Earnings Call: Q3 2021

Aug 6, 2021

Good morning, ladies and gentlemen, and thanks for joining our call today. This is our 9 months 2021 Analyst Call. My name is Sebastian Fredericks, and I'm Head of Investor Relations. And with me as usual, our President and CEO, Doctor. Lubin Mans and our CFO, Justus Wehmer. I would like to hand over to management now to give you an introduction to our financial statements of 9 months 2021. And afterwards, we look forward to taking your questions. Yes. Thank you, Sebastian. Good morning, ladies and gentlemen. My name is Ludwig Munz, and I would like to welcome you to Cordless Meditech 9 month 2021 Analyst Conference. On Slide 2, you see the outline of today's conference call. I will start off with a short review about our results of our Q3, and then my colleague, Jesus Wehmer, who is the CFO of Karlsace Meditech, He will provide you some more detail on the financials in the next section of the presentation. Yes, in the highlights section, I will talk about the Thais Medical Ecosystem today, a system that we launched a few weeks ago. And finally, I will give you an update on our outlook. Okay. So please have a look at Slide number 3. I'm really glad to report that calcite's Meditech 9 months performance was really very strong. The Q3 made a significant contribution to growth and surpassed our previous expectations. Revenues reached EUR 1,198,000,000. That is a significant increase compared to prior year despite of negative currency effects. On a constant currency basis, revenue were at €1,235,000,000 which corresponds to 28% growth. As you will see later, the APAC region performed extremely well, but also EMEA and Americas achieved some growth. In terms of our SBUs, both microsurgery and OPT ophthalmology increased significantly. However, growth was stronger from OPT. Justus will discuss the contributors more in detail in just a minute. Before we go there, let me say that the EBIT margin Increased to 23.6 percent versus 11.6% in prior year. Clearly, the comparison base of last year is very low. Nevertheless, the margin is very high due to the sales performance, due to positive mix effects, both in terms of products and regions and in particular, due to a still pretty low expense level. Our net income reached €183,000,000 which corresponds to earnings per share of €2.04 Last year, we were at 0.77 Overall, the development is positive despite of the impact of the still ongoing COVID-nineteen pandemic. Having said that, I would like to hand over to Justus, who will provide you more background and will discuss the figures more in-depth. Justus? Thank you, Ludwig, and warm welcome here from myself, from Jena. Yes, I'm now going to give you a more detailed Overview of our financials, starting with the performance of our strategic business unit of Tamic Devices. Revenue came in for OPT with EUR 923,000,000 compared to prior year. This represents a reported increase of plus 30.2% and at constant currency, plus 33.9%. Growth continues to be driven by our consumable business, but also device sales recovered increasingly throughout Q3. Especially in our Refractive business, we see continued strong growth, but we are also Quite happy with the surgical ophthalmology and diagnostics performance. SVOOPT, EBIT margin increased significantly compared to last year due to the revenue and cost trends, as Ludwig mentioned. OpEx, especially in discretionary expenses such as sales and marketing, remain on a level well below our expectations for this time of the year. Yes, let's talk about Microsurgery. Microsurgery delivered Solid performance given the actual circumstances with revenue of EUR 275,000,000 Euro in previous year that was €259,000,000 Business overall significantly improved in Q3. The revenue increase of around 6.2% and at constant currency 10.4% is a return to solid growth after several slower quarters due to the corona situation. EBIT margin is down versus last year's figure. This is mainly due to foreign exchange headwinds. As you know, the U. S. Market is very meaningful for our Microsurgical business and an increase in R and D spend that also contributed to higher expenses. Still, however, it's An overall solid level of EBIT margin above 20%, supported by general high cost awareness in our organization. Yes, let's look at the regions. The good news is All regions have returned to growth meanwhile, although APAC still significantly outpaces the rest of the world with its demand. But please keep in mind that the comparison with 2019 2020 includes our Q3 of last year, which was the weakest of all pandemic quarters. So let's take a look at the Americas First. Revenues came in at EUR 306,000,000, which is an increase of 12.3 percent as reported and in constant currency 21% versus prior year. And that comes particularly from further acceleration of our U. S. Business. However, as you can already tell from the first numbers that I shared, the solid growth in the U. S. With plus 13%, but at constant currency, 22% was quite heavily impacted by the dollar euro valuation. Situation in Latin America improved and delivered in total an increase of roughly 9%. Negative effects still come mainly from Brazil. EUR 370,000,000 of sales in EMEA It's overall an increase as reported of 18%. It's constant currency 19.8%. Due to the difference in the nature of the local lockdowns a year ago, the growth rates differ quite severely country by country. We see in Germany growth rates of plus 7% versus France, plus 36% or UK plus 99%. And that actually represents quite nicely the as I said, the severity of the lockdown measures taken last year in those countries. Finally, APAC revenues came in at €575,000,000 which is an increase of 34.7% versus prior year And at constant currency, 36.7%. Once again, growth was mainly supported by China and South Korea. But Southeast Asia also saw some regaining momentum. And Japan, though not yet in a growth mode, but also still recovered versus last year. China, including Hong Kong, So an outstanding growth of 69%. And also South Korea saw strong revenue growth of 20%. Yes. Then let's have a look at the P and L. You can see an increased gross margin of roughly 58%. And compared to prior year, this It was mainly supported by favorable regional and product mix effects. The OpEx Reduction in total is mainly driven by our continued lower sales and marketing expenses, mainly still due to the corona restrictions affecting travel, entertainment, advertising and trade shows. However, 1st, face to face trade shows and conferences are taking place as we speak and are scheduled into the next month and into the Q1 of our next fiscal year. So we should see some visible impacts in increasing expenses going forward. R and D increased in absolute terms. We maintain to have a strong focus on our digitalization and cataract workflow innovation projects. You will hear more about it later. But overall, good operating leverage helped to bring down the R and D ratio by a couple of percentage points from the high levels of last year. And finally, EBIT with EUR 283,000,000 It was well above prior year at EUR 112,000,000 yielding a year to date margin of 23.6%. Yes, on the next slide, a quick view at the adjusted EBIT margin, which reached 23.9%, Rather small effects related to purchase price allocations and a onetime effect in our other results of €2,400,000 due to the sale of our office building in Jena as we reported already earlier this year. And finally, a short look at the cash flow statement. Operating cash flow is at 2 €29,000,000 versus €63,000,000 last year, significantly above, of course, due to the positive EBIT development. Working capital, overall, a significant increase in Accounts receivables due to the sales development. On the other hand, however, we also increased our trade payables related obviously to an increased business volume. Cash flow from investing activities, mainly driven by Expenses for plant, property and equipment, please remind, as we have shared here with you that we are building up and extending our IOL production capacities in China, but also in other places in the world. And finally, cash flow from financing activities is mainly influenced by changes in receivables and payables on our treasury accounts as well as the dividend payments. Yes, and with that, I hand it back to Ludwig for highlights and outlook. Yes, great. Thank you, Jesus, for the discussion of our financials. In the highlights section today, I would like to talk about a very significant product launch, which we had just recently. As you might remember, Tijs has been driving digitalization in ophthalmology and microsurgery for many years. When I say many years, that means more than 10 years. So really long time. Our focus has always been on improving the efficiency of treatments and the medical outcomes of the patients of our customers. However, compared to the early days of digitalization, technology has really advanced very much in the meantime. As you all know, nowadays, large amounts of data can be easily transferred through the Internet and stored in the cloud. Artificial intelligence algorithms can be used for the analysis and the data can be accessed easily from anywhere. We all have learned in the consumer world about such easy to use cloud based ecosystems that integrate all kinds of devices like computers, mobile phones, home automation devices and much more in a seamless way and Provide us with numerous new applications. The consumer ecosystems really have changed the way we communicate, the way we purchase our daily consumption. The ecosystems have changed entertainment industry and much more. And this is really important. We believe that a digital ecosystem for the medical world will have a similarly transformational potential. SAIS has been working on a SAIS medical ecosystem for quite a while, and we are glad that we could start the rollout of our ecosystem just a few weeks ago. The ecosystem will be at the heart of our solution strategy going forward. It is meant to provide an easy to use environment for our customers that creates value in many ways, both in terms of efficiency and better outcomes of the patients. The SAIS Medical Ecosystems consists of 3 layers, which are shown here on this slide. First one is connected industry leading devices. The second one is cloud based data storage and the third one is software applications. Now let's go through that. Zeiss has shaped both ophthalmology and microsurgery for more than 100 years with innovative devices. All of them generate data, for example, images, but also videos, measurement data, status data and much more. Our devices and consumables will remain to be a key value driver for our company. That's very important. That remains to be the key. However, the data will be stored on a secure and compliant cloud platform effortlessly and seamlessly. This data can be accessed by its owners easily from anywhere. The software applications are designed to support streamlined workflows and to optimize the clinical management of patients. Data passes seamlessly from one Zeiss device to another. Clinical decision making is supported by AI algorithms and much more. The Saif Medical Ecosystem will be available to all our customers without any additional investment. Charges for some of the applications may apply, however. Users of our on premise solution forum, which has been in the market for very long. They will see immediate value from the ecosystem as well. As a first step, they can back up their data in the cloud and access their data remotely. There's a lot to expect from Saiz over the coming months years in all the three layers of our ecosystem. Okay. So much about that. Stay tuned as we try forward the digitalization in our industry. Lastly, let me comment on our outlook, which we have already pre released last month along with our preliminary Figures, 1st on the trends, our industry continues to benefit from highly favorable long term growth trends, as you know. There are the these trends are the aging of the population and growing wealth in large parts of the world, Rising access to health care in the rapidly developing economies and the increase of access to information. These trends lead to a growing number of patients and thus to a higher load to the health care systems and higher demand for health As the economic efforts sorry, as the economic effect of the COVID-nineteen pandemic Are beginning to wear off. We are seeing by and large a return to these growth patterns. In most countries, Surgical procedures have come back to the pre pandemic level rather quickly. However, the equipment business has improved, but needs some more time to recover fully. By now, we are seeing growth against 2020 2019, both in surgical procedures as well as in the equipment. The COVID-nineteen pandemic has accelerated digitalization in health And therefore, we strongly feel that the ZEISS Medical ecosystem is coming just at the right time, and we will extend our lead in digital solutions for our customers. Regarding the financial targets for fiscal year 2021, we are now expecting to exceed €1,600,000,000 in revenue and should significantly exceed our previous target of an approximate 20% EBIT margin. Keep in mind, however, margins are benefiting substantially from artificially low sales and marketing expenses as we discussed before. Yes, as you will have noticed, our midterm profitability target has not yet been addressed here. We will Update our midterm target in due time as we move out of the pandemic and get a better sense for the future level of our operating expenses and for the level of recurring revenues going forward. Ladies and gentlemen, with that, we have come to the end of our prepared remarks, And we are now looking forward to your questions. I hand back to the moderator to explain the procedure. Thank you. We will now begin our question and answer session. And the first question is coming in from Patrick Wood at Bank of America. Please go ahead. Perfect. Thank you very much. I have two questions, please. The first one, thank you for some more details on the digitization in the Zife Medical ecosystem. I'm just curious, you mentioned that It's essentially a freely distributed platform to people initially, but there's some kind of potential revenue generation from incremental Offerings within that platform. I'm just curious, could you give us a little bit more detail on how you're going to generate revenues On the software side with this or is this more about driving hardware? So that's the first question. Second question is really around China. I'm just kind of curious how you've seen demand very, very recently on refractive and IOLs. I know one of Your peers was commenting the growth accelerated as they went through the quarter. And I'm just curious, is demand there being driven really by New classes, is it about penetration into lower myopes? Or has the mix of patients been pretty stable, do you think? Thank you. Yes. Thank you for your questions. So let's start with the question on the ecosystem. Yes, it's The idea is really the ecosystem is just there, yes? And we know it as I was explaining, we know that from the consumer world. And if you think of typical ecosystems like we know them from our mobile phones and so on, it's just there, Yes. So you don't have to subscribe to it. You don't have to install software or something. It's just there. That makes the integration of the devices much better and increases the value of the devices. So our first Revenue impact will come from the devices because just our solution will be more attractive. There will be more function. There will be more functionality, More value to our customers through the platform. Does that mean that it's only revenue generation in hardware? No, Right. There is clearly also an opportunity to monetize on software applications. But it's really both. And I believe that the at least in the beginning and going forward, The major effect will be higher attractiveness of the overall solution and thus revenue effects from hardware, but it's going to be both longer term. On your second question regarding China, As we said before, the growth rates, which we are seeing currently in Asia, Also in China are difficult to interpret as last year we were in a deep crisis. You might remember that China went into the pandemic already in our Q2, in the end of the second quarter, but Still there were severe effects in the Q3. So the increased growth But we are seeing now both year to date and also quarter by quarter over quarter Q3 this year compared to Q3 last year. These growth rates are really difficult to interpret because the basis is so low. Nevertheless, there is growth in China, and We believe that has to do with growing demand. So it's just more patients treated. And I don't believe that there's a major shift in the mix, Yes. I mean, if you compare our company with other companies, the product mix is probably different because our offerings are different. So there might be mix effects. But overall, the buying behavior, the mix of demand, I would not See a significant change there. It's just that the treatment of patients has recovered. And therefore, we see some positive effects here. Yes, I believe that explains a little bit your question. The other question which plays into this is how much of that is pent up demand because there was last year was a pretty weak year and now patients might be treated this year, which had plans for treatment last year. That's difficult to say how much of that is pent up demand. We simply don't know, but there is certainly some of that. Totally understand. Thank you very much for taking the questions. You're welcome. The next question is coming from Jacob Friedrich at Deutsche Bank. Please go ahead. Thank you. Good morning, everyone. So my first question would be On order intake growth, can you potentially give us a feeling for how this looked in Q3 and after the 1st 9 months, especially on the equipment side of your business. And then secondly, we noticed that you Received your approval for your intraocular lens in the U. S. Seems a little bit earlier than we all expected. So could you share what that could now mean for the rollout in the U. S? And whether there might even be a little bit of a financial impact already this fiscal year. And then the third question is related to that because it's on The upcoming FEKO launch, would be great if you could update us on the time line. And given that the IOL is now already approved, whether you still target A combined launch with the FEKO in the fall? Yes. Thank you very much for your questions. I start with the IOL and take your questions and then Jussus can answer on the order intake question. Yes, regarding IOLs, that's actually very good news that we have received a first approval of our first IOL for the U. S. We will it's important to understand that There are more approvals needed. So the product that we will launch in the end needs another approval, which We have filed and we are waiting for. So we are a little bit earlier than we had expected, but through nevertheless, We need that second approval, which we expect to come in later this year. And then we can start The launch the second approval is related to the injector, the IOL injector. And so that we have a really highly attractive product then for the U. S. We still believe that This will coincide with the approval of the FEKO, yes? And that has always been our approach because The FEKO and the monofocal IOLs are typically sold together. There's always Strong relation of these two products. And this is why we believe that Just makes sense to launch this simultaneously. We expect the launch of our FEKO As announced previously, the end of the fiscal year or rather in the end of this calendar year, also Q1 of next fiscal year, That's our time plan and it's going well. The feedback we receive on the device is extremely positive. So We are quite confident that this time line actually will work out. You also say first question on order intake. Sure. Yes. Falko, I think I can keep that rather short. I mean, you were referring to the equipment side. And I'd say both in OPT and in MCS, we have seen solid order intake growth for equipment. To be a bit more specific, in ODX, to start with the Diagnostics business, We certainly have seen, especially from the U. S, a good rebound of interest and that is building sorry, in The order book, the biometrical devices and optronic microscopes in surgical Seeing good demand and also the Vismarck, so the lasers for our refractive business I've been also in good, how should I say, good shape as it comes to sales projects filling the funnel and ultimately transition into orders. And for MCS, Pnevo once more is leading here the equipment order entry for MCS. And here again, the U. S. Demand was quite solid in last quarter. I think that helps you to get an idea. Perfect. Thank you. If I can briefly follow-up, even if you can't be too specific, are we still talking about double digit growth rates On the order side for the areas you mentioned? Well, again, Let's remember to what we compare. Last year, Q3 was the trough of our sales dip, so to speak. So yes, for various of the product families that I mentioned, It is double digit, but again, with a bit of care to be put in your model, because the comparison with last year is now more heavily affected by the low Q3. Understood. Okay. Thank you. The next question is coming from Markus Koda at Stifel Europe. Please go ahead. Good morning and thank you for taking my questions. So my first one is on the Visumax facelift. I believe this is something You originally intended to launch this year. So could you provide us an update on this? And could you share with us your expectations what the near term Replacement potential is for the Vismarckx. My second question is on your progress on the rollout of the smile in the U. S. Can you give us a ballpark figure for the growth in the installed base this year so far? Thank you. Yes. Thank you for your questions. Yes, VisualMax and Smile is Clearly, innovation focus we have been working on, although Smile has been in the market now for about 10 years. We still see a A lot of potential there for further innovation. And this is while we have further developed this. It's actually much more than a facelift, trust me. This is going to be just the next level of innovation what's coming up. However, First of all, that development, which has been going on clearly for quite a while, has been impacted by the pandemic as access to clinics is just restricted. And the Clinical testing of such a device is of essence clearly and that has caused some delays during the pandemic. The launch will, of course, depend on the approval country by country. And so we expect to receive The CE Mark first and then we will probably get Approvals in Asian countries and finally in the U. S. That's a process that will To really get the approvals for country by country until we are completed, that will take several years, yes, just to manage the expectation here. This is not going to be a fast rollout. It just cannot be because of the approvals. That's a high risk class, high risk class device, and this is why it takes so long. So yes, that's definitely The time line regarding the replacement potential, of course, there is some replacement potential. We have Customers who always want to provide the latest technology, the highest performance to their customers, We cannot estimate how the percentage of customers who will exchange their device, but we believe that The next level of the technology will certainly strengthen the position of the Smile procedure in the market. So I believe that's the leading effect. So it's not so much the sale of the device, but rather that the SMILE procedure will be even more accepted. SMILE in the U. S. It's developing really well. I have to say that. I've always warned here and we'll do that once again in this group. That is not going to be a fast expansion because The refractive surgeons in the U. S, they all have their equipment. And It just takes a long time to eat into the market and exchange the existing devices because it's just if a refractive surgeon is just invested 1, 2, 3 years ago, he or she will not replace by now. It's just a relatively slow process. The installed base is Higher than 100 in the meantime in the U. S. So we trust that this will continue and we see a really nice increase despite of the pandemic here in terms of installed base and usage of the devices. So that's going well. Great. Thank you. You're welcome. The next question is coming from Sethi Ozanash at Missi, please go ahead. Good morning. Thanks for the presentation. I couldn't I actually have two questions, please. I couldn't have but noticed that the pre release of the results, the statement that came with the pre release in mid July Didn't include the statement that EBIT margins are expected to remain sustainably 18 above 18% in the medium run. So is there an update for that? How should we think about margin protection going forward? And my second question relates to the newly launched ecosystem. In which parts of the world was this launched and where Which parts are next? And what kind of a hit ratio or like how many customers do you expect to be on the ecosystem, Say like within 1 year or like 2 year or whichever targets you might have? Thanks a lot. Yes. Thank you for your questions. Regarding the midterm target, I was referring to that actually in the presentation. Sorry, if That didn't come across. We have not updated our midterm target because we need to understand What product mix to expect longer term as we were explaining the product Have shifted country by country and it has not come to a steady state, but that is absolutely essential When we forecast our midterm EBIT margin, so we need to expect we need to wait until we have a better And of that product mix. And the other unknown, which we also need to get a better understanding of is cost levels. As we were explaining, our sales and marketing cost is currently significantly below the prior COVID level. And as the trade shows And other marketing activities will more and more normalize going forward that expense will increase. And again, we do not know yet what level that exactly will be. And this is why we, for the time being, have not updated our midterm profitability target. But as soon as we have a better understanding about these factors, which impact the profitability midterm, We will actually release that. Regarding the ecosystem, it will be in general a global launch. There are Certain countries which will probably need country specific adaptations, if you think of China, for example. So focus in the beginning clearly on the EMEA region, Americas region And some Asian countries, but not all the countries because of these differences. The Digital World in China is very different from the rest of the world, so that needs a special focus. Yes. How many customers? Well, I can't give you a number, but it's very obvious as this Ecosystem, as I was explaining, would just be there. It's nothing that customers need to acquire or that customers Need to install with every sale that we do in the future, the number of People on the system will increase. So that's a little bit the logic. What will be a key measure is clearly the utilization. So how do customers really use this? And that will depend on the applications that we launch because the applications generate the benefit to the customers, yes, what they actually do with the ecosystem. And the number of applications will increase over time. As I was explaining, there are numerous ideas that we have and many things in the pipeline. They will only be released step by step and that will steer the ramp up in the end. So please understand that I cannot Understood. Thanks a lot. Just as a small follow-up, when the applications come, they will presumably be on a like Monthly fee or a similar fee structure, right? As I was explaining, partly yes, partly no. It depends on the application. And Some applications we will charge, for others we won't. Okay. Thank you. You're welcome. The next question is coming from Freya Katow with Berenberg. Please go ahead. Hi. This is Priya dialing in for Scott. Just have two questions. So firstly, can you talk about the durability of growth in microsurgery? So could we likely see a growth moderation in the next year or 2? And secondly, do you have any updates on any other new launches? So For example, the trifocal cataract lens in Europe? Can you repeat the first question on the MCS? What Specifically, what's your question? I didn't get that. Can you talk about the durability of growth in microsurgery? And yes, where do you think it will go in the next year or 2? Yes. So let's start with that. Microsurgery Still is I mean, we are growing. We have seen some growth compared to prior year, but also compared to the 2019. So we are back on a growth path. That's actually the good news. We have a well filled order book also in microsurgery. So I would expect that we slowly return to pre crisis behavior and pre crisis growth. How long that's going to take is extremely difficult to predict as nobody knows how the pandemic will work out. So it might well take a year or even longer until we are back to that pre crisis level. Maybe it's faster. I really don't know. But again, we see positive trend. We see positive signs. So that I'm actually confident that The pre crisis level will be reached in a foreseeable time. Yes, update on launches, That's as always, I cannot make announcements here for product launches And we're not we were talking before about the ecosystem, but there is a lot to expect On the ecosystem side, applications that come in that context, That's going to be a very exciting field because that's really a first to the market. And the feedback we have received in this field is extremely positive. Now the other launches that we already talked about before Are to be expected in surgical ophthalmology. So in particular, on in the IUL field, fecal field, particularly in the U. S, but also globally. I believe that is what's been announced so far. So beyond that, well filled pipeline, but I cannot comment Okay. Thank you. The next question is coming from Alexsmar Halitzer at Hauke Neufeuser. Please go ahead. Yes, hello. Thank you very much for taking the question. You Probably already touched upon what I wanted to ask, but maybe you can add additional color. It is with regards to the U. S. The entry with IOLs, you mentioned that it will be coinciding with the FICO release. I was just wondering, is this already enough to is it just putting you on the sort of equal footing with your competitors in this market? Or does It brings sort of additional features or edge that it would sort of put you above them. And then in regard in this context, maybe So if you can discuss potentially, if you can give a rough indication of the time line with the Yantac technology And what's the potential there to really elevate you above your competitors in when it comes to cataract treatment? You cannot imagine how happy I would be to share that information with you because it's so exciting, but I cannot and will not because that's highly sensitive. And our competitors would give you a lot of money for that information. So Please understand that I will not comment on teachers and on the competitive level. I promise you, you will be surprised. Fair enough. Thank you very much. Maybe just another one. I guess, you also briefly already answered it. It has to with regards to your ecosystem and the software features that could be potentially monetized. But Is there a way for you or can you imagine a model there, sort of a revenue model based on the procedures numbers, Same as you have with Smile? Or what is the most appropriate revenue model for those features? That's an excellent question. And I believe there's no simple answer to it. So I do not expect A radical change of revenue models, but I expect more variety. So there will be new models, right, also procedure depending models. Yes, So we can find out what makes sense to our customers, what makes sense to us. And it will be a mix in the beginning and potentially New revenue models will be established over time. So yes, we will see. And clearly, the ecosystem will allow us to do this. And That's going to be interesting how this will be developed. But again, that's difficult to predict. Thank you. Excellent. Thank you very much. You're welcome. There seems to be no further questions. For closing remarks, I'll get back to the speakers. Yes. Thank you very much. Dear ladies and gentlemen, I really appreciate your questions And your interest in Kaldasai's Meditech, we are now into our final quarter of this fiscal year. So I'm looking forward to reporting next time The full year results, as you could see from our remarks, we are really quite optimistic, although The COVID-nineteen pandemic is still going on and there's still some uncertainty, but look at the trend, it's really a positive one. So I wish you a good time. Some of you still have some summer vacation ahead of them. So have a good time and I'll talk to you back probably in the end of this calendar year. Thank you very much. Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.