Shalby Limited (SHALBY) Earnings Call Transcript & Summary

[Audio Gap] The required approvals for selling this product in India to begin with. And from next year onwards, we'll be able to add the revenue coming in from the Indian subcontinent.

And EBITDA, what kind of EBITDA it will generate, which do you see?

Essentially, the EBITDA that it will generate, so we feel that at the moment, the company is having a kind of a manufacturing, we are using about 15% of capacity. So once that goes up significantly, it will start adding the significant earnings to the group. We believe that by FY 2023, we will be able to make this EBITDA-positive company.

So what you mean to say is $11 million or $15 million kind of average, if we take, so $12 million to $13 million sales they are doing is just they are utilizing only 15% of the capacity. Isn't it?

Yes, 15% of the capacity utilization is for the year FY 2020.

Great. And what kind of cost advantage we will have if we procure implant from this division? What kind of cost reduction we will have?

See, at the moment, to be honest -- so go on.

Yes, is it cost-effective vis-à-vis Indian made or other foreign-made implant?

Yes. So it is definitely going to be cost accretive to us from day 1. The magnitude may be way more than what we have assumed because as we kind of ramp up the capacity, we may be able to come down significantly. So we are in the process of trying to map that right now. Once we are able to map it, we'll come out with the numbers to you, and we'll share those numbers with you as to what will be the exact advantage, but there will be a significant advantage in terms of cost savings for Shalby.

[Operator Instructions] We'll take our next question from the line of Mulesh Savla from Shah & Savla LLP.

Our dearest congratulations on this new acquisition. But as I understood from your commentary, you have bought assets and inventories. So how do you join -- how do you take these employees on your rollout? They will be new appointees on your company's role? Or they will be servicing in continuation with the -- with their existing employment?

So as I said, we have formed the company under Shalby Limited, which is Mars Medical Devices, and that is based in India. And that, in turn, 100% owns Shalby Advanced Technologies Incorporation in the U.S., right? Now these assets are all acquired in this company from Consensus Orthopedics, right? Now what -- yes. So all the 40 existing employees of the implant business from Consensus will now be working on the payroll of Shalby Advanced Technologies Incorporation. And the benefit is that these people are in the system for the last 10 to 15 years, all of them. So they are very, very experienced people. And they have seen highs of $18 million to $20 million in terms of sales back in 2015, '16. So it is -- basically, we are inheriting this entirety on to Shalby Advanced Technologies.

Great. Great. And their appointment to our company will be fresh appointment. So we will not be having any liabilities or dues related to their part with the existing company?

So Mulesh, that's a good question and which was the thought process from the beginning. So the thought process was not to assume any liabilities of the previous company. So from the point of employees or from the point of view of trade receivables or from the point of view trade payables, we are not assuming any liabilities on ourselves. So this is the reason why we have just gone for procuring the assets.

Our next question is from the line of Surya Patra from PhillipCapital.

Congratulations for the successful Consensus transaction. And so just -- can you just give some sense, what is the competitive positioning of Consensus Orthopedics versus the global established brand? And so that was the first -- that is my first question. And the second question is that, the professional management buildup, what we have seen now, obviously, this is a big positive for Shalby. And you have already mentioned about your 100-day plan, but it is -- if you elaborate a bit, what is the kind of the milestones that you have set? And how will you be achieving that? And how would that be benefiting Shalby over next 1-year period? So that would be great.

So if you look at the market in the U.S., it is certainly a very robust market. As far as Shalby -- Consensus goes, it has an excellent reputation amongst the orthopedic surgeons in the country, and we've done an extensive amount of channel checks with respect to reaching out to all these different wholesaler distributors who in turn serve the doctors. And clearly there, the feedback has been very, very good. Also, as you know, as you may know, Consensus currently already serves this market, so setting up a more efficiencies and marketing system should enable us to reach out more to the doctor network. With respect to the management structure, as Shanay had mentioned, with the onboarding of Sushobhan Dasgupta and Dan Hayes, coupled with the existing team, which has been at Consensus for several years, we think we have a very strong management in place in order to effect the ramp-up with respect to the company. Specifically on the 100-day business plan, clearly, a lot of it is going to be, first, in terms of defining the vision and the operating norms for the business, trying to establish some operating procedures really for all the different processes for sales and marketing. Again, as I said, there already is a strong distributor network, which we look to further build upon over the next 100 days. Clearly, also, we're going to start ramping up the production. Clearly, all this is going to result in optimizing the cost structure, which, again, will then start becoming comparable with some of the global peers. And last but not least, with the view of starting to bring some of the production back to India, start applying for regulatory approvals in India -- in India, which most probably would take about 6 months or so before we can start selling the product in Indian market and also for capital consumption within Shalby.

I would like to give a very good question to you, is Dr. Vikram Shah. I would like to answer this in little detail. It will take some time, but it will make everybody's understanding in a proper perspective about competitiveness and about how it makes sense for us to go and buy such asset as a hospital industry people. First of all, I would give you one example to make you understand more easily. If you are buying a car, you can drive Toyota or Honda equally well. It's not flying a plane. And if you are a pilot of Boeing and if you train for Airbus, you cannot go and fly Airbus next day. Similarly, what happens here in orthopedics and joint replacement or whatever high-end surgeries are, that people come to go to high-volume places to get trained in the right way. And whatever the system are being used there, they get trained in that, and then they are hooked on that. It is not very easy for them to change this so fast or so soon. We have Shalby is one of the largest center in the entire world for joint replacement surgery, and we had been training surgeons from all over the world all the time for last 25 years in a continuation, and we have been doing this for all multinationals. So we thought that why we should not do it for us also where it makes sense that we get a cheaper implant as well, and we can train surgeons so that they can be hooked on our products. So I have been saying we have been training all across our Shalby, surgeons from entire Asia Pacific, Africa, everywhere, surgeons are coming continuously, China, Taiwan, everywhere. So the whole purpose is that we continue training people with our system and then get them using it when they go back. So what we do for multinationals for years, we'll be doing for our whole company. So it's not why this company was not able to do. That question comes to everybody's mind what others are doing while because they were not engaging surgeons in a proper perspective. There was nobody who was furthering this company. Now we are furthering this company. And when we are furthering this company, we are moving to train surgeons for our system, so that it can be made popular. So it is a 2-prong advantage. One is internal consumption, where it's increasing our ROCE by substantial margin in a coming time because it is accretive. Plus we are training surgeons across the world so that they can use it. And as Mr. Shanay Shah said, that it is like a 15% production, we don't need to invest much further until it reaches 200%.

Okay. Okay. So this is really interesting. Is it fair to believe it's better so that it's an investment for salary as well as the acquired asset? Because since we are creating platform for the global market in terms by providing training to the export and surgeons? So they will -- since the product will be -- our device would be certified by Shalby or it is manufactured by Shalby, so then that in those markets, the product will get automatic certification from the usage point of view, one. And we will get for our own requirement at a cheaper and qualitative product, a certified product, in-house product. And hence, it is a win-win for both the businesses.

Yes. And another thing is some of these products are even -- all of these products are in United States FDA approved. So that is a very high standard, including some products that are FDA approved in Japan and also in Australia, and it is also being sold in Brazil in some amount. So there is a platform ready where we can start working on very systematically. And we have the right kind of team to work on.

So essentially, because you -- I think you can be -- I mean, your question has 2 parts to it. One is that because the products are USFDA approved, to get approvals in some of the other countries will not be a challenge for us at all. The second thing is the acceptability of this product will be much quicker, as [ Rakesh ] has said, because the stickiness of the customer is very high once the customer starts using the product. And as Mr. Murari earlier said in his talk, essentially, the acceptability of the products in the United States is excellent, and the product has hardly any product recalls over the last few years.

Excellent, sir. So just if you can talk about allied product opportunity, what you also in the opening remarks, as Dr. Vikram had mentioned, which could be the potential opportunity going ahead. So if you can just maybe give some sense on those pipelines for you?

So I think the allied -- our allied business opportunity would largely be the Consensus Orthopedic asset purchase, where we are going to be getting into kind of backward integration, which is one. The second thing is the implants will be used for internal consumption here, which you all already know. Apart from that, the franchisee model, which has been worked on and it has been kind of not progressed as we had planned because of the ongoing pandemic. As soon as that picks up, these implants will start being sold over there also, and it has a great potential there. And as I said earlier, the American market already is a place where Consensus has been doing business since the last 24 years. So essentially, that is the biggest opportunity, along with the other 2 that we have.

Our next question is from the line of [ Nikhil ] from [ Chris ] Portfolio Management.

Sir, I have just one question. I would like to...

Sorry, we can't hear you.

Hello? Am I audible?

Yes. Yes.

Thank you for the opportunity. Apologies if you couldn't hear me speak, with the volume. If I heard it correct, this is an EBITDA-positive business, right? Like it has been remitting EBITDA for the past several years since being in the operation?

See, this business was EBITDA-positive good business back in time last year. Since last 1.5 years, the business has been affected via pandemic. And essentially, because of that, the volumes, as I said, have come down, and the capacity utilization is around 15%. So it is not EBITDA positive right now. But having said that, we are not buying the business from Consensus. We are just buying the assets. So essentially, as you already know that in the United States, the pandemic has peaked out long time back, and the numbers of elective surgery have started going up. As soon as we are able to ramp up production, which may take 2 to 4 months, we will be all set and geared up to kind of start selling in the American market. And over there, of course, we will first start tapping the existing distributors and existing doctors who are already working with consensus as well as we will work on trying to connect with new customers.

Okay. Got it, sir. Sir, and any fair guidance on like EBITDA margin in respect of these assets? Like probably, I just wanted to understand because these are some assets that you have acquired from Consensus. And you'll be having a ready to adopt distributors and doctors that you'll be approaching. Any fair estimate of EBITDA margin that we are having it in our mind?

Yes. So as I said, we are -- business with Sushobhan Dasgupta, Mr. Daniel Hayes, all of them are at the plant, and they are spending the next few weeks there. We are working on a firm plan that we want to work on over the next few months. So I think in the next couple of weeks, we should be able to share something with you on the lines of EBITDA margins as well as the ROCE numbers.

Okay. Got it, sir. But just last point, will it -- this will be at least what Shalby at least are currently earning, right? Like north of...

What I want to assure you is that the entire production capacity that we are acquiring can all be used at Shalby itself, right? So all of the production can be consumed at Shalby itself, right? So basically, from that perspective, we will be able to be at 100% occupancy, at 100% capacity utilization and still sell everything to Shalby. And as I said, we have invested an amount of around $11.5 million here. So it has to be kind of such that where we are going to be saving some money compared to what we are buying the implants at right now, right? The only thing is I'm not able to share the numbers due to right now because we're working on the plan.

Our next question is from Riddhesh Gandhi from Discovery Capital.

I just wanted to understand, is this a broader strategy of getting into the devices space? And would we expect to see a whole lot of acquisitions around this and/or like organic growth around this? Or because of the close linkage with the procedures we offer in India, this will only be on this particular acquisition?

That is...

Sorry, go ahead. Go ahead.

Sorry, go on. Go on.

No, please go ahead. Please go ahead. No questions.

So I was saying that essentially, the asset that we are acquiring over here are basically in line with what we consume the most, right? Because we control about 15% of the orthopedic operations within the private sector in India. And essentially, this is in line of actual integration of India, and we are very excited for this opportunity at the moment. And we will be focusing on this over the next 3 to 4 years and then thinking about what will be next for Shalby Advanced Technologies.

Got it. And just to understand how much is the inventory, which we -- which actually came along with the acquisition? How much is the inventory at true value of the business? In the business?

Well, predominantly, it is inventory and property, plant and equipment. Those are the 2 assets that have been acquired, in addition to some patents and trademarks. But it's predominantly inventory that forms the bulk of the purchase consideration.

Got it. So effectively speaking, it is inventory, which we would have -- which we would have -- have a big purchase in any case. So we've pretty much got the asset for free and then over and above that, we can sort of optimize and sort of help to grow and build out the business. Is that the right way to look at it?

Yes. So we basically got the assets. In addition to that, also an ongoing business, right? As we said earlier, about 40-odd people are transferring over. The operations are going to continue in the same facility that was in the past. Those -- that is a leased property, which Shalby Advanced Technologies is going to step in as the tenant. So for all intents and purposes, there is significant continuity of business.

And on this point, do we...

And really, it takes time. It takes about 2 years to put up the plant and another 2 to 3 years to get a USFDA approval. So we have got something where we are going to start working and start production immediately. So it's a significant advantage.

Got it. No, but I was just asking as to how much the inventory today is actually really worth, sort of to know how much we've been paying for the inventory as opposed to the IPR and the plant and...

So again, we've had external valuers look at inventory. And clearly, what we have paid for it is very much in line with those valuation guidelines.

Got it. Okay. And the other question is that who does the products compete with globally and in India, effectively? So who would our competition be actually in this? So sort of right now, Shalby uses this product, but who do they also use? And how should we be thinking about that?

See some of the players in the orthopedic space globally are quite well known. So they are -- Johnson & Johnson is one of the companies. There is Stryker, there is Smith & Nephew. And essentially, there are also other Indian manufacturing companies like [ Merill ], et cetera, which are there. So essentially, these are the well-known names that are in the market as of now.

Well, actually speaking, it's an oligopoly kind of situation. There are not more than 3, 4 companies in India in total with an organized structure and capability to supply in a proper way. So there is not much of a larger competition. It is all about service and about inventory ability to keep up the inventory. So most of the foreign companies are not able to do that in India as of now. And there are 3, 4 companies largely functioning in multinational and 1 company in national.

Got it. And if we look at this acquisition, let's say, 5 years out, actually, what would we see as the potential expectation around the revenue potential or EBITDA potential or [ odds ]?

So as I said, we are working on that plan right now. I mean, there is already a plan in place. We are working on making it concrete. And in the next few weeks, we'll be able to share the -- some of the numbers that might be helpful.

Got it. And for the last question...

As I said, the company itself, the assets that we have procured has generated about $15 million in revenue in 2018, about $11 million in 2019.

Got it. Got it. And just to effectively -- are there any operating losses that we should be expecting in FY '22 because of this acquisition and the ramp-up? Is it still happening? Or we expect this to be at roughly a breakeven-ish kind of level?

So we believe it will roughly be at the breakeven level. There could be a minor loss as well. But we don't see a significant loss at all.

Got it. And key risks that you see of this acquisition?

So as such, as I said, the biggest risk could be that as such, we do not see any risk, first of all. The second thing is that because also the fact that potentially all the implants can be used internally. And essentially, in some of the franchisees, we don't see that there is any risk in this project at all.

[Operator Instructions] Our next question is from the line of Dixit Doshi from Whitestone Financial Advisors.

Firstly, one clarification, when you mentioned 15% capacity utilization, so that is for 2020, where they did around $7.5 million in turnover, right?

Correct. That's correct, yes.

Okay. Secondly, so when they used to do $15 million kind of revenue in 2018, at that time, they were profitable? Or even that time, they were not profitable?

So in '18, et cetera, they were EBITDA positive. The company had a very different capital structure at that point in time, which is very different from where we are today. So from that perspective, given the fact that now the interest expense, et cetera, is going to be minimal. Clearly, the operating dynamics and the financial results are going to be very, very different.

Okay. And just 2 small questions. One, currently, whatever they are selling, they're only selling in U.S. and not in India or Europe. And secondly, you mentioned that the entire capacity can itself be consumed by Shalby. So I just had a question like how much -- so pre-COVID, let's say, how much would be the Shalby consumption of such implants annualized?

Yes, Shalby consumed about 8,000 to 10,000 implants every year, right? So basically -- and this number is roughly growing at 8% to 10% over the last 2 years. So essentially, in the next 2 to 3 years, we will roughly be at around 13,000 to 15,000 joints. And this company has a potential to manufacture between 18,000 to 20,000 joints with the current kind of capacity. And of course, if required, we can always add more capacity in the existing plant because there is enough space.

Okay. Okay. And they are selling only in U.S. right now, right?

Right now, they're only selling -- the majority of the sale is coming in the U.S., as Dr. Shah said. They have also sold in the past in other geographies as well and which we would want to capitalize on. But yes, you're right. America has been the majority of the sales in the past for the company.

Our next question is from the line of Samarth Singh from TPF Capital.

Yes. So you mentioned that when the company was running annualized revenue of $15 million, it was sort of breakeven. So I think that includes about 30% utilization. Is that right for EBITDA breakeven?

So actually, I think it's not fair to go with the past numbers because as Mr. Murari said, the cost structure at that point of time was very different and since we were catering to the U.S. market, which is a very highly -- which is a very high-margin accretive market. Since we will be also selling to some of the other developing markets like India, for example, in a big way, we will have to work on the cost structure and, et cetera. And the dynamics will completely change because of that, and we will be margin -- EBITDA margin accretive, much quicker than the previous company.

And so do you have any thoughts on and what capacity utilization would you be EBITDA breakeven?

Yes, yes, absolutely. So as I said, we already have the plan in place. And in the next few weeks, we'll be sharing that plan with the people.

Okay. And just roughly, can you tell what is the pricing differential for the product between the U.S. and India?

The -- as I said, we are not able to give those numbers as of now. It is definitely accretive in terms of the price at which we are procuring in plants at Shalby right now. But we are just working on some of the efficiencies that we've taken once Shalby starts production. And we will be able to share the definitive numbers with you after a couple of weeks.

[Operator Instructions] As there are no further questions from the participants, I now hand the floor back to the management for closing comments. Over to you, sir.

Thank you very much. First of all, I would like to say here that there are certain -- still, there are certain questions, which remains unanswered as far as the future revenue and EBITDA and projections are concerned. So we will make sure that we are able to -- you all are able to talk with our Mr. Sushobhan Dasgupta, who's our Vice Chairman and Global President; and Daniel Hayes, who is the CEO of our American company, so we will make you all talk to them so that they can give a further larger picture of whatever we are discussing to you as of today. In summary, this transaction is a major milestone in the history of Shalby Group. I'm personally very excited about the development and confidence that by strengthening the management base, at the same time, it places us well for a trajectory of profitable step-up growth for the years to come. My personal focus area, we ourselves are to continue deriving medical excellence across our hospital group, working closely with Mr. Sushobhan Dasgupta in refining our strategic priorities, and ensuring that this transaction creates significant value for stakeholders. Thank you very much.

Thank you. Ladies and gentlemen, on... [Audio Gap]