and then the improvements also on the bottom line and also cash flow, which makes us confident now going into '24, where we want to continue on that strong foundation. So that's where we base our optimistic outlook on. And I thank you, again, for taking the time listening in. And if you have any questions, I hope you're going to see you in the roadshows and we can further elaborate on any main topics that you may have. So thank you very much, and have a great rest of your day.

Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.