Earnings Call: H1 2021

Sep 10, 2021

Dear, ladies and gentlemen, welcome to the conference call of Medabtec Group S. A. 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. I I now hand over to Mr. Cipati, who will lead you through this conference. Please go ahead, sir. Thank you, and welcome to this 2021 financial results call. I am together with Corrado Seth, today, company's CFO and Gianna Larana, our Investor Relations. I would Start with the highlights of the 1st semester. We already Commented on the revenues for H1, which was strong with a growth of 35.4 percent at €177,500,000 reporting now Strong EBITDA margin, almost 32% and an adjusted EBIT margin of 21.4 The profit for the period is close to EUR 30,000,000 or 16.8 percent on revenues And a good free cash flow of over €13,000,000 In the 1st semester, we managed to Further increase our number of employees with 63 jobs added in the 1st 6 months of 2021. In terms of additional highlights on the following slide, you have Some details about the contribution on this very good growth that was coming from all our business line and geographies. Once again, those have been in detail reported in July already. And the gross profit margin improved as well at 72.5% with, As we said, an adjusted EBITDA up to BRL 56,600,000. This was, of course, significantly better than last year. And of course, we compare ourselves with a period That was significantly and negatively impacted by the 1st waves of COVID. Free cash flow was positive. Adjusted free And very important on sales and marketing side, we managed to introduce more than 50 new products across Europe, U. S, Australia and Japan for all our business lines, hip, knees, shoulder, spine and sports medicine. We did manage to increase our sales force, which is vital to support our growth. And all the new customers have been supported with additional surgical instrumentation, which is In terms of marketing and medical education, which is one of the pillars for Medacta's As a success, we managed to be extremely active in all the semester and since June and hopefully in the months to come as well. We have restarted some international travel. Some of the congresses have restarted as well like the American Academy even in August this year. We do expect some potential restriction to come and we will see it and discuss it in the outlook. One of the key products and key technology is our Nexstar, Our augmented reality surgical platform, we started with the first surgeries in Europe After receiving our CE marking for all our application, total knee, total Shoulder and pedicle screws spine application. The shoulder application has received as well our FDA clearance. So it is now entering the U. S. Market following the knee application that was already cleared in mid of 2020. Nexstar is an important portion of our my solution ecosystem, which is based on a platform that Medacta has developed internally over now 10 years that This is part of our personalized medicine aimed at Improving surgical accuracy and patient engagement. What's very different about the Nexstar is limited upfront capital investment And a reduced cost per case when compared with our competitors, which makes the system extremely flexible under a commercial point of view and extremely fit on not only the hospital segment, but as well The ambulatory surgery center in the U. S. And of course, on top, the European markets, the Japanese markets, which are Much less keen in investing in significant capital equipment. So far, we are I'm extremely pleased with the deployment of the Nexstar, especially considering the difficult situation of deploying new technologies with COVID limiting quite a lot of our ability to support certain countries such as Australia or Japan where In the last 18 months, we have not been even able to be physically present. If we go to the next slide, we will go more in details of the P and L And financial results, and I would like Corrado to present you with the data. Thank you. Yes. Thank you, Francesco. The let's have now a look at the numbers of the 1st semester. I think that the top line was Very well discussed in July, so I will go very quickly. I would like just to underline that the growth Was in all our business line, as you can see here. And if we move to the next slide, we can also notice that Every region contributed to this growth. If we move To the profit and losses slide, here going through the numbers, I think that the first comment Should be on the gross profit margin evolution, we see that there is a remarkable increase from 69.7% of last year to 72.5 this year, and this primarily is reflecting the leverage on the depreciation registered in this semester compared to last year. If we move down to the fixed cost area, We can say that we continue to expand our sales force, and this is reflected in the increase in cost line you see here. It is fair to say that we also realized some savings in travel and Congress's cost Due to continued travel restrictions for COVID-nineteen and these activities and the related costs We'll start again in the 2nd semester. With regard to G and A expenses, This number include €4,500,000 provision for the final settlement Of the MicroPort Master, I think that the rest with regard to fixed cost is in line with last here with no need to give any other comments. As a result of this number These numbers, we can see that the adjusted EBITDA margin raised to 31.9% coming from 20 3.8 last year, which is a good result. And I will give you now Some comments on the bottom part of the profit and loss. The first comment is on the financial results. You see 0 this year, and this is thanks to the EUR 1,500,000 foreign exchange gain we realized in this period, which offset the financial cost of the semester coming primarily from the revaluation of the inter The second comment I would give you would like to give you is about the income tax. You see the effective tax rate was about 6%, which is very low and below The average let's say, the average and normal tax rate, which is in the region of 30%. And the reason of this extraordinary low Tax rate is the tax deductions that we can register in the U. S. For the micro port cost that emerged in this semester. Given the higher tax rate in that country, We can we had a positive effect on the average effective tax rate in this semester. We ended with a €29,700,000 of profit for the period. Moving to the Next slide, here we see the investment, investments of the semester. As always, the biggest part of the investments I've been in new surgical instruments, which is the blue slides of the cake. And this is to follow, of course, the revenue growth of the period and the customer acquisition and the revenue growth expected also for the future. Other investments, tangible investments are always related to growth and basically our Expansion of our production capacity in terms of machines and space. Research and development capitalized costs reflect the activity of the company in developing and improving our product range and is in line with the average performance of the last year. Moving to the next slide, We say that we The adjusted free cash flow was EUR 13,400,000 adjusted for abnormal. A few comments About the enormous of the period, first of all, as always, we adjusted for the extraordinary legal costs in the U. S, EUR 40,000,000, but the biggest adjustment is the payment of ordinary income tax for the years 2017 2018. It is important to understand that this is an amount which was already accrued in the relevant financial statements of 2017 2018 and was paid this semester after having received the relevant tax assessment from the tax authority. The last adjustment was €1,900,000 and this is related to the extraordinary investments We are doing to expand the Rancati facility. I think that that's it about the free cash flow, and we can move to the last slide For my section, which is the evolution of the financial debt, we see we started from EUR 83,300,000 up last year. And the evolution is, as explained, cash flow and Investments, free cash flow from operating activities and investments, some IFRS treatment of repayment of lease and other debts for right of use payment and for technologies. And the net debt at the end of the period was April 27,000,000. I think that this is the last slide from my side. I will leave you to Francesco for the final part of the presentation and the Q and A session. Thank you. Thank you very much, Corrado. So we would take a look at current outlook. We, As you remember, updated our guidance already in July. So we are confirming at the moment our outlook With the 2nd semester that is expected to normalize compared to 2020, In terms of growth, we had, especially in quarter 3 last year, very Important pent up demand recovery in many of the European and U. S. Markets followed by 3rd wave, I would say, in quarter 4 last year. So 2021, we hope this will In terms of guidance, we confirmed our revenue guidance to be between EUR 355,000,000 and EUR 375,000,000 at constant currency with an adjusted EBITDA margin in line with our 2020. It is clear that this guidance is based On the evolution of COVID without any particularly negative impact from The pandemic and related lockdown. If we go To the next, I believe, is going to be focused, hopefully, our Q and A on how we see the future. But I leave the floor to the Q and A and happy to address any question you might have. Thank you. Now we will begin our question and answer We have our first question is from David Adlington, JPMorgan, the line is now open for you. Hey, guys. Thanks for taking the question. So just one really to start off with. Some of your orthopedic Larger competitors, I think, become incrementally more cautious in terms of the procedure outlook for the Q3 and potentially the Q4 given what's Going on with the COVID variance, obviously, that differs a lot, not just country by country, but individual state by state. I just wondered with respect to what you're seeing on the grounds in July, August and into early part of September. Is there any areas of course of particular concern? Or do you it sounds like you remain relatively relaxed. Yes. Thank you, David. I think you cannot be very relaxed in this period In general, in particular, we have seen or we are seeing in Q3 some negative impacts Headwind in Australia, whereas you know, Melbourne and Sydney in particular, they are back Into a severe lockdown, we are pleasantly surprised by the fact that the impact on elective procedure is significantly less than what happened in the past, but still we see Headwind that we were hoping not to have in quarter 3. We have seen it It's not the first time in Australia. It's happened in the past as well. What we have experienced is A swift recovery in that market. So we hope to be able to recover what we are losing in immediately in Q4, but that's a hope. U. S. Is another area where we see some COVID related issues, Some regional impacts, both in terms of elective procedure canceled and more in general, something I believe is becoming more and more of a problem, which is a scarcity of nursing. So the nurses are becoming a reason to cancel elective cases, And this is somehow associated with post COVID stress and the phenomenon of Agencies hiring nurses at significant higher salary, which are pulling from the hospital environment quite a lot of workforce. So those are the 2, I would say, key areas where we have some negative impact already and some concerns moving forward. Europe is going pretty well. We do expect some potential negative impact from the Delta Variant and hopefully not from additional variants that we started to see on the news. But so far, the impact is relatively smaller than what we've seen with the 3rd, the second and of course, the first wave. That's great. Thank you. And maybe just in terms of on the Nexstar launch, In terms of when we might start to see that coming through in terms of revenues and I suppose Any sort of initial feedback, what surgeons really like and maybe what they would like to see some things improve still? Yes. We are extremely pleased with the launch The next caller, especially given the external circumstances, if you think that we have never been able To physically go in Japan or in Australia, and we just went to the U. S. For the first time physically in person in August this year. Of course, you can imagine that launching such a complex technology overall and train Our partners in the U. S. Through WebEx, etcetera, is Suboptimal. Europe launch is going Extremely well. I hope to be able to announce an important milestone of Passing the 100 system installed in the market before the end of 2021, which is, In my opinion, a very important milestone across knees, shoulder and spine with different level of maturity. We are extremely pleased on the early feedback on our shoulder application. The knee is a little bit more mature And more platforms are delivered on the knee side. But as it is a common platform, there is a very good Implant sales increase, thanks to the Nexstar. And we have started to sell the capital equipment as well In certain markets, and this is usually after an initial period of evaluation. But as we said, having A significant lower industrial cost, we can be much more aggressive than most of our Competitors are much more creative under a commercial point of view. That's great color. Thank you very much. Thank Janelle speaking. I can address a question submitted By Ayesha Noor from Morgan Stanley. I'm reading the question. We have seen your competitor Launch a robotic solution for the anterior hip indication. What do you think of this product? And could it impact your volumes In those hospitals that have installed, this is Robert. Thank you, Jana. Yes, of course, I've seen this competitor launch. It is something we knew it was coming. I would say they are We are talking about the ROSA system and the hip application. They are following Stryker's Mako hip application, Clearly focused on anterior approach. I, of course, have a lot of respect for all those technologies. We Picked a completely different path, especially on the interior hip side. We did not see a significant Pickup with Makoheap application or let's say not enough to worry us In a particular way, and we don't expect this to be any different on Zimmer side. We will see and we continue to monitor and try to compete with our solution on the heap side, and we are happy with the heap results so far. There are no further questions, and so I will hand back to you. Thank you. Thank you very much. If there are no additional questions, I would like to thank all the participants and look forward to report additional results in January. Thank you very much, and have a nice day.