Earnings Call: Q1 2020

Feb 10, 2020

Good morning, ladies and gentlemen, and welcome to the Carl Zeiss Meditech AG Conference Call regarding analyst conference three months figures twenty nineteentwenty twenty. At this time, all participants have been placed on a listen only mode. The floor will be opened for questions following the presentation. Let me now turn the floor to your host, Mr. Sebastian Frerich. Yes. Good morning, ladies and gentlemen. Thanks for joining us to our three months analyst call. I'm Sebastian Felix, Director of Investor Relations. And with me is Jules Lauer, President and CEO, Doctor. Ludwig Mons and our CFO, Justus Hemmel. I will hand over to them now to give you an introduction to our financial statements of the first quarter. And afterwards, we look forward to taking your questions. Yes. Good morning, ladies and gentlemen. This is Ludwig Mons speaking. I also would like to welcome you to Carlsbad's Meditec's Analyst Conference on our '20. Please turn to Slide number two of our presentation, which shows the outline of today's conference call. As always, in the first section, I will start with an overview on the results, then Justus Wehmer, our CFO, will provide you more details on the financials in the next section of the presentation. Afterwards, I will share some highlights, including some comments on the situation in China in light of the coronavirus epidemic. And finally, I will talk about our outlook. So let's continue on Slide number three. I'm really glad to report that Caldas Meditec could use the momentum of last fiscal year and was again able to grow substantially in Q1 compared to the same quarter of prior year. Revenues reached €370,000,000 with strong contributions from both SBUs. Also in terms of regional split, we do not depend only on one region. We had significant growth in all of the three regions, Americas, EMEA and APAC. In total, the growth rate was at 14.2%. On a hypothetical constant currency basis, the growth rate was 12.7%. In other words, we had some currency tailwinds and users will go into the numbers more in-depth and will discuss growth contributors specifically. The EBIT margin increased to 15.4% versus 14.9% in prior year. Please keep in mind that we had some positive impact from R and D capitalization in Q1 of prior year, which means that the improvement on a like for like basis was even higher this year. But we will address this later in the presentation. The margin improvement was supported by a positive development of the product mix. And once again, we increased the share of recurring revenue. But also careful cost management helped. We have worked with the organization on the OpEx awareness. Our net income reached around EUR39 million, which corresponds to earnings per share of EUR0.43. In prior year, it was EUR0.32. So earnings per share increased due to the EBIT increase and due to the absence of hedging losses that occurred in prior year. Okay. So overall, the performance developed really nicely. And I now would like to hand over to my colleague, Justus, who will shine some more light on the details of our results. Justus? Thank you very much, Lupin, and also a good morning, and welcome from my side to everybody in the call. We are going to Slide five, please. And I'm now going to give you a more detailed overview of our financials, starting with the performance of our strategic business unit, ophthalmic devices. Revenue came in for ophthalmic devices with €269,400,000 compared to prior year reported growth is at 12.5% and currency corrected 11.1 There was strong growth across the portfolio and again, good recurring revenue share. We see continued positive effects from innovations we've launched like the Cloudera 700 or the 0.6 benefiting our Diagnostics portfolio. The Refractive Laser business continued its strong performance from the past. Here, especially our SMILE technology continues to develop nicely. Again, also a positive trend in Surgical Ophthalmology, driven by the ophthalmic microscopes, where, as you know, we have launched the Artevo microscope towards the end of last fiscal year. The SBU EBIT margin decreased slightly compared to last year due to some extraordinary or seasonal effects. As Lupin mentioned earlier, last year, Q1 was affected by R and D capitalization. And we also have to remember that Eantech is included fully in the first quarter of this year's financials. Last year, indeed, the acquisition was consolidated only in December 2018. So from that perspective, we also have an additional expense built into the R and D expenses of this fiscal year. So we were supported by a more favorable product mix, a solid share of recurring revenue and higher operational leverage. Let's turn over to the next slide and cover our SBU Microsurgery, which again delivered outstanding performance. Revenues have reached the €100,000,000 threshold versus previous year, 84,000,000. This is a revenue increase of around 19.1% and at constant currency, still remarkable 17.4% growth. There is a continued strong revenue development growth in neuroENT, supported by our robotic visualization system, Kinevo, but we also see a good trend for the new TiVato 700. EBIT margin is still very strong and improved even further due to volume effects on the one hand side, but also the regional mix and the cost awareness in our organization contributed to that remarkable performance. Let's now take a look at the regional performance. You can see, again, a fairly well balanced regional split across the three regions. The Americas now showing the €109,000,000 of revenue, a strong increase of 18.5% and at constant currency, 15.5% over last year. The U. S. Market itself contributed strongly with the growth of 15%. We also, in that region, benefited from the Clarus 700 and Cirrus 600 Cirrus 6,000, sorry, introduction and also a good contribution from our MCS business. Also, the Latin American markets, which last year were somewhat disappointing, showed increasing performance. EMEA with €111,000,000 and an increase of 7% and at constant currency 6.9%, again, with good growth rates. The performance is somewhat more heterogeneous. Some markets major markets like Germany, France developing with growth rates in the mid single digits and some other markets a bit weaker than last year. But overall, we are satisfied with the performance in the first quarter. And last but not least, Asia Pacific with €150,000,000 revenues and an increase of 16.9% and at constant currency 15.5%, again contributing strongly to the overall growth. China with good contribution, but also South Korea and Japan. With that, we move over to the P and L. You can see here an increased gross margin with roughly 56% compared to previous year due to positive product mix, especially high share of recurring revenue. OpEx in terms of absolute numbers increased, but OpEx margin overall stable with roughly 40% of sales. Increase in R and D ratio, as we mentioned before, we had the capitalization in previous year and also investments in some of our strategic development projects, which we have outlined in previous calls in the field of surgical ophthalmology are contributing to the higher expenses for R and D. EBIT of €57,000,000 significantly above prior year and EBIT margin, as mentioned before, at 15.4. If we move on to the next slide, the adjusted EBIT margin reached 15.7%. That's an improvement of 0.6 percentage points versus previous year. There, as you know, are only rather small effects in terms of purchase price allocation related explaining the difference. And here, the increase is mainly now from the PPA of Eantech. Moving on, finally, to a quick look on the cash flow statement. Operating cash flow reached €26,000,000 That is above prior year and is mainly driven by the positive EBIT development. Cash flow from investing activities in comparison to last year is mainly affected by the fact that in last year, we had the Antec acquisition. And cash flow from financing activities is mainly influenced by changes in our receivables and payables in our treasury accounts. With that, I will then hand it back to Lucin. Yes. Thank you. Just so that brings me to the highlights section. And as I said before, I would like to start with some words on the coronavirus outbreak in China. As you may wonder, how that will impact Carlsbad's Medic business. And it's a little bit explained on Slide number 12. As you know, public life in some regions of China was basically shut down over the last two or even three weeks. However, it's really important to note that China had the Chinese New Year holiday break anyway. And this break was extended because of the coronavirus epidemic. But nevertheless, it looks like people are returning to work starting today. It was in the news this morning. And we really hope that we will return to normal very soon. As we do not have much information from the end customers yet, it's really difficult to assess the impact of the crisis on our business. But let me a little bit explain our thinking. The Chinese New Year holiday period is typically a period with high volumes of surgical procedures. Our customers had prepared for this and stocks of consumables were at a high level going into this period. Due to the coronavirus epidemic, many hospitals had closed temporarily or at least restricted their service of non essential treatments and refractive surgery is such a treatment. Therefore, the consumption was probably lower than expected and demand for replenishment of the consumables might drop temporarily. However, our working assumption is that most of the procedures will only be postponed, but not canceled. So we might see some headwind on our consumable sales in China over the next one or two months, but the lost revenue should be moderate. Currently, we do not expect the coronavirus epidemic to have a significant impact on our profits and the margin of the full year. And therefore, we confirm our guidance for the ongoing year, although it will be somewhat more difficult now to get to these numbers given the crisis. Obviously, a key question is how long the corona crisis will last and how fast the recovery will be. Nobody knows that, and we will keep you updated on this topic as the situation evolves. So let's move to the next topic on Slide 13. I would like to talk about the reach of our products. As procedures with Carlsys Meditec devices or consumables have grown strongly in recent times, more and more patients get in touch with Zeiss products. That's a very interesting fact. And here I have some fun facts on this slide. Basically, two examples with our visual health platform, and we talked about that before. With that platform, which was piloted in India and is currently being rolled out to other countries, we have successfully introduced a new digital business model. The system provides screening for certain eye diseases through mobile stations even to patients who do not have direct access to ophthalmic specialist care. With this model, we could reach more than 300,000 patients since the introduction in 2015. An even bigger reach we have through our consumable business for refractive and cataract Surgery. In twenty eighteen, twenty nineteen alone, we delivered more than 1,400,000 intraocular lenses, which contributed to restoring eyesight and improving the quality of life of patients. On the refractive side, we sold more than 1,300,000 contact glasses for VisuMax for both SMILE and LASIK, so really significant numbers. I believe it's also worth mentioning that our Forum platform, our digital platform for data management is currently being used by more than 30,000 healthcare professionals on a daily basis. So also, that creates a big visibility of size in the ophthalmic market. Yes, that were our two highlights. So that brings me to the last agenda item, which is our outlook. So please go to Slide number 15. The growth drivers for the medical market in general and the microsurgery and ophthalmology market in particular are fully intact. And these drivers will lead to further profitable growth and presumably. Let me mention some of the well known growth drivers, aging of the population in major parts of the world growing affluence in countries like China and India, but also others, increasing information access and health awareness, these all lead to more patients. And as a consequence, the patient load and cost of the healthcare systems will go up. CASAS Meditec will continue to follow this strategy, which has been successful over the last years. We will continue to focus on our strategic priorities, which are further expand recurring revenue, drive rollout of SMILE refractive laser surgery, extend technology leadership in cataracts and lead neuro EMT market by turning next generation products into business growth. And finally, I would like to mention that digital solutions will play a key role going forward. Now for fiscal year twenty nineteentwenty twenty, we confirm our guidance, which are number one, that we want to grow at least as fast as the markets grow number two, we will keep an attractive EBIT margin between 1719% and number three, midterm, we expect an EBIT margin sustainably above 18%. Now ladies and gentlemen, this concludes our prepared remarks. So we are now happy to take your questions, and I turn back to the moderator to explain the procedure. And the first question comes from Mr. Scott Bardo. Please go ahead. Thanks very much for taking my questions. Yes, so I wonder if you could share some additional insights into the potential disruption for refractive laser consumables in China. Obviously, these are quite lucrative business lines for the group. And presumably, your investments into R and D won't moderate as a result of this near term disruption. So I guess the nature of the question is, do you still anticipate the prospects for the full range of EBIT margin guidance to be in play? Or do you now think it's more prudent to adopt more the lower end? So that's question number one, please. And second question, in Microsurgery, some very good margin dynamics and growth dynamics in the first quarter. I wonder if you could talk to the sustainability of these margins at these levels. Is this abnormal? Or is this the new level that Carlsar sees? And perhaps some feeling on how significant or important the Tavato product is within this divisional mix? Thank you. Yes. Scott, thanks for your questions. I will start with the first one and just to take the second. The question whether given the prices in China, we will rather end at the low end of our EBIT margin or the high end is really incredibly difficult to tell. As a matter of fact, it very much depends on what I said before, whether the procedures are just postponed within the fiscal year or whether they are canceled. And we don't know that yet. So we just have spoken to one or two clinics, and they are still optimistic, but even they don't know yet. So I think we need to be a little bit patient and see how things develop. It's clear that things are becoming more difficult, right, if actually some of the profitable revenues would be canceled. But that's speculation for the time being, right. And from what we see and know so far, we would expect that the effect will not be as significant that it would lead us out of the range. But again, I really can't predict whether it will be below or the high end of the range. We need that range because of that uncertainty. So I ask you for your understanding. Yes. Scott, I think the second question referred to the Microsurgical business and the as you said, the good dynamics and the question about the sustainability. I think overall, we definitely acknowledge we have now a portfolio which is as refurbished almost as it could be. It started with the Kinevo almost two years ago. We extended to the Kivatra and XTARO. And from that point of view, yes, we definitely benefit right now from the fact that all products seem to be well received in the market. So portfolio is good. Secondly, we have seen through the last two years, mainly Europe and U. S. Contributing to the growth in neuro. As we have reported about August, we got the approval for China that could indicate that for this year, we can hopefully and provided that corona is not going to be a lasting issue, That could mean that we also see this year a growth contribution for MCS from China. So in a nutshell, we definitely have some optimism for this fiscal year when it comes to sustainability of that growth rate. As you know, we deem that market for MCS as one which is rather, let's say, nichey market. And we already commanded pretty strong position. So with all the, let's say, pleasure with which we see the current growth rates, but we believe there will be some natural kind of ceilings to it. So maybe that is yes, maybe I can add one more thought. The when you look at the margin in microsurgery, there are two factors to it. The one is certainly the growth, right? So we now have more revenue to cover our cost base. And this is what your sister explained is that growth or at least the revenue level actually can be maintained, that will help with the profitability. The other factor is the profitability of the products, right? And new products the new products that we have introduced are profitable, very profitable. And that also that might go down a little bit. The price level might go down a little bit, but the first effect remains. Okay. Thank you very much indeed. I'll jump back in the queue. Okay. The next question comes from Mr. Daniel Wendorff. Mr. Weldsos, you can now ask your question. Can you hear me? Yeah. Very good. So thanks for taking my questions. And the first one is on the the revenue contribution coming from your Refractive Surgery product suite overall. Can you give us an indication how big this line item is meanwhile, both in terms of instruments and consumables? My second question would be on the margin development in ophthalmic devices. You mentioned already the R and D topic. So my question would be how important was product mix for the margin development in ophthalmic devices? Yes. Regarding the Refractive Surgery business, how large is that? I really must ask you here for your understanding that we do not break down our revenues product lines. And that has very simple reasons, which is competition. We don't and cannot make this transparent to our competition how large and how profitable the individual product lines are. Let me say this Refractive Surgery has become a substantial and very important business for us. That's pretty clear. But I cannot provide numbers for this, unfortunately. Regarding the margin development of Thermic Devices, it's indeed a question of product mix. The trend which we have been discussing here for many years is that we work on increasing the share of recurring revenue. And recurring revenue is implants, but also consumables. And class of products tends to be more profitable than the equipment business. And at the same time, it tends to have a different cycle when it comes to economic ups and downs. And this is why we are interested in further increasing and growing the recurring business. And we see a constant shift of our product mix from the equipment to a larger fraction of recurring revenue. And this clearly is an important contribution to the margin development, which we have seen over the last years. Thank you. Okay. And the next question comes from mister Marcos Gola. Mister Gola, can now ask your question. Hi. Thanks for taking my question. So my first one is also a follow-up on the coronavirus. I wonder whether you can give us some additional color how the KINEVO rollout has been progressing so far this year, given that I think the pure January to March is quite important for that rollout and the fact you mentioned in the conference call that most clinics have been busy with other stuff at the moment? And my second question is on your cost base. So will you be able to postpone some or at least some of the cost buildup you have anticipated if your top line growth slows down noticeably in order to protect the margins? Yes. I'll start with the first one on the coronavirus. Well, we have received approval for Kinevo in China, actually beginning of this fiscal year or end of last, I don't remember exactly. But we are now in the process of ramping up demos. This is a large ticket item for our customers. So they definitely want to see a demo. They want to try out the product before they actually acquire. And the other thing to keep in mind is that given the large amount we are talking about, customers have to reserve funds and in some cases have to apply for funds. So typically it takes a while until the money is available and they can actually do purchase the product. So in other words, the times K here is rather month, if not quarters of a year, right, and not weeks. And the corona crisis now slows down the country, hopefully, for not more than a few weeks, right? So I would expect a significant impact on of the coronavirus on the rollout of the Kinewalk because it's just different time scales. Yes. Second question for you, Jesus. Yes. I think you were asking about to what extent we can basically brief or adjust our OpEx behavior if we were hit by negatively in our top line. The answer is, we have already, a while ago, implemented in our organization the concept of what we call resilience, which basically means that if we feel the need to adjust expenses, we are kind of prepared to know where and what we may consider in order to postpone along the cost items and expenses by types that we have, and this includes sales and marketing as much as G and A and R and D. So from that perspective, I can only tell you that we I think we have the instruments. However, to what extent we have to make use of it, of course, right now remains to be seen. But there is clearly a portion on our OpEx that is variable and that we will manage with a lot of scrutiny if need be. I would also like to mention that in last crisis actually, we did not stop our R and D investments and that paid back when we came out of the crisis. So if we can afford it, and that really depends on what the crisis would be if there was one, right? Right now, we don't see a crisis. But if there was a crisis and then we would need to make that judgment as you just described. We are prepared. But again, if possible, we would continue to invest at least in research and development. Great. Thank you. And the next question comes from Mr. Falko Friedrichs. Mr. Friedrichs, you can now ask your question. Good morning. Thanks for taking my questions. I would have three, please. Firstly, on China, can you expand a bit on your supply chain there in terms of how much is produced in the country and how the rest is brought into the country currently? And secondly, on your IOL business, can you update us on the approval process in The U. S? What are the next steps here? And is everything on track for launch next year? And then thirdly, on your Diagnostics business, which showed very strong growth again. After launching new products, how long do you tend to benefit from that in terms of growth until the competition catches up, just based on your experience from the past? Yes. Thank you, Mr. Friedrichs. I'll start with the China question. The supply chain, well, there are two things to look at. The one is our own manufacturing in China. So we do manufacture also in China, but not to a very large extent. Given the few weeks of slowdown that we see right now, I would not expect a major impact of that going forward, difficult to predict. So if the corona crisis would last for, let's say, two, three, four months, of course, we would see something. But for the time being, two weeks, we can certainly bridge. Then there is the other component and that is the supply of components, which we purchase in China and which are integrated into our devices elsewhere in Europe, in The Americas, in Asia. And this is mainly electronics components. So we depend on electronics components, which are manufactured by several or many companies in China and then are supplied to us. And here, the same thing applies, right? Right now, we don't see an effect. If the crisis would last longer, that definitely would change. But again, I have no idea how long it will take and how large the stocks in with our suppliers are actually are, right? Because typically, suppliers have stocks of electronics components, which we can consume and we would need to find out. But again, for the time being, I believe we are okay. And I think that this crisis will be over in a few weeks. Regarding the IOL business in The U. S, there's no news, which is good news. So we are currently conducting our clinical trial that goes as planned. So there's nothing new on that. So I would expect that we can hold the time plan. However, keep in mind, in the end, the final approval will not only depend on us. We need to provide the clinical study results to the FDA and some more documentation, but then it's up to the FDA how long it really takes until we get an approval or if they have further questions, nobody knows. So that still has some uncertainty. But again, there's no news here, which I believe is good news. And your third question was on the Diagnostics business. When there's something new, how long does it take until competition catches up? A general answer is also difficult because I believe it depends on the product. There are certain and of course, on the feature. So in some cases, for example, let's take an OCT and you remember a few years ago, we introduced OCT angiography and then it took maybe a year until competitors had something similar. Our main competitor was still struggling because their hardware was not prepared for this. So they although they had some similar feature, it was not as good. So then it took them relatively long. If you take a typical product, and a competitor would need to develop that product from scratch. So start, we come up with something new and assume the competitor would say, Oh, we should have something similar, and they start a development. Then the time until that competitive product in Diagnostics would hit the market is between three and five years. So it really depends. It can be faster if it's just a minor modification of an existing product. But if it's something entirely new, it's several years. Okay. Thank you. And there are further questions from mister Daniel Wendorff. Yes. Thanks for taking my question. And I would have a follow-up question on the performance of your rather old legacy products in microsurgery. Can you comment on this, how well these products still did in the quarter? Yes. I'm just thinking what our old legacy products. I mean, in microsurgery in neurosurgery, our flagship product used to be the Pantera, which is now replaced by the KINEVO. And the idea of the KINEVO introduction is to really replace the Pantaro. So it's just natural that the Pantaro sales goes down as the Kinevo sales goes up. So what we typically do is we basically add the two, right? So Pantaro sales plus KINEVO sales. And here, we clearly see some growth. And this is what results in the overall growth of MCS. So I believe we are good there. If you take the Tivato, that replaces the Opnivario, which really was an old product. You could call it legacy product. And here it's basically the same. So the idea is that the new product will replace the old one. So also the old one goes down and it will basically be taken from the market at some point in time. The timescale, by the way, to do this such a transition depends on the approval situation. So for example, Pantera, we are still selling Pantera in China to a large extent. We will also keep the Pantera in the market in a lower market segment, but the high end will be fully replaced once we have the approval in all countries, which in the meantime for the Kinevo is basically the case. So overall, the legacy products are in the process of being replaced, and that's actually the intent. Okay. Thank you. And there are no more questions. Okay. If there are no further questions? There are no further questions. Then I would like to thank you, dear ladies and gentlemen, for your interest in Carlsbad's Meditech. We will keep you posted on the development and latest after Q2. We'll talk to you again in our Q2 call. Thanks, and have a good time.