Good afternoon, this is the Chorus Call Conference operator. Welcome, and thank you for joining the Medacta Group First Half 2023 Financial Results conference call. As a reminder, all participants are in listen-only mode. After the presentation, there will be an opportunity to ask questions. Should anyone need assistance during the conference call, they may signal an operator by pressing star and zero on their telephone. At this time, I would like to turn the conference over to Mr. Francesco Siccardi, CEO of Medacta Group. Please go ahead, sir.
Thank you very much, and welcome to the H1 2023 results from Medacta. I will go over the key financial figures together with Corrado Farsetta, Medacta Group CFO. On first slide, we can see our already reported top line, reaching EUR 255 million, of a very solid growth over 21% in constant currency and 20.8 reported. And we are reporting as well a good increase both of course in absolute term, but in percentage as well for our adjusted EBITDA margin, reaching 28.2%. This performance is especially good, considering the headwind translational effect we had in terms of currency.
We increased, as well, our headcount, both in the headquarter and in the different markets, adding close to 100 new jobs and reaching over 1,631 employees. We are delighted as well by the performance of the supply chain. Despite this tremendous acceleration, we were able to really support the growth without any disservice. We expanded further our efforts in terms of medical education and sales force expansion, leveraging as well our new personalized solutions across the different business lines.
We have already reported the revenues and in terms of geographical performance we really had a very strong performance in Europe with over 24% growth close to 18% in North America and 22% growth in the Asia Pacific region. Those are the three most important regional that we report around 10% in the rest of the world market which is overall a very very solid performance. In terms of product lines we continue to grow in our core product lines both Hip at 15.7% and Knee close to 28% organic growth as a very robust performance. The Extremities over 30% growth and Spine at around 15% growth.
So across all the product lines, we were extremely pleased with the, with the performance, on a global scale. In the next slide, we just wanted to report the CAGR Medacta is experiencing, from 2019. And I think it's important to show this, very significant performance over time across all the business line with a CAGR for the period of over 15.5%. I would like, now to ask, Corrado to go over the P&L and the margin comments, and then we will, go back to you for the Q&A. Thank you.
Thank you, Francesco, and good afternoon, everybody. So let's now have a look at our P&L. We just discussed the top line, so I will start from the GP line. The reported GP in this first semester this year was equal to 68.9%, including 1.5% of negative effect, translational effect. Which means that net from this FX effect, it was in line or slightly above last year's semester, and this is primarily attributable to two main reasons. As you have seen, EMEA was again the fastest growing area, and this, along with the anticipated trends in the ASPs, impacted negatively on our GP. On the other side, we had a significant leverage on D&A, and the instruments generated by the top line, along with the limited impact from inflation, thanks to some industrial efficiency driven by volumes.
So the result was the 68.9% of profitability in this semester. Moving down to fixed costs, they were equal to EUR 132 million, with an increase of around EUR 70 million, primarily coming from our continued expansion of sales force and personnel in logistics and industrial area to sustain and allow growth. As a percentage of revenue, the fixed cost resulted 1.3% below 2022. And this is the result of a careful management of fixed cost expansion and the leverage effect given by the revenue growth. The full year effect of, moving to the next slide. The adjusted EBITDA increased to 28.2% from 27.5%, including at this level, a translational effect negative for 1.6%.
The adjusted EBIT was EUR 43.8 million, equal to 17.2% on revenue, with an increase of roughly 30% compared to the adjusted EBIT of the previous year's semester. If we move to the financial result line, this was in the semester, negative for 6.8 million, and the increase from last year is almost entirely due to unrealized losses generated by the devaluation of the U.S. dollar against the Swiss franc. The cost of money increased a bit compared to the previous year as well. Income tax, in the first semester, they were equal to 7.1 million, including in one-off negative effect from the release of some deferred tax assets and liabilities generated by the repurchase of part of our inventory in the U.S.
You know, that now there is active logistics hub in the U.S., and then we try to optimize also this from a fiscal standpoint, and this is the one-off effect from an accounting standpoint in this semester. Finally, I would say the last line of our profit and loss, the profit for the period was equal to EUR 29.1 million. Moving to the CapEx line, this semester, the total amount of CapEx was around 40 million, out of which 27 million, which represents roughly 70% of our total CapEx, are represented by new instruments driven by revenue growth and new customers. The research and development CapEx were EUR 4.2 million and in line with the past trend. The rest is composed by investments in production capacity, land, and building expansion.
The free cash flow, as a result of all the above, the free cash flow of this semester was equal to -5.3 million. And moving to, my last slide, the total debt of the company in this semester was 127.9 million, with a leverage which remains below 1x the EBITDA. I think this was my last slide, and now back to Francesco for some final remarks.
Yeah. Thank you, Corrado. I just wanted to express the satisfaction we have for the very good performance in H1, and maybe leave to the Q&A session for the next minutes.
This is the Chorus Call Conference Operator. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on the touchtone telephone. To remove yourself from the question queue, please press star and two. Please pick up the receiver when asking questions. Anyone who has a question may press star and one at this time. The first question is from Sandra Dietschy from Octavian. Please go ahead.
Yes, thank you for taking my question, and good afternoon. The first question I have is on your performance in Asia Pacific. You mentioned that price reductions impacted the performance in Japan. How does it look like in Australia? Was that region also impacted by price cuts? Or should we expect that price cuts in Australia will materialize next year? Just some color on volume growth versus price for Asia Pacific would be very helpful. And the second question is on your margin guidance. This implies, obviously, a significant drop in the EBITDA margin in the second half. And if you can just shed some more light on the development of your OpEx costs in the second half.
Is it inflated by some extraordinary costs related to events, or is it simply the spillover from the costs from the investment into the sales force expansion you did during the first half? Thank you.
Yeah. Thank you, Sandra. On the Asia Pacific, I think it was a very good top-line growth, which was all volume. And as you said, the overall volume growth would have been even higher because there is a price erosion in Japan, which is like Australia, those are two markets where the price is fixed by a price list by the government, and from time to time, they reduce it. Both markets have very high prices compared to other segments in Europe in particular. We do not expect a price cut in Australia in the second half of the year.
It is possible that there will be a price cut next year, although with the inflation, there are some chances that either will be postponed or reduced. This is something the different groups, working groups in the countries are trying to utilize to protect the current price, which is already even not growing, reduced by the inflation on the cost side. So overall, a very good performance despite the price erosion in Japan. In terms of margin guidance, if you take the first semester is very often historically higher in terms of profitability compared to the second semester.
This is because most of the events, congresses, are in the second half of the year, and as you said before, there is the full year effect of the first semester hiring, which is somehow annualized or more robust in the second half of the year. It is typically lower the second half. How much lower will depend, but yes, we did expand quite a bit our sales force, and there is always a customer acquisition cost, which is driving down the marginality a bit in the second half of the year.
Perfect. Very clear. Thank you.
Thank you.
The next question is from Thando Skosana, from UBS. Please go ahead.
Hi, and good afternoon. I just had two questions, please. The first one is just on what are you guys seeing on the ground in terms of, you know, volume growth and sales? If you could give any commentary around that, and whether you're seeing any benefit from a backlog. If you are, how long do you think that's going to last? Will it take you to 2024? Just on margin, I also wanted to ask, I'm quite surprised that this guidance was not raised, despite the fact that you deliver—you had 160 basis points of margin headwind. I just wanted to get a sense, maybe, Corrado, if you could just size up impact on gross margin.
So I'm thinking here, the input cost inflation, your geo mix, and also pricing, just if you could size that up and how we should think about that, for the remainder of the year? Thank you.
Yeah, well, thank you, Thando, for the question. I think, I will take the volume growth and the backlog. I would say there is a general tailwind in the market in several segments, geographic segments. We remember the very strong negative effect we had last year, for example, in Australia. This is clearly not there anymore, and on the opposite, we are recovering some of the backlog, definitely in Australia. We see as well a positive development in Europe and in the U.S. There are no data yet in terms of the general market growth, but if you compare as well the growth of some of our competitors, you definitely see some tailwind there as well. So our estimate is between 3% and 4% of a general tailwind across the globe.
And again, this is an average. On how long it's going to last, I think, there are clearly some markets where 2024 should continue to have some tailwind. There is definitely some recovery and some other markets, where this is probably not going to be the case. We expect to recover most of the backlog in the U.S. in the second half of the year, and probably Europe is going to be more or less the same. But this is just based on feedback from the surgeons and the waiting list that we see in the key centers. Maybe I ask Corrado to comment on the margin on the second half of the year, the geo mix, the pricing, and overall development.
Yes. Hi, Thando. What we can say is that in the first semester, we had several effects on our marginality. The first one is the FX effect, and then we say geographic mix and ASPs reduction that have been offset by positive effects that are basically D&A, leverage on D&A, on instruments, and some industrial efficiency driven by volumes. We are not disclosing details, but basically, if you make the calculation, you see that the net foreign FX effect, that the other effects are basically offsetting each other. The most important, the biggest one within the effects we had in the first semester was the geographic mix. Which means that once we are back to the, let's say, more historical, the usual growth rate in our countries, this effect should disappear.
So, deducted the geographic mix, it means that the net effect coming from the other elements of the marginality could even push the marginality into positive evolution compared to the previous year.
So, what I can say, yes, basically, again, we don't disclose details, but for the second semester, the marginality is expected to stay more or less stable at the current level, given the expected evolution of the growth, which is not basically be dramatically different from the first semester. The inflation is impacting our P&L less than expected, so we'll be there, but still less important than we thought. And that is why I can say that overall, the marginality should stay more or less at the same level of the first semester.
As Francesco said before, if you speak about EBITDA margin, the reduction in the second semester will be coming almost entirely from the, say, let's call it seasonality of some fixed costs and full year effect of costs that are, let's say, here already in the first semester, but then we will see the second semester, we will have the full year effect on all those, fixed cost elements.
Thank you. I just wanted to confirm, so are you saying your H2 GP margin will be similar to H1 GP margin?
Yes.
Or will it be similar to prior year?
No, no, sorry. Similar to first semester.
Okay, thank you.
This semester, yeah.
As a reminder, if you wish to register for a question, please press Star and One on your telephone. The next question is a follow-up from Sandra Dietschy from Octavian. Please go ahead.
Yes, thank you. A brief follow-up on currencies. I think you said in July that you expect for the full year, negative currency impact of around 100 basis points on the EBITDA margin. Can you update us on what the impact, what impact you expect on the current rates, on September spot rates?
Yes. What we think, hi, Sandra, correct me. What we think is going to happen is a full year FX effect in the region of 1% negative, which compares to 1.6% at EBITDA level, margin level. This is also explaining why the profitability of the second semester seems to be much higher, because 0.5% comes from the different FX effect in the two semester, and on a clear basis, reduction of roughly a point.
Oh, perfect. Yeah, that makes sense. Then maybe a follow-up on the question, which was asked before on the, on the gross margin. You said that it should—we should expect it to remain largely stable, in the second half. What about if you look into next year? Should we then expect some tailwind from, from geographic mix or again, some rather stable development on the gross profit margin?
Yes. So the geographic mix, maybe Francesco can elaborate better than me, but basically it really depends on how the commercial effort will be able to generate new sales and customers and some backlog evolution in the country. So for sure, there is a positive effect somewhere that we will be able to generate the moment the growth rate in APAC and U.S. to be back to the historical rate.
With regard to the rest, prices are expected to reduce, but this is a trend that we have been observing over the last years. Volumes should help the industrial efficiency, as well as some industrial projects that we have in pipeline to increase the efficiency of our industrial production and contribute to keep the marginality at a decent level.
So for 2023 full year, again, I think that we should stay pretty much in line with the first semester. And then what will be 2024, I think it's early to say, to speak about that, but I do not expect any, any reduction, a significant reduction on the current trajectory.
Yeah, I would say that what is a little bit an anomaly in those years is not really the growth rate of U.S. and APAC, it is the higher than anticipated European growth rate, and I frankly don't mind. If we continue to keep up at this growth rate for several years in Europe as well, and this is somehow impacting because of the geo mix, I wouldn't mind. I think it's all very positive to continue to outgrow the market in Europe as well.
... Yeah, sure. Thank you.
Thank you, Sandra.
The next question is a follow-up from Thando Skosana from UBS. Please go ahead.
Hi. Thank you. Thank you once again. So I just wanted to just get some guidance on free cash flow, just for the full year, what you guys expect here. And then maybe, Francesco, if you can just comment on the NextAR platform, how that's going, how's momentum, and what's the latest feedback you're getting? I just want to get a sense if you're getting, if you're seeing any slowdown. Thank you.
Yeah, maybe I will comment on the NextAR and leave the cash flow comment to Corrado. So on the NextAR, we continue to expand our footprint across all the product lines. As we mentioned in our press release, Knee, Shoulder, Spine, they are all really benefiting from this technology. And on top of this technology, those lines are, in general, growing pretty well, especially, I would say, the Knee side is independently from the technology growing in the non-technology segment as well, in a very, very strong way. But the contribution from the MySolutions, so either NextAR or the other technologies under this umbrella, are really performing well, helping driving our our top line. So NextAR and the MySolutions remain very central for Spine, for Shoulder, and for Knee.
Yeah. And back to your question about the cash flow. Let me just comment on the evolution of the CapEx, because I think that the short-term growth investments that are strictly linked to the growth, we stay more or less with the same ratio that we had observed in the first semester. And this—this is pushed by the strong growth that we are experiencing in 2023. But this strong growth is also asking for an acceleration in other investment area, land, buildings, production capacity. So we need to accommodate a big amount of production capacity and spaces. So the cash flow for 2023 will be zero or slightly negative.
See no reason why we should be back in positive area, because basically, that's the balance we try to keep when we plan our growth. We will be able to refinance all investments, without increasing the leverage of the company and stay at a very low level. That is what we have more or less in our plan.
Thank you.
For any further questions, please press Star and One on your telephone. Mr. Siccardi, gentlemen, there are no more questions registered at this time.
Thank you. Then, I would like just to thank once again all the participants to this call today, and all our employees, customers, suppliers, that really help us during this tremendous growth period. I hope to continue in this direction for many, many years to come. So if there are no further question, thank you very much, and speak to you all soon.