Earnings Call: H2 2019

Mar 3, 2020

I would like to welcome you to our first call in the 2019 results of Medaltis, which we have published this morning. My name is Chris Bronneman. I'm the CEO of Medaltis. And I'm here on the phone together with my CFO, Dominik Leutwielle, and we also have the Head of Investor Relations, Patrick Christ, on the phone with us as well. It's our pleasure to have you all in our call today. In this session, we would like to walk you through our full year results presentation, which is available on the Medalti's website. You can also follow it online if you have joined this call via the link we provided in our invitation. After the presentation, we will be happy to answer your questions. Please also note the disclaimer on Page 2. Furthermore, I would like to inform you that our call is being recorded, and a replay will be available on the Medalti's website later on. After my start in Medalltis in the beginning of September 2019, which was based on technology and innovation leadership moving from a large American corporation to Medalltis, it was with the option and the opportunity to develop Medalltis to a leader in the extremities business. Within my 1st month, I had very positive And in my 1st month, I had very positive reactions from surgeons all over the world, who were very positive about the technology and the ease of use of our systems, which led me and confirmed the positive impressions I had of the company at the very beginning. Let's move on to Slide number 3. I will lead you through the highlights and then we'll turn it over for the financial review to Dominik and then we'll get back and lead you through the focus priorities and outlook for the coming and also for the midterm. Just as a reminder, precision and fixation, we have as methodologies, we are focused on the fixation of bone fractures and osteotomies. The company was founded 1997. We are active in direct markets. There are 13 markets, and we are about 600 employees as of today. Our products are used in the extremities, which is from the fingertips to the shoulder, foot and ankle and including the head. In 2019, we have continued to execute our strategy, continued the growth path above the market levels has made further investments into growth. If you look at our markets, there are a few highlights. For example, the U. S. Business has grown at above marketplace, and we have for the first time introduced a wrist spanning plate for the U. S. Market only, which demonstrates our focus for the region needs in particularity for the U. S. Market. Last year, we have also started our direct sales in the lower extremities in Japan and have achieved product authorization in China. So we are now ready to start our sales in China in the course of this year. We have also established a new leadership team in Brazil and also in the Mexico subsidiaries. And in Brazil, we are now fully ready to fully integrate the former distributors in the course of this year as well. Also, we have continued to expand our product portfolio and we are proud to have strong sales in our most important revenue line, which is the digital Radius and RISC. 3rd, we have developed new product areas. Scholter has grown at a very low level, but according to our expectations, and we are pleased about the accelerated growth in the elbow segment. From my perspective, we have completed a smooth handover from my predecessor. And on the BOSS level, we have established a Strategy and Innovation Committee, which is fully operational. On the next slide, those strategies have driven the following results. We have a sales achieved of SEK130.1 million, which is a growth of 7% in Swiss francs and 10% in local currencies, which reflects the foreign exchange evaluations. The sales result is at the upper level of the guidance that we have given back in August between 8% 10%. The EBITDA performance, we achieved CHF20.3 million, which is an EBITDA margin of 16% reported and 15% adjusted, which exceeds the guidance of 13% by 2 percentage points. From an employee perspective, we have created another 48 jobs, which is an increase of 9%, and we are now at a total employee of 609. With those numbers, I would like to hand it over to Dominik, who will give you now a more detailed view on the financials. Thank you, Christoph. And also from my side, welcome to this telephone conference for the closing 2019. Before we start into details of the key financial figures, I'd like to give you some overview of items that drive through to the closing process. First of all, we have informed in our FOG information the 9th December that we will build a €3,000,000 provision for a legal case in Brazil. We have also IAS 19, the pension that were the conversion rates reduced and defers an additional 3,400,000 in earnings. In the IAS 16, the leasing, we have a positive impact of 3,600,000. Now I'd like to go into the details of the key financial figures. The net sales adjusted for 2019 was €130,100,000 The gross profit ended at 110.6 percent. The costs were 103.6 percent, that's additionally 13%, I can detail later in the slide. The operating profit, EBIT is $7,000,000 And as mentioned, the EBITDA is $20,000,000 adjusted with an EBITDA margin of 15%. The operating cash flow sits at €8,100,000 and the capital expenditures at EUR 19,400,000. We have there a special fit out of the building that is onetime for the sterile packaging, warehouse and 3 d printing. The networking capital is increased to EUR 55,100,000. We have there special stock for new products. Christoph will show you the new products that are coming. This also in relation to the MTR Medical Device Regulation introduction in May this year. Now I'd like to give you the overview of the sales number by region. The biggest region is EMEA with 17,300,000, That's a grow in local currency of 9%. Asia Pacific ended with SEK 23.7 percent, that is 9% growth in local currency. North America was 21.7 percent, that's 11%, and the smallest region, Latin America, is grown by 16%. Now some more details by regions. As you can see at the arrows, the subsidiaries overall had a good performance over the market level. We have seen a dynamic growth in U. K, France and Poland that was achieved. The auto subsidiary has also a solid growth in all markets. At the distributor level, we see a mixed performance at the distributors due to the limited investments ahead of the MDR implementation. Italy and Spain are below our expectation, but have a better second half year in 2019. We have seen a dynamic investment in Netherlands that is a pioneer market in the sterile product. Now we go to the region of North America. North America, we had a strong growth over the market but under the expectation of the management. We have implemented the new wrist spanning plate, especially for the U. S. Market. Also, we expanded the collaboration with the distributors and started regional collaboration with the eyebrow within the U. S. Asia Pacific. We had a strong growth in Australia. As already reported in the half year twenty nineteen figures, the government reduced the prices on market level by 7%. Also in 2020, the prices will be reduced by another 5%. Japan completed the first year as a subsidiary in line with our business plan. The distributor that covers the upper extremity is under our expectations. In China, we had the product released from the CFDA in the second half year twenty nineteen, and we are right now in preparation for the launch in 2020. In South Korea and Thailand, we have a dynamic growth in the distribution markets. Latin America. We have there a double digit growth over the organic growth 2018 was behind the management's expectation. The dynamic growth in Brazil, despite a challenging market. Mexico is behind our expectation. We have implemented a new general manager in Mexico and Brazil. On the distributors, we have a dynamic performance in Chile. Now the view on the segments. The biggest segment is the upper extremity with $92,600,000 That is a growth in local currency from 9%. The market is there at 6%. The lower extremity ended with 18.3%. That's a growth by 16% and the market level of 7%. The CMS, maxillofacial market for the head product ended with 19.2%. That is 10% growth in local currency. Now onwards to the gross margin. The gross margin was elevated by 1.6% to 85%. The main driver there were that we were growing in higher priced markets. Our product innovation, we were able to put on a high market level. Also on the cost side, we implemented a new lean manufacturing and automation program. We were also able to reduce the purchasing prices from the suppliers due to the higher volume. On the other hand, we feel a price pressure from our customers and purchasing organizations. From words to the COGS, the biggest part is the selling and distribution with 66 €900,000 We have there done future investments into our sales force. Also, the new markets, Japan and China, were costly, and we invested into our end to end supply chain. The administration part ended with SEK 21.3 billion. So there, we invested in our customer service in the subsidiaries. And also after 10 years, we needed to invest a onetime maintenance in our building here in Basel. The research and development ended with 15,400,000 We invested there in the NDR processes to be able to deliver off to May 2020. Also, efforts in education with Ibra were included in there. All this ended with the mentioned EBITDA of $20,000,000 that is 15% as in sales. The double digit growth in local currency and the OpEx investments reflect our growth strategy. We have also a positive effect of $3,600,000 due to the first time application of IFRS sixteen. Now I hand over back to Christoph for the focus and priorities. Thank you, Dominik. I would like to lay out to you now our strategy starting from the market, talking a bit about our midterm priorities and give you an outlook as to what goals and results we are going to expect over the near and mid term. Medalltis plays in a very attractive market. We estimate the extremities and CMF market was about $10,000,000,000 with an expected growth rate or CAGR of 4% to 6%. One of the main driver of the growth is the demographics, the aging population above 65 years old, which has a significant increase, almost doubling from 2015 to 2,030 and the similar increase towards 2,060. It's not only the activity level of those population, it's also an increasing prevalence of comorbidities, which are diabetes, obesity or osteoporosis. Those high risk patients will show more complex fractures, are high risk for operations and demand more specializations of the surgeon and hence more sophisticated and innovative implants and treating methods. So there is a continuous growth of demand for innovation. The question now is, who is going to fill in that innovation? And if we take as an example, the number of market introductions as a indicator, we see that the major, the large competitors over the years are reducing their innovation strength. And this basically creates exactly the gap that we want to position Medalltis in. To fill that prevailing innovation gap, to deliver new technology that has the potential to become standard of care and also provide our surgeons solutions to treat their patients and meet their clinical needs beyond just blades and screws. So what are the success factors that we believe we need to meet in order to move into that space and position Medalltis as a leading extremities company. It takes innovation strength, but it also takes innovation speed or time to market. The third one is the proximity to surgeons across the regions as innovation is still created close and in close collaboration with our surgeons in the OR, understanding his needs, but also understanding the needs of the patients to assure a good outcome for including high risk patients. As Medartis, we are very well positioned with the track record of innovation. If we look at the launch and the string of innovation, we see that almost every single year Medalltis has been able to launch an innovative system or innovative product at least once per year in almost every single year of its existence. So now what is it going to take Medativ to go forward building on that strength of innovation and technology? We have grouped it in 3 priorities that we want to focus going forward. We need to combine the strength in technology and innovation with more focus on sales, addressing regional needs. The second priority is for us the U. S. Market. The U. S. Market represents about 40% of the global market. And as you can easily see from our sales numbers, in that respect, we have a lot of opportunity to grow building our U. S. Business. The 3rd priority is the acceleration of our time to market and the expansion of and the strengthening of the innovation pipeline. Let me go through those three priorities in a little bit more detail. Enhance the sales focus and addressing regional needs. What does that mean? We have announced at the end of last year that we are not going to replace our global sales position. We're going to move our sales organizations into 3 distinct areas or regions, which is EMEA, North America and LATAM APAC region, and we will also include the leader of those regions into our executive management team. This makes sure and should assure that we have more market and more sales representation in the executive management team as well. What does it mean to become more sales focused for us? More sales focused means that we want to achieve a market penetration as for example we have in Germany with market shares beyond 30% in our key segment Hand and Digital Radius. Sales focus means our sales force needs to get well trained and very well set up to convert new accounts to generate new business. It's not enough for us to grow in the existing accounts. Of course, we need to give great support from a technical perspective to the incumbent accounts. But the key for us to win in the market is to acquire new accounts, and we also need to make sure that we have an old proportional incentivization for additional growth for the sales force. Those indicators will be part of our executive management key scorecard that we are going to establish and follow on a monthly basis. The third point for us is we need to simplify the structures and get more efficient in our processes and along the entire value chain in order to support the future growth. We have seen double digit growth for the past years. Now it's also the time to consolidate, to simplify the processes, to adjust the organization structure in such a way we can get more innovative, faster to the market and continue to support the growing and expect the growth of sales. It is our vision to become the top 3 supplier in hand, wrist and elbow in our direct markets. Also want to build and focus on the foot and ankle business, especially with the new portfolio that we are about to launch in the course of 2020. Along with the expansions and the build up, especially of the U. S. Business, it's important for us to also expand the network of key opinion leaders that we have around the globe. The second priority, the U. S. Business. We have started to recruit a new leadership team and we are undertaking the sales force and in-depth analysis, focusing on the direct and also the indirect sales channels. With this analysis, we will continue to expand our go to market and we will selectively expand either through direct or through the indirect distribution channels. In addition, we are going to build a dedicated sales force for the lower extremities. In order to become successful in the U. S, we are firm to believe that we need to establish ourselves as a full fledged company and not only just as a sales organization in the U. S. This means the proximity to the market, the proximity to the surgeon needs to be combined with locally focused product development capabilities. We have successfully launched the wrist spanning plate, which you see on the bottom right, a x-ray picture, which is a very particular treatment of complex distill radius fractures in the U. S, which are using a spanning plate in order to immobilize the wrist for about 6 weeks and then the plate is removed and the patient will be available to move the distillators and his wrist again. That's a very particular U. S. Specific requirement. We have already now certain requests from the UK surgeons as surgeons talk to each other. So we will also CE mark the Hispanic plate and eventually launch it in Europe as well. But this is a very good example of being close to specific U. S. Market needs. Besides building local development capabilities, it is also important to continue to build professional education, which we're doing with our IBRA partner. So we want to establish a U. S.-based faculty, so that we have U. S. Surgeons training U. S. Surgeons. And by doing that, we want to expand the key network in the U. S. On lower extremities, but also in upper extremities. Last but not least, our Mergers and Acquisition focus focuses on innovation to complement the upper and lower extremities portfolios. So we're looking for U. S.-based companies at least from a technology perspective and second also from a sales perspective. All those initiatives, we expect a quadruple of our current sales until the year 2024 in the U. S. Our research priority. We have consistently developed our products and systems in house with a strong focus on plates and screws and added some staples. We are going to continue to focus on our core competency, but we are organizing ourselves in such a way that we can reduce the go to market time for line extensions to 4 to 6 months and for the launch of new systems less than 24 months. We have a couple of system that demonstrate the capability of the organization. The CCS extension screws will be launched in May. We have a full launch in June, which is less of 5 months development time. Also, the spanning plate that I've referenced before is an example not only for a U. S. Product, but also for a product or a full system that has been developed in less than 24 months. But we do not want to limit ourselves to the internal capacity. We're also going to extend our innovation efforts by undergoing partnerships, especially when it comes to complementary technology, which goes beyond the screws and plates. Also in these partnerships, we strive to innovate and develop products within less than 24 months, and we have now, the beginning of the year, signed 2 projects, which are now underway in partnerships in complementary technologies. Our 3rd pillar for innovation is M and A. As I mentioned before, we're looking for U. S.-based companies up and lower extremity technology with the potential to become standard of care in the future. We have looked at and are working on a long list of 200 and plus companies, and we have engaged in 5 due diligence at the time. So what are the results that those three priorities are expected to drive? We expect a 2020, and that's our guidance, a continuum of the growth on the level that we have seen for 2019, which is 10%, at a stable EBITDA margin of 15%, which is based for that those three initiatives will have a limited impact in 20 20, but will set us up on a strong basis to accelerate growth into the coming years. In the mid term, we expect growth beyond 15% with a gradual increase in the EBITDA margin. Our growth investments are first priority the U. S. Business buildup. Now the investment cycle for building up the subsidiaries in China and Japan are coming to an end this year. We continue to invest in the portfolio, extensions and in the partnerships and potentially into M and A. Let me comment quickly on our investment criteria. We focus on additional solutions for existing customers, for existing surgeons, focusing and being becoming specialized in the extremities business. And from a financial perspective, we want to be accretive to growth and margin of a maximum of 5 to 8 years, which is depending on the pipeline on technology we're looking at, more towards 8 years. If it's a more common technology or includes an existing portfolio that is already been sold, it's going to be at the lower end of maximum of 5 years. On our path to become a global extremities company, we are launching this year a series of key systems for us, which includes the forearm fracture system, which is in full launch in June the clavicle system, which complements our shoulder portfolio, will be started in a limited release in June as well. I've already mentioned the CCS Compression screw extension will launch in June full launch, and we are already in a limited release of our mid foot correction auto system and our distal ankle fracture trauma system, which is going to go into a full release worldwide in July. The ongoing introduction of the new CMF Motors 2 system is going to be complemented by a 3 d planning software and cutting guides in April as well. If we look beyond 2020 in innovation, for us, we're going to continue to build the portfolio, a comprehensive portfolio going beyond just screws in place for the extremities with a special regional focus on the U. S. And we're going to partner for complementary technologies with specialized companies looking into building and expanding our core competence beyond just plates and screws. Let me come to the summary in Dialogroup. As a summary, we continue to execute our growth strategy. We're going to continue to invest building our business. In 2019, we achieved a solid growth of 10% in local currencies above market levels and an adjusted EBITDA margin of 15%. We have set clear mid term priorities, enhanced sales focus in addition to our technology and innovation focus, accelerate the U. S. Business and accelerate our go to market and pipeline strength. The 2020 outlook For full year sales, we expect 10% growth in local currencies, considering the mild winter with lowercase numbers and an adjusted EBITDA margin expected around 15%. The cash flow will be reinvested to drive further growth. This brings me to the end of today's presentation. And Dominik Leuttwil and I are now happy to take any questions. You may also ask questions via e mail on corporate communication, corporate.communicationmedatis.com, and these questions will then be read out and answered by myself or by Dominik. So maybe I can first take the question that we have received an e mail from Brian Garnier. We have received 3 questions. The first one, can you help us understand your tax expenses of this year and give us more color about what we should expect in terms of the tax rate going forward. The second question in terms of EBITDA margin guidance for 2020. Given that your EBITDA margin reached 70% during half year twenty nineteen, so we have to consider that 15% target is a conservative or does it imply your willingness to invest significantly? Finally, regarding M and A, can you explain us what will drive your acquisitions? Is it a technology that is missing from your current portfolio or a way to reinforce your sales force in the U. S? I will take over the first two questions and will give to the 3rd to Christoph. About the tax rate, Our tax rate, as in this closing, is 49%. The main influence there is deferred taxes that we had different to the prior year. Going forward, including the tax changes that we have here in the region of Basel, we are expecting a tax rate of 17%. In terms of the EBITDA guidance, we are expecting that the 50% is a reasonable target. Our invest from the cash flow are going to support the current business, and we are expecting, as mentioned, a continued increase over the years of this EBITDA number. I will give over to the question about the mergers and acquisition to Christoph. Thank you, Dominik. The question regarding M and A, we are certainly looking in first priority for additional technology, which complements the portfolio. So it is the idea to give a complete portfolio to our sales rep as normally, especially in the U. S, the sales rep is covering about 75% of the cases. So it is important that the sales rep has the entire bag that the surgeon needs covering the entire operation. So first is technology and the second criteria then of course is establish sales and if needed, we will certainly also take and consider additional sales force in order to expand our U. S. Sales force. Do we have any other questions? You see the instructions on the screen if you want to ask questions. Raise your hand. Okay. Okay. Okay. No more questions so far. Any e mails? Okay. If there are no more questions, I would like to thank you all for your attention and interest in our company. Thank you all again. And in case of questions, do not hesitate to contact us. And with this, I would like to close for today. Thank you very much.