Dear ladies and gentlemen, welcome to the conference call of Medacta Group SA. At our customer's request, this conference will be recorded. As a reminder, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. If any participant has difficulties hearing the conference, please press star key followed by the zero on your telephone for an operator assistance. May I now hand you over to Francesco Siccardi, who will lead you through this conference. Please go ahead, sir.
Thank you. Thank you very much, and welcome to today's call. We're gonna go over the full year 2021 financial results. We have reported already our revenues at EUR 363 million for the year with a growth above 21% versus previous year. Our growth was significantly higher than the pre-pandemic level, and here we reported as well versus 2019 with a growth rate of 18.9%. All those growth are at constant currency.
In terms of margins, we have for the first time passed a EUR 100 million mark in terms of EBITDA, 107.1 to be accurate, with a margin of 29.5% adjusted, which again is very much in line with pre-pandemic level and an increase compared to 2020. In terms of profit, we had a significant growth reaching EUR 51.5 million, equivalent to 14.2% on revenues. Free cash flow reached EUR 33.8 million, up 5.8% compared to the previous period. We did expand our employees and sales force, and overall numbers reached 1,341 employees, 158 more than 2021.
If we go to the next slide, those are the comments. The additional comment I would like to make would be to distribution proposal of CHF 0.54 per share that I believe will be proposed to the annual general meeting in May. If we go to the next slide, we can see some of the key elements that have been part of our success in 2021. We have prepared the deployment of our NextAR surgical platform, which is the Medacta answer to the technology battle in orthopedics. It is a platform that has application in the joint replacement and in the spine procedures and is exiting the limited market release as we speak for some of our applications.
It has some advantages and differentiating factor versus the current solution in the market with a lower upfront capital investment and cost per case, which make it particularly suitable for many markets around the world and the fastest growing segment in the U.S. market of the ASC orthopedics. A lot of new products, which is another important aspect of our growth. I would say the second pillar of our growth is our product range increase and the product innovation across all our business lines in the hip, in the knees, in extremities, and in spine. We went over those important product families in the previous call, so I would probably go to the next slide already.
Very important pillar as well of our growth is our support that we provide to innovation through the medical education programs and marketing tools. We have been able to go back to normal in 2021 in terms of number of surgeons that we were able to get in touch with and expose to our product courses and medical education in general. With a significant increase in terms of overall numbers compared to 2019. We had to redesign significantly our programs in order to reach this target. We mainly decentralized our courses in order to reduce international travel, increase our flexibility, and go closer to our customer rather than asking our customer to come to our courses.
We did, of course, leverage some of the experiences we made during COVID by strengthening our M.O.R.E. in Touch program. All the web-based experiences are complementary to our in-person offering. On top of that, we have launched a new platform for remote proctoring, which is as well empowered by augmented reality. Now for Medacta, augmented reality is not only navigation tool, but as well a tool to deliver medical education. I would like now to ask Corrado to present you the results in terms of P&L and the comments associated with it. Please, Corrado.
Thank you, Francesco. Very briefly, we have already discussed the top line. You see here the solid, strong contribution from all our business lines to reach the 21.4% growth. If you move to the next slide, you see here the evolution and the composition of the growth by geographic area. I think that it is important to note that every country has at least a very good result, but it is also important to note that the geographic evolution in 2021 was less favorable than in the past. In particular, you see that the APAC area, the growth in that area was below the average, while the growth in Europe was very strong and very similar to the U.S. market.
This will be better, this when we speak about marginality, has reduced the natural offsetting effect that we have seen in the past, coming from the negative trends in the selling price that we have seen in almost all our countries. If we move to the next one. Since 2020 cannot be taken as an appropriate baseline to measure the effective growth of the company, given the basically negative result in 2021 in terms of revenue growth, I mean. We analyzed the growth over the last two years, taking as a baseline 2019. You see here the 18.9% growth, 2021 versus 2019.
This is a solid performance we think that shows how we recovered the negative impact of COVID-19 on our top line, and that we actually continued in our path of growth over the last two years. If we move to the next one, we see the profit and loss of 2021 compared to 2020. Just a few comments on the most important lines. We see that the margin pressure continued in 2021, primarily due to price cuts in Europe and in U.S. mainly. On the positive side, the increase in volumes had a positive impact on the usage rate of the surgical instruments we have in the market. What you see here is also corresponding reduction of the depreciation and amortization of surgical instruments as a percentage of revenue.
This largely explains the improvements that you see here in terms of gross profit from 70.8% to 71.9%. If we go to the OpEx lines, the first is research and development. You see that there is an increase. We continue to push our research and development activity, and we completed a significant number of projects as a key pillar of our growth, and this is the result in terms of numbers in the Profit and Loss. The biggest increase, if you go to the line, sales and marketing, composed by sales and marketing costs, of course.
This increase is almost entirely represented by sales force expansion, both direct and indirect, and by the recovery on the sales and marketing activities and travels in 2021 further to the, say, release of some COVID restrictions. G&A, the increase in this line is almost entirely attributable to the expansion of our operation staff in our subsidiaries further to the increased revenue over the last few years. I will skip comments on other income and expenses. You see the limited amount, and this has basically allowed the company to increase the profitability up to 29.5% adjusted for abnormals. The financial results is basically this year, CHF 3.3 million, and it's composed by interest we pay on our debt, very low debt, and bank charges on activity in the countries.
A few words on income taxes. As you may know, the average tax in Switzerland, in Canton Ticino is around 17%. Let's say that after the tax benefits on research and development activity that we have here in Canton Ticino, the so-called patent box deduction, our midterm tax rate will be around 12%-13%. This year, thanks to some one-off positive tax effects, in particular for the MicroPort settlement in the U.S. and from the recalculation of deferred tax liabilities accrued in the past, the effective tax rate was exceptionally low and equal to 7.1%. If we move to the next slide, we see here the pie of the investments. As always, the biggest chunk is composed by instruments.
You see EUR 35 million, and this is the amount we had to put in the market to feed new customers and to sustain the growth we expect in 2022. The rest is composed by expansion of our production capacity in terms of new machines, research and development costs capitalized, and other minor intangibles for registration costs and patents. If we move down, we see here the cash flow of the company. Basically, the cash flow from operating activities was equal to EUR 54 million, less than last year, which was EUR 59.6 million. This is because of some extraordinary expenses we had, in particular, the payment of EUR 18 million of 2017 and 2018 income taxes already accrued in the past, the settlement of the MicroPort case and the legal and associated legal costs.
Adjusted for this extraordinary cost, the cash flow from operating activities was EUR 81.2 million. Deduct the CapEx, EUR 52 million of CapEx we had in 2021. The adjusted free cash flow was equal to EUR 33.8 million. This result, so we started last year from EUR 83 million of net debt equal to 0.95 times the adjusted EBITDA. This year, thanks to the evolution of the cash flow, the leverage is down to 0.87 times the adjusted EBITDA and EUR 93.6 million of total net debt. I think that was it for this year numbers. Francesco, maybe you want to continue.
Thank you. Thank you, Corrado. I would like to give you our current view on 2022 outlook. We remain very committed to our growth trajectory this year again, focusing on the three main pillars of our growth that remain the key focus for us moving forward. Number one is the continuous expansion of our distribution, particularly on the sales and marketing in the U.S. market, but as well, of course, across all our geographies and especially on the newer business line. We do have as a second pillar of our growth the product innovation and the expansion that will provide to our fast growing sales force more products in their bag.
Last but not least, our continuous focus and effort around medical education, which will help bring safely to our patients these new products in the year to come. A very important aspect that will come as well with the new products in terms of NextAR technology platform, which will be fully released with the first application on the shoulder. In the second part of 2022, we should see the spine application and the knee application fully released in the market. Thanks to this strategy, we are targeting for 2022 revenue in the range of CHF 400 million-CHF 414 million at constant currency.
An adjusted EBITDA equal to 29%, within a range of 100 basis points, very much in line with our historical marginality. Of course, the persistent impact of COVID pandemic and the related hospital staffing shortage, which was still strong at the beginning of this year, together with inflation, the supply chain, and unfortunately the current geopolitical issue may negatively affect our performance. This is the last slide from our side, and I would be happy to address any question you might have. Thank you.
Dear ladies and gentlemen, we will now begin our question and answer session. If you have a question for our speakers, please dial zero and one on your telephone keypad now to enter the queue. Once your name has been announced, you can ask a question. If you find your question answered before it's your turn to speak, you can dial zero and two to cancel your question. We have a first question. It's from Daniel Jelovcan, Mirabaud. The line is now open for you.
Yes, good afternoon, gentlemen.
I have three, I take one by one if it's okay. The first one is, what is very eye-catching is that the growth between hip and knees was similar, as you said, in 2021 compared to 2020, but compared to 2019 there was quite a big delta, so 10% for hip and 20% for knee. What was the reason? Is that product launch timing or is that in relation with strong recovery pent up elective, non-elective different patterns between the two categories?
Yeah. There are a couple of factors. First of all, historically, Medacta was stronger on the hip than on the knee. So if you look at pre-pandemic values, we were growing already faster on the knee compared to the hip. Because of this difference between hip and knees, of course, when we had some negative impact on our sales, we did have a higher impact, if you want, on the hip side than on the knee side. That was one aspect. The second aspect was probably as well associated with the difference in the impact in Australia, where we have a significantly higher portion of our sales associated with the hips.
As we are missing in the second half of 2021 sales in Australia, this has probably impacted more our hip sales than our knee sales, which further increased the difference between hip and knee recovery and performance overall, if you compare it to 2019.
Okay. Thank you. The second question is, you mentioned marketing and sales. You pushed both the distribution and with distributors and direct sales. I'm not sure if you can disclose now the mix of your total sales, which is done with direct sales and with distributors.
Yes. Just to be very, very clear, there are stocking distributors which are typically representing Medacta in less strategic market, if you want, or outside of Europe, U.S., Australia and Japan. Those are properly considered to be stocking distributors. This is roughly 5% of our revenues. Within certain markets, in particular in the U.S., there are agents which very often are referred to even by our peers as distributor. Let's call them agents just to reduce the confusion and direct sales force. Outside of the U.S., we basically have only direct sales force. Within the U.S., in the joint side is roughly 50/50.
Okay.
In the U.S.
In Europe you have direct.
Only.
Only direct sales.
Yeah, basically. Yes. Yeah.
Okay. The last question, thanks, is just for the CapEx, as a percentage of sales. I mean, you mentioned of course the instrument is a big part, but as a percentage of sales it increased from roughly 11% to 14% of sales. Is that a sustainable figure which we can model in the future, or is that very volatile because instruments can be less or more?
Yes. Maybe I can take this, Francesco. The 14% of this year, of course, is the result of a combination of new surgical instruments put into the market. In a particular period like this one, there is still in the market some demand which is not entirely expressed and captured by the revenue. Basically we have more instruments than what the standard average would require if the situation were normal. Let's say in the future we will continue to add new instruments and to invest because we are growing, we want to continue to grow, as fast as we can of course. This average could be a sustainable number in terms of cash because we are able to generate cash even with this so high level of investment.
Of course it will be always driven by the new customer that we have planned to acquire.
Okay.
Just as a last comment on that aspect, the faster we grow, the more instruments we need because these are needed to serve new accounts. As you can imagine, in 2021 we had a tremendous growth. It's all CapEx driven by growth, mainly instruments. The second biggest chunk, which is completely driven by growth, is the adjustments of our manufacturing capacity which requires of course additional plants or additional machines. Those are the two growth driven CapEx.
Yeah. I see.
The next question is by Chris Geller, Credit Suisse. The line is now open for you.
Yes. Thank you. Good afternoon, Francesco, Corrado. I have a few questions actually. Just to start off with, you know, a simple one on FX, you know. What is the budget rate, you know, you use to get to these 400-414 because things are fairly volatile, just to give, you know, kind of, an idea of where we what what's based on.
On the 2021 numbers you say, you mean?
for the guidance for the EUR 400 million-EUR 414 million, because you're guiding
Ah.
absolute in Europe. It's basic.
Revenue
Yeah.
on a comparable basis 2021.
On the 21% effective tax rate. Okay.
Yes. Yes. Correct. Yes.
Okay. You know, because things are fairly volatile these days. Good. Then, secondly, just if I look at your margin in the second half relative to the first half, you know, it was fairly down, you know, somewhere, you know, kind of on adjusted EBITDA somewhere around, you know, 400-500 basis points, you know, and yet, you know, your sales were, you know, maybe roughly EUR 10 million more, you know. Is this basically kind of a gross margin was a bit down, but, you know, is the operating expense base now kind of the normalized level that, you know, we can assume, you know, and is this basically now kind of the starting base, you know, kind of this, let's say, 27% we had in the second half?
Absolutely, yes. That's the reason why you see margins in the second semester dropping compared to the previous semester, the first semester, because in second semester, there was a recovery of the activity, sales and marketing, travels. That is a spike compared to the first semester, and that's why you see the profitability growing, as you say. That can be taken, let's say, as a new long-term level of activity for the future.
Okay. Yeah, actually, that gets me to the other question. I think, you know, remembering vaguely, you know, a few years ago already, you know, the IPO, I think, you know, we were, you know, kind of, you know, hoping to be able to, you know, keep, you know, margins, you know, or grow to in the low 30s%, if I, again, remember right. You know? Basically now it seems like, you know, you seem more comfortable around the 30% level and, you know, just basically, you know, you know, to grow half the company, essentially, that is basically the model we should, you know, base our models on, you know. Is that correct?
Yeah, Chris. Hi, this is Francesco. I think there are a couple of key factors that we need to consider. First of all, we are growing probably slightly faster than we anticipated. Of course, when you grow, you don't manage extremely well your cost optimization, and you always have some inefficiencies because of the new hiring or of a higher portion of new hiring. At the same time, unfortunately, we are all seeing significant changes in the world in terms of inflation, in terms of raw material cost, energy cost, salary cost, plus price pressure. Those are all conflicting aspects that would not allow us to expand on margins.
At the same time, we are targeting, even this year, growth rates which are slightly higher than the previous plans. Those are the key variables that would probably change the big picture moving forward in the next few years.
Mm-hmm. Okay. Got that. Maybe the last question is, I'm sure you have seen, you know, kind of Medartis, you know, bought, you know, a business earlier this week, you know, which, you know, was an interesting move insofar as, you know, this was essentially kind of, you know, a fee contract development and manufacturing business. I just wanted to, you know, see if you had any thoughts if that, you know, was something that you might consider as well, you know, to broaden your pipeline, you know, to get a second manufacturing site, you know, if there was any attraction, let's say, for, you know, such a proposition from a Medacta perspective.
Yeah, as you know, M&A is an alternative way of growing. I think I wouldn't comment too much on our colleagues at Medartis. They are in a different segment. I think they did pretty well in order to increase or break through in a difficult market like the U.S., where it's not always easy. We do have probably a stronger presence and a stronger base on which we can leverage our future growth as we are doing in the U.S. Manufacturing expansion in a different site is something we always consider. Additional opportunities in terms of M&A to enlarge in areas where it would be difficult to potentially develop directly or faster.
It is as well an area that we always monitor, especially for the new business line, when and where it will make sense. We would definitely potentially take a look. So far we are monitoring. We don't see short-term anything to announce, but we always keep an eye open. Yes.
Okay, thank you. I appreciate your comment and see you next week. Thanks.
Thank you very much, Chris.
The next question is by Craig McDowell, JP Morgan. The line is now open for you.
Hi, good afternoon, everyone. Just two questions, please. The first one on the sales force expansion that you pointed to this year. I'm wondering if you could give some indication on the phasing of the additions through the year and also how long it takes for new sales force to begin to contribute to the top line. Also on that point, just where or which sort of franchise these additions will be contributing to. Secondly, on gross margin, obviously, sequential step up in gross margin and also year-on-year, consensus when I look at it is looking for a pretty significant step up in FY 2022. I'm wondering whether you could give us some kind of indication of what we should expect for gross margin for FY 2022.
Is the H2 level that you've just posted an appropriate one to model for full year 2022? Thank you.
Thank you. I would take maybe on the sales force expansion and leave Corrado elaborate on the gross margin. Sales force expansion is a constant effort we are doing. This year in particular, we would focus a little bit more than usual in the U.S. market because we see very good opportunities in the short term. We are already executing this as we speak, and we started already at the end of 2021. In terms of business line, we would of course allocate probably more employees to the core business, hip and knees.
Of course the newer lines would continue to benefit from significant addition, and if you want, even more as a percentage of their current dedicated sales force than our core business. We are particularly focusing on our extremity and sports medicine business line, which is especially on the sports medicine side, starting basically from scratch. We have identified key employees to be hired and to build local structure in all the key markets from U.S., Europe, Australia, and in the second half as well, Japan. The difference is linked to the regulatory path. On top of those direct employees, there is, especially in the U.S. spine segment, a constant research and increase of our agents in the market.
That of course is on top of the direct employees you see the numbers for. Overall, our trajectory of growth is very much linked to the trajectory of sales force expansion, and it will be very much in line with our previous additions in terms of percentages to our sales force currently employed in 2021.
Thank you. Just so we're clear, the number of heads added, it's a big number of sales force expansion. Is that? Should that mainly begin to show up in the H2 this year, or is it? Should we see some kind of benefit in H1? I'm just trying to get to how quickly they can begin contributing.
Yeah, I mean, you know. I was going to address the ramping up of their contribution to the sales, which was, if I remember well, the second aspect of your question. Unfortunately, it depends a lot on the quality of the people that you hire. On average, usually before a salesperson reach saturation can take between six and 18 months. Let's say 12 months on average. Unfortunately, some of them would never reach saturation, do not perform as expected, and you end up having to face cost without revenues, which is sometimes the fluctuation you see as well on margins when you make too much of those mistakes. In the last years, we improved and increased even more, given the external circumstances, our vetting system.
In general, yes, you see a total contribution that really becomes relevant roughly in 12 months. I will leave, if you agree, the gross margin comments to Corrado.
Thank you. Yep.
Yes, Craig. Corrado speaking. Let's say that with regard to the margin, gross margin of the company, it honestly, there are different scenarios you can imagine with regard to next year, because let's say the best we have in mind is to keep the marginality at least stable as the current level. You see this year, you can see how revenue is, the increase in revenue is key to drive profitability also at this line. Let's say that if we will be able to grow as expected, and we will be able to saturate all the instruments in the market.
Because of a continuous trend in terms of growth and customer acquisition, which means, depreciation and amortization of new instruments to be in line with last year. We have no FX effect on the top line, and we have no very big unexpected increase in terms of price for raw materials and transport costs. The mix could allow to stay at the same profitability of this year. That is the best. I would say, the best scenario. The worst scenario is a level of activity lower than, say, in the low end of the guidance, with the price pressure on industrial costs higher than expected, and not, let's say, continuous growth and acquisition rate of new customers, which will require an extraordinary amount of instruments with extraordinary level of depreciation compared to the revenue generated that year.
That will be the worst case. In the worst case, I would say that it is easy that we move down of 1% compared to this year. Let's say 1% can be considered as a variability in this line in the best and worst case. It is important to understand that there are several aspects this year for 2022 that are not under our control. Namely, FX effect as always, but price pressure in industrial cost, supply chain disruptions, increase of cost for transport due to the situation, as you know, for petrol and gasoline and other all other increasing costs. I think that the range can be considered as a reasonable range.
That's very clear. Thank you very much. Bye.
Thank you.
We have another question. It's from Daniel Jelovcan of Mirabaud. The line is now open for you.
Yeah. Just one last one. You mentioned the hospital shortage of staff, like many other companies. I guess that's primarily in the U.S. Also, is it more for the nurse or for the operating room staff or even the surgeon? How does it affect you? I mean, is it more difficult to get new clients because there is not enough staff at the hospital level to receive you? Or is it that there are not so many surgeons that they can't do as many surgeries as planned?
Yeah. First of all, it is very much a U.S. problem. We do have a few centers in France that had, unfortunately bigger centers, but very few, that had staffing issues. The staffing is mainly associated with nurses, so it's not about the surgeons. It means that the ability for the hospital to go back to pre-COVID level in terms of volume is not always there. As we all know, there is probably still a stock of patients which are there in the waiting list. The hospital should, and have been able in the past, to not only go back to the pre-pandemic level, but as well, they should increase in order to recover some of the pent-up demand that is there.
If the staffing issue is not resolved, which we do see some positive aspects there as well in the U.S. as we speak, it means that they will not go back to the pre-pandemic level, and it will take much longer to fully recover the stock of patients that are waiting. On the positive side, as I said, there are some variables. Some of the nursing traveling nursing agencies have less work because of the pandemic crisis is hopefully coming to an end. The trend to move patients from hospital to ambulatory surgery centers, where there's significant smaller amount of staffing issue is there, especially in the U.S., and those two factors could hopefully address the staffing issues in the months to come.
It's very geographically localized in few areas in the U.S., so it's not a very, very general problem. In the big cities in particular where the big hospitals are, it is definitely a problem that they had to face in the last 12 months at least.
Okay. Thanks so much, and have a nice weekend.
Thank you.
There are no further questions for the moment, and so I hand back to you.
Thank you. Thank you very much for your participation in today's call. I would just like to once again thank all our employees and all our customers for their support in 2021. Thank you very much to all, and I'll speak to you soon.
Dear ladies and gentlemen, this call has been concluded. You may disconnect.