medmix AG (MEDX) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to the medmix Half Year Results 2024 Conference Call and Live Webcast. I'm Frenzy, the Chorus Call operator. [Operator Instructions]. The conference is being recorded. The presentation will be followed by a Q&A session. [Operator Instructions]. The conference must not be recorded for publication or broadcast. At this time, it is my pleasure to hand over to James Amoroso. Please go ahead, sir.

Thank you. So my name is James Amoroso, Head of Investor Relations at medmix. I'm joined by Rene Willi, our new CEO; and Jennifer Dean, our CFO. In the interest of brevity, we will assume that you have read the disclaimer on this slide regarding forward-looking statements. With that, I will now hand over to Rene.

Thank you. Good morning, everyone. I'm very pleased to talk to you for the first time as CEO of medmix. Jenni and I will update you on medmix' progress in the first half of this year, as well as give you some insights into the second half. I will also share with you my initial impressions after my first 45 days as CEO. On Slide 4, you can see the key figures for the first half. In terms of revenue growth, our two Business Areas came under pressure, for different reasons that we shall discuss shortly. In terms of profitability, we are pleased to have slightly improved gross margins, but lower revenues weighed on our adjusted EBITDA margin. By contrast, our key metric of adjusted operating net cash flow almost doubled to reach CHF 24 million. Our free cash flow also grew strongly. Also, these results came in broadly as we have planned, they do not reflect what we are capable of, and they do not match our ambitions. Later in this presentation, I will touch on some factors that I believe will take medmix into a new era of profitable growth. Let's move to Slide #5. These are our highlights in the first half of the year. Dental segment revenues began to normalize, delivering strong year-on-year and sequential growth. Our other segments saw an anticipated organic revenue decline. We continued to invest in operational excellence, with our new Valencia site ramping up efficiency to fuel margin improvements. And our new ISO-certified Atlanta site starting productions, on schedule, to increase customer proximity in the U.S. Our Qiaoyi acquisition continued to perform well on top and bottom line. Gross margin for Business Area and Group and all Cash Flow KPIs increased. Adjusted EBITDA margin remains constrained by lower volumes, with higher reported EBITDA. Let's look more closely at our market segment revenues, on Slide 6. Firstly, in the Healthcare Business Area, we are particularly pleased with our Dental market segment, whose growth suggests that customer destocking has run its course, and we look forward to confirming these trends -- positive trends in the months ahead. The double-digit decrease in Drug Delivery more than offset this growth, taking the Healthcare Business Area into negative territories. The decline in the Surgery market segment had only a limited impact due to its small size. In the Consumer and Industrial Business Area, the Industry Market was -- segment was challenged by the strong growth generated in first half of 2023, but grew in double digits in the first 6 months compared to the second half of last year. The organic revenue decline in the Beauty market segment was driven by a normalization of launch activity after last year's record levels. Let's discuss our Healthcare market segment in more detail on Slide 7. The Dental market segment enjoyed strong organic revenue growth year-on-year and sequentially. This growth is reassuring given that the dental end markets were soft. We are cautiously optimistic that our positive trend will continue into the second half. The Drug Delivery market segment was impacted by the long-anticipated shift of a portion of production volumes to a third-party manufacturer by one customer. In April, we announced an exclusive partnership with Nipro Corporation to promote and distribute the PiccoJect autoinjector in the Japanese market, starting early next year. Our confidence that the segment can deliver on its longer-term ambition was confirmed this month by signing another new project for the PiccoJect platform. In the Surgery market, we had an exceptionally strong year-end in 2023, and this weighed on our first-half performance. On Slide 8, you see our new ISO-certified Healthcare plant in Atlanta, which started operations in June on schedule. In fact, we will ship our first surgery products tomorrow. This state-of-the-art facility will increase customer proximity in the U.S. across our entire Healthcare portfolio, provide space for customer co-creation and can support our customers that there is a request for dual-site sourcing. In this way, we aim to take our Healthcare business to the next level. Let's move to the Consumer and Industrial Business Area on Slide 9. The Industrial segment made good progress despite a negative year-on-year revenue comparison. This chart shows a sequential revenue increase compared to the second half of last year. We are now feeling the benefit of having our full product range available, in particular the environmentally-friendly greenLine product range, despite continued softness in the end markets. The full portfolio of products is now available from our new Valencia plant, and we have turned our focus to increasing efficiency. The Beauty market segment's first half revenues are compared to our exceptionally strong prior year period with several customers launched after COVID. This year, customer launch activity is more evenly spread, which we see in our sequential organic growth of 4%. Our Chinese acquisition, Qiaoyi contributed nicely with CHF 12 million of revenue. In the first half of the year, we maintained the pace of innovation at the very high levels. On Slide 10, you can see just a few examples from our Dental, Beauty and Industry market segments. On the left side, in the Dental market segment, we launched the world's first sustainable mixing tip using almost 70% biobased materials. By cutting CO2 emissions by more than half it provides us with a significant competitive advantage. And by not changing any aspect of our proven design, dentists are able to make an immediate switch. The Beauty market segment lives from innovations. So we are proud to have created three truly innovative products. Firstly, the patented bridged-bristle Mascara Brush, on the left, is 3D-printed, so requires no investment for tooling and it's much faster to market. It's unique patented design delivers an unmatched Mascara application performance. The featherBRUSH mascara applicator on the right, is uniquely formed to perfectly fit the natural shape of the eyes, while, its unique angled zig-zag bristles gives a better grip and style for the lashes. And, thirdly, in between the 2 mascara brushes, you see the Ballerina precision applicators for eyes and lips, an adjacent area beyond our core eyelash expertise that we have targeted for growth. In the shape of Ballerina shoe, its slanted surface, beveled side and pointed tip made for a perfect product load and easy line drawing. On the right side, in the Industry market segment, we have rolled out two product extensions to our greenLine range, following the launch of 15 products in the second half of last year. Our customers are keen to reduce the virgin plastic usage and carbon footprint, so we have great expectations for the entire range going forward. And it's not just our products that are sustainable. We build sustainability into everything we do, as you can see on Slide 11. CDP is a globally recognized organization that assesses companies' environmental impact and efforts and its Supplier Engagement Rating. Gauges a company's supply chain engagement on climate issues. CDP has awarded us an A-, the second highest score, which ranks us in the Leadership band and places us amongst the top 15% globally of all firms implementing current best practices. We ranked far higher than the average of our sector and for all our sectors on a European and global base. The CDP assessment helps us improve our performance as well as support our suppliers and customers to address their own climate risks, and this makes us a better partner. I will come back at the end of the presentation to discuss our outlook. But for now, I will hand over to Jenni, who will take you deeper into the financials.

Thanks, Rene. Our main KPIs can be seen on Slide 13. While revenues declined year-on-year, they increased slightly on a sequential basis with the Dental and Industry market segments and the Qiaoyi acquisition compensating for shortfalls in the other segments. Our gross margins at the business area and the group level, both expanded slightly year-on-year. This was thus, due to an improved mix, thanks to higher Dental revenues and the inclusion of Qiaoyi, both of which generate profitability above the group's average. Lower volumes suppressed our adjusted EBITDA margin. Our reported EBITDA, however, increased strongly in absolute terms and in the percentage of revenue, both year-on-year and sequentially. We saw a decrease in the one-off expenses incurred as we transition to our new Valencia plant. We are particularly pleased with our cash flow metrics. Adjusted operating net cash flow and free cash flow, both made a strong recovery in the first half, thanks to improved working capital, a planned reduction in CapEx as well as fewer costs relating to the temporary production in our Industry market segment. On Slide 14, you can see our half-yearly Healthcare gross profit and margins over time. While we reported lower gross profit in absolute terms due to lower volumes, we were able to increase our gross margin, year-on-year and sequentially, thanks to an overall improved product mix. This is due to the volume recovery that we have seen in our highest margin segment, the Dental market segment. We look forward to confirmation of these positive trends in the Dental segment in the next months, so in the context of soft-end market demand. Drug delivery volumes will remain impacted in the short term by the implementation of a customer's second source production and surgery revenues are expected to normalize in the second half. Moving now to our Consumer and Industrial Business Area on Slide 15. We were able to maintain our overall gross profit at 2023 levels, supported by our accretive Qiaoyi acquisition. On a year-on-year basis, we increased our gross margin due to Qiaoyi in the mix. The Half 2 '23 result was driven by exceptional results in Beauty, both in the newly acquired Qiaoyi business and GEKA Brazil. On Slide 16 now, our Half 1 adjusted EBITDA margin declined 100 basis points year-on-year due to lower volumes, partly mitigated by the impact of the sale of our Dispenser site in the U.S. and the release of some provisions no longer required. Our reported EBITDA margin rose strongly, thanks to fewer extraordinary costs related to the high-cost temporary production for the Industry market segment while transitioning to our new plant in Valencia. On Slide 17, I'll take you through our adjusted EBITDA walk from first-half '23 to first-half 2024. We have a negative impact on adjusted EBITDA from lower volumes in the Industry and Drug Delivery market segments. The negative margin and mix effect shown here is driven by our new Valencia plant, which is in the process of ramping market efficiency. The positive movement from operating expenses reflects the sale of our Dispenser site in the U.S. and some unneeded provision releases. Our Chinese acquisition, Qiaoyi, contributed positively to adjusted EBITDA in the first half. We have a decrease from CHF 9.5 million to CHF 2.8 million in nonoperating expenses year-on-year, spread across our cost of goods sold and operating expenses, as we have now transitioned to our new Valencia plant. Slide 18 shows the walk from adjusted EBITDA to net income for Half 1 2024. Our depreciation and amortization have increased slightly year-on-year, due to the activation of assets in our new Valencia and Atlanta plants. Non-operating expenses have decreased as mentioned in the adjusted EBITDA walk, due to the end of temporary production to the Industry segments. Now, I'll take you through the walk from net income to free cash flow, on Slide 19. We made a small gain from the sale of our Dispenser site in the U.S. and working capital has stayed relatively flat. We were able to deliver significant increase in our operating cash flow versus CHF 15.3 million in 2023. We continue to invest in CapEx, 2/3 of which was focused on our two plants, Atlanta and Valencia, but at a much-reduced level than in the prior year. Ultimately, we delivered a positive CHF 7.6 million free cash flow compared to a negative CHF 4.9 million in the first half of last year. Slide 20 shows the walk from our adjusted operating net cash flow in the first half of 2023 to first half 2024. As a reminder, operating net cash flow is a key element of our short-term management incentive scheme, along with organic revenue growth and adjusted EBITDA margin. Our strong operating cash flow performance was the main driver behind the 77% increase in our adjusted ONCF year-on-year. And with that, I would invite Rene to come back and discuss our revised outlook.

Thank you, Jenni. As you will have seen from our press release, we have revised down our full-year guidance. When we set our original guidance, it was based heavily on a second half volume recovery in our Industry and Dental market segments. What we see currently is that the demand in these end markets remains very soft. I've had the opportunity of being with medmix more than 2 years. First, as a Board member, and since June 1 as CEO. And in the last 45 days, as CEO, I've had excellent discussions with our key global customers and have met many of our medmix' talented and passionate teams in all segments, geographies and functions. I'm convinced that we have all the elements of global leader in high-precision delivery devices for the healthcare, consumer and the industrial end markets. The discussions with our customers, with our teams have confirmed that medmix has terrific growth platforms, particularly in the Healthcare Business Area. And I remain optimistic -- very optimistic about the future, and I'm excited about what we can create and the journey we have ahead of us. We have the right fundamentals in place to shape and drive a new wave of value creation as we accelerate our transformation into a Healthcare company. This transformation will be also driven by new product pipeline, including disruptive innovations, positioned to address unmet customer needs. That being said, also incremental innovations and life cycle support remained a key focus for us in responding to user feedback and improving our globally-recognized and category-leading products. Our first half results and new 2024 guidance, match neither our abilities nor our ambitions, and we need to make some changes. Specifically, we have identified three urgent priorities. We must and will execute flawlessly on our innovation pipeline with a focus on securing co-development projects with our key customers. Secondly, we aim to create a customer-centric organization and culture that will deepen our long-standing strong customer relationships. And thirdly, we want to drive operational excellence within our enlarged and the upgraded manufacturing network. We are currently updating our strategic initiatives to sharpen our focus in line with medmix' unchanged vision, mission and core values. Our five market segments reinforce each other by leveraging our technologies and key competencies. Our segments have excellent long-term perspectives and operate in highly attractive markets, which are supported by global trends such as growing middle class and aging population, increased urbanization, self-administered treatments and sustainability. As such, I am very confident in our future. With that, Jenni and I will be pleased to take your questions.

[Operator Instructions] And our question today comes from Patrick Rafaisz from UBS.

A few questions from me, please. The first would be on Drug Delivery and the effects of the dual sourcing. Can you add more details on that? How big was the impact? What should we expect for the full year? And can you talk about offsetting factors, such as the -- maybe related licensing income? That's the first question.

So yes, the decrease is really driven by one customer's implementation of a second source, and this is -- we have an under-license to medmix. About how big and about licensed fee, we are not allowed to disclose such information, because these are customer-specific -- the informations. But I think this trend will continue also in '25, but we will be still a major source for these products for our customer.

And what would that mean for your Drug Delivery outlook into '25? So you're saying there will be an additional incremental effect from the dual source? Or is it then a clean base from where Drug Delivery can grow again?

I think that's the information we are not yet disclosing.

We're not making any statements today about 2025, Patrick. That's basically the situation.

Okay. Good. Understood. Then the second question is on Dental. There was various information, right? On the one hand, you mentioned the soft wholesale Q1 reports, but you also expect a further normalization in H2. My question is really how do you think about inventory levels at customers? And how quickly can we, let's say, realign your dental volumes with the end markets?

It's difficult to say something about the inventory level of our customers. And I can also not really say something about the end markets. Just as you know, I came from one of our biggest customers, and that's something you have to ask them directly. But what we will see is, I think, is, of course, always in the supply chain, some variation from one quarter to another, but the overall growth trends in Dental remains very stable. And despite the softness we see in the end markets, Dental is, in the long run, one of the most exciting markets. There's just the reality that every human has 32 teeth. And if you are 44, I think about 2/3 of the people have lost already one teeth, and there's a treatment required. So the Dental market is one of the most stable and continuously growing market we have seen in the entire Healthcare segment.

Okay. Super. And then the last question would be on the EBITDA bridge and the pricing, which was a small negative but looked like mostly flat. Can you talk about the pricing dynamics across the various segments? Is it a consistent picture or the variations across these various business lines?

Please let me transfer this question to Jenni.

Patrick, I think there's no change for us. I mean, historically, in our five segments, of course, we have natural pressure between our customers and our suppliers and ourselves. That's normal. But we have not historically had a lot of put and take on pricing. During COVID, as you might remember, we had, for the first time, a succession of price increases we imposed on our customers due to the exceptional increases we saw, but that's stabilized now, and I think returned to the normal where customers asking for pricing, we're showing why this is not realistic and it's quite normal. So, I think, I don't see any looming pressure, particularly in either direction there. I think, we'll continue to stay pretty flat.

[Operator Instructions] And the next question we have is from Daniel Jelovcan from ZKB.

Sorry, I was on mute. And Rene, congrats to the new role. And hopefully, we continue to meet like in the last 20 years. Good to have you.

Thank you. The same from my side.

Just on Dental because they are the top expert. There is a lot of noise. I mean, over the last few years about all this cannibalization of intraoral cameras for using less impression materials. I mean, I know it's just one indication in your application devices, but it would be nice if you can share some insight about the future here for this segment. That's the question.

Daniel, thanks for this question because I expected that because I was driving the digitalization for more than a decade. And it's clear, this trend to our digital dentistry is ongoing. Now, when you look about the different segments, you indicated rightly that the impact is mainly on the impression materials. And what we see actually on the impression materials, I think midterm is that this market is flat. And everyone in the industry is expecting that there will be a long-term decline. As we both know, I think in the Dental area, these changes are going not overnight. It takes time, and it's a process which is actually ongoing for more than 10 years and it will continue. But the impression material is just one segment in our portfolio. And actually, we have -- at -- the majority of our products are in other segments like segmentations, which are not impacted by this digital dentist actually, they are supported also by digital dentistry because it makes treatment access to more people. And in these segments, we see and we also expect in the future, we see very nice growth. And we have currently in these segments, low single digits -- no high single digit, sorry, high single digits and low double-digits growth. And this will continue and this will also be supported by our future innovations. Overall, I see that whole digitalization more an opportunity for differentiation and for innovations in the future. So that's something we see and we see as an opportunity also from medmix.

Okay. And maybe as a follow-up, last one on Dental. I mean, you hear a lot of mixed signals in this industry, especially in the U.S., some people say consumer confidence is declining and will have an impact on nonelective treatments in dentistry, others say, savings rate is still high, not as high as at the peak, but some say people save the money. It's -- I guess you understand my direction of the question and your insight into the channels. I mean, I know you have these big wholesale customers, but with that providing details who it is, of course, your view -- I mean, you said you are positive in the next few months, and I guess the visibility is not longer than that for you, but still what is your view on that?

So I think we have to differentiate between different Dental treatments. I think you have sectors like the endo where we are also in with our products, which are not affected by the overall economic and consumer environment and consumer confidence, because if you need an endo treatment, you go not only to the dentist. And then you have -- as you mentioned correctly, you have some elective treatments and these elective treatments, they are really also driven by consumer evidence. But these are -- and that's what you hear also in the industry, these are, let's say, the more expensive elective treatments like aligner treatments, like implant treatments and particularly large implant treatments. And this, in the U.S., of course, is also driven by consumer confidence, by interest rates because often, these treatments are also financed by -- not directly, but by some credits. And there you see a higher fluctuation. But if you look in our portfolio, then we are not really in this high investment treatments, our exposure is much smaller in that respect.

We have a follow-up question from Mr. Rafaisz.

I just wanted to understand a bit your margin guidance. The gross margin evolution has actually been encouraging, especially in Healthcare. You are anticipating a normalization and maybe even sequential improvement on organics into H2, and efficiency improvements are continuing. So just wondering why the updated margin guidance looks so cautious for the second half.

Thank you, Patrick. Jenni, would you like to take this question?

Sure. We had a lot of discussion and did a lot of scenario analysis on what we were seeing and where it could take us. And it all is about the top line. You're quite right. I'm really pleased with some of the trends we see, lower nonoperating costs and so forth. But it's all about the volume. And so when we gave the guidance on the top line, the margin guidance is just following that. If we have a higher level of volume performance, we'll be at the top end of that range and vice versa. So we just didn't want to lock out sell into really silly short-term actions, and wanted to really get back to focusing on developing our strategy, as Rene said, and be ready to come back to you in February with a really exciting future vision, because I think we have a lot of momentum since Rene joined. We're all completely mobilized to his three priorities, and that's what I want to be focusing on now.

Okay. And related to that, just a detail on the COGS, especially the other COGS line, can you talk about the order of magnitude we should assume here for the year? What do you expect? Because it looked like we're tracking a bit ahead of the historical levels for the other COGS.

You mean that in general or in the nonoperating?

In the -- yes, in the other COGS below the segment's gross profit.

I think it's looking pretty good. I mean, I don't see a massive step change while the markets remain soft. I think this is still the challenge in that group is under absorption or underutilization in our plans, which has been our challenge, as you know, as well as the other COGS, which is warehousing, molds, global teams and so forth. So I think that will stay pretty stable for now. I don't see some big changes.

So sort of a CHF 50 million run rate makes sense then?

That would be guiding.

No, because I'm just wondering because it used to be more like a CHF 40 million plus/minus line, right? And then in '23, it went up to almost CHF 60 million for known reasons. And I'm just wondering how fast we can normalize or if there are structural reasons why that line should remain higher than pre-'23.

Yes. In the second half of this year, we have some mobilization in our Atlanta plant, which will keep these additional nonoperating costs elevated. So we'll still stay a little higher, and then we'll come back to you on the outlook for '25 later.

We have another follow-up question, Mr. Jelovcan.

Just on the industry segment and forgive me, I am not the expert here, but you mentioned in the press release quite in detail why the year-over-year decline happens, Poland, et cetera. And you also mentioned some end markets will remain soft. Can you maybe describe what kind of end markets are soft? And also the impact of Valencia, forgive me, I don't know the timing of the opening. That was an impact as well as you were not ready. Is that correct? Or was that -- yes. This kind of status?

Okay. Maybe I can start. And let me start first about the whole industry organic growth, and then I will hand over to Jenni. I think what you have to be aware is that the year-on-year comparison can be a little bit misleading. Last year, first half was an unusual high because we have had the possibility to release inventory from Poland, and only the second half of the year was weak due to the continued softness in the end markets. And there, we have some mixed feedback from the different industries, as you know our industry is really varying among automotive or transportation, construction and electronics. And not all of these markets are in the same cycle. Jenni, you'd like to add something to that?

Yes. I think you're right. The Beauty -- right that's a bit of a pun. But the beauty of our industry portfolio is that we participate both in the new and aftermarket areas. So for example, in automotive is based on interest rates or whatever macroeconomics. New cars are slowing down, then we still participate in aftermarket with car glass for windscreen repair and also aftermarket spread for glass protect and you name it. So we do cover a lot of segments. So we're able, usually, to sort of balance out. I mean aerospace at the moment is really strong. The EV market in transportation, also very strong. And so this sort of counteracts some. But overall, if you look at the sort of purchasing power and the consumer indices, it is still looking, I would say, more soft. We don't participate fully in the DIY market. We're more in the professional space, and this is where it's really suffering. We do see some geographical differences too, construction is looking better there, let's be cautious, but better in the U.S., but in other areas in Asia, China, it's still completely suppressed. So I think it is really mixed overall, but the markets were our strongest with our global customers, because I think that's important to note that we're really following these big global players around the world. This is still a soft-end market. So we don't see a shift there. In terms of the Poland phenomena, just a quick catch-up there. I mean, as Rene rightly said, was the first half last year that materials were released finally from Poland, but this is actually the story from prior years when the sanctions happened. So we can go back inside and try and reconstruct that, but we do still see a big impact on loss of momentum there right at the time that the markets were softening. We had many products that we could not fulfill there anymore. We have some dual sourcing within our network, but we had a lot of products that we couldn't deliver, especially on some of the newer products we're developing like greenLine, our exciting portfolio. So we do see the chance for that to recover now, and we're monitoring that closely. But we will continue to see this impact of the loss of momentum, why we were unable to deliver.

And about your question about Valencia, I think we are very pleased about our Valencia plant, which has been opened last November and now it's fully operational, producing our full portfolio of products. Of course, that helps us a lot that we can now produce the full portfolio of products, but we are also now really started is -- we have launched our operational excellence program, automatization. So we already see improvements and this comes also as increased volumes, but this will help us also in the future for our whole endeavor to increase our -- or decrease our COGS.

Okay. We've got a question on the webcast from Eugen Perger. And he asked, could you please shed some light on regional developments within Dental?

What we have to say, I think we have no direct regional information on Dental, because often, our customers are global OEMs. So you can name them, but it's a [indiscernible]. They are global customers. And we do not see them how the whole regional development is on Dental. When we go to our other customer segments, which are our distributor partners, then I think we do this markets. We do not have enough size that we can distinguish between the different segments. What we see there is mainly the U.S. market from our distributor partners. So that's something we cannot say. And I think it's better if you ask that question and also I think, directly in the large distributor calls, they have a much better transparency on this.

Okay. I don't see any more questions at the moment. Operator, do you see any more questions?

No, there are no further questions.

Okay. So then thanks a lot for participating in today's call. I also hope that we will see us in the near future also in person. And let me just conclude by saying that I'm very excited about our prospects going forward, and I look forward to sharing with you our strategic plans and our exciting vision about the future in February next year. Thank you very much.

Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you very much for joining, and have a pleasant day. Goodbye.