Dear ladies and gentlemen, welcome to the conference call of Medacta Group SA on the 2020 half year results. 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 zero on your telephone for operator assistance. I will now hand you over to Medacta Chief Executive Officer, Mr. Francesco Siccardi, who will lead you through this conference. Please go ahead.
Thank you. Thank you very much. Welcome to H1 results for Medacta. I will go through very quickly on the highlights of this very particular semester we all experienced. Then we're going to dive into the full P&L analysis. In terms of H1 2020, we already discussed the revenues in July at EUR 134.8 million, with a negative growth of 11% versus the previous period. This is, of course, a negative growth, but we were all expecting even more negative impact due to the COVID. We have seen, and that's probably in the first highlight of today, that not only June and July were registering a double-digit growth, but in August, we continued with the same trend. This is linked to the rigid demand of orthopedics and the good expansion that some of our product lines were able to deliver even during this period.
Of course, we are all exposed to the changes which are associated with this pandemic. We've seen that the future remains very uncertain with a situation like the Melbourne area in Australia in complete lockdown since a couple of weeks. They just expanded that for another couple of weeks. The situation in France, the situation in the U.S. We remain very cautious for the remaining part of the year. At the same time, we've seen solid EBITDA margin at around 24%. This is thanks to the different initiatives that the company was able to put in place and to really reduce a lot of costs, mainly associated to travel and marketing, which have been completely cut during the lockdown period.
We are very proud to say that we were able to retain 100% of our workforce, and this is not only critical for all our employees, but it's critical for the rebound effect that we were expecting. In fact, with those strong months in June, July, and August, we really needed the full support of our people in the different departments. As you have seen, with a lot of news associated with new products introduction, Medacta has had the ability to introduce more than 25 new products in different markets, either in Europe, in U.S. or in Australia. We were able, during the H1, to completely redesign our marketing and especially our education offer, where we shifted a lot of activities from physical to web-based, and as well, we redesigned a lot of the physical meetings.
We were able, by doing that, to retain the attention of our existing customers and to gain as well, the attention of new customers. We invested. We continue to invest in our instrumentation, which is very critical to support our growth. More than EUR 20 million have been invested in CapEx, and this, of course, had a negative impact on our free cash flow. We will go a little bit more in details later, but we still can rely on a very strong liquidity position in order to continue to fund our future growth. If we go to the next slide, I wanted to go a little bit more in details about the marketing and the education offer that we were able to redesign for our surgeons.
This is, of course, not critical because of the immediate impact of those activities, but because my main focus and my main concern has been to make sure that our pipeline of new surgeons was not drying up during this period, because otherwise this will come as a big problem in the months ahead of us. We discussed those 1,800 surgeons attending our online and digital education programs. We completely redesigned the Medacta.TV channel. We had those web-based MORE in Touch initiatives, and that's more on the online activities. We really redesigned our physical medical education as well. We moved from big labs to very small labs, even mobile trucks in certain countries, in order to continue our medical education on cadaver courses. We have converted some of the big events we had planned in the H1 into a worldwide webinar, for example, on the knee side.
We have, in the more recent weeks, restarted almost completely, although not in all the countries, our classical, more surgeon-to-surgeon medical education. This includes not only the cadaver lab, as well, the surgeon-to-surgeon support. We are very close to finalize and announce additional initiatives in this space that will help us to continue to stay aside our customers, while we introduce our innovative products. If we go on the next slide. There is a little bit of a delay on my slide. I just wanted to point out on the R&D focus. We mentioned more than 25 new products cleared in H1. This was linked to the MDR deadline, which was expected to be in May 2020. As we all know, this has been postponed by one year. This was the pipeline we did prepare in order to meet this very critical deadline.
We have now a new deadline, which is May 2021, for the introduction of the MDR, and we will see another very long list of new products that will be hopefully cleared in one year from now. Nevertheless, if we look at what we have done so far, we had, across all the different product lines, significant innovation in the hip side, in the knee side, on the shoulder, on the spine, and in our sports medicine. We have seen as well, the most recent clearance for our augmented reality NextAR solution. This is the first FDA-cleared augmented reality total knee surgical navigation system. We had the pleasure to have a very positive feedback just last Friday with the first clinical case done in Australia, with a very positive feedback. We're very proud of what we've been able to deliver in those difficult conditions.
If we go on the next slide, there is what we have discussed more recently about the NextAR. This unique product that Medacta was able to internally develop with strong collaboration from our surgeons designer group. Surgeons that are coming from different backgrounds, different geographies, and different philosophies as well. This is the first application of many, the total knee application. As we discussed, the solution will be applied to our total hip, total shoulder, and spine product line as well. The goal of this solution is really to change the market of the technology with a very low upfront capital investment, very much reduced cost per case. The ability to attack different segments of the markets with something which is proprietary and unique. In particular, we mentioned we have a very precise strategy in entering the ASC market in the U.S. Ambulatory Surgical Center in North America.
I believe that was my last slide on the highlights of H1. I have the pleasure to introduce Mr. Corrado Farsetta, our Chief Financial Officer, to go over the P&L analysis. Thank you, Corrado.
Thank you, Francesco. Thank you. What you see here is what we already discussed, Francesco broadly discussed, the revenue. I would like just to refresh some key numbers, and then I leave Francesco to provide more color if needed during the Q&A session. We say sales declined by 12% at constant currency, driven by the reduction in revenue in Europe, 17%, U.S. -14%, and rest of the world. Asia Pacific registered the positive results of +6% in terms of revenue. Products, hip and knee revenue were down by 17% and 13%, respectively. Extremities and spine did very well, +41% for extremities, shoulder, and +11% for spine. Let's now have a look at the profit and loss, where we can discuss the profitability and the results of the company.
The gross profit margin, equal to 69.7%, shows a reduction by 3.9% compared to prior period. This drop is largely explained by higher D&A as a percentage of revenue, and I think that the reason is clear. The revenue declined. The number of instruments in the market did not disappear and continued to generate the same amount of depreciation. I would say that this amount can be even higher if we consider the investments we did in this semester to prepare for the recovering demand in the next months. At this level, there was also a minor effect deriving from the negative price trends in the market, and I would say, a less favorable composition in terms of revenue geographic mix, given, let's say, the U.S. part of revenue declining compared to last year.
The savings delivered in the first semester, along with the EUR 2 million grants obtained by the government for the reduced working hours plans, helped the company to protect EBITDA margin, and at the end of the semester, EBITDA was EUR 31.9 million, equal to 23.7%, adjusted to 23.8%. The adjustments are two types of adjustments. The first one is an adjustment for legal expenses, extraordinary legal expenses, which is a positive effect on the P&L. Then we have a negative effect because we released the over accrual that we did last year for the same reason. Basically, the effect is almost zero in this semester. Financial results, we see they are in line with prior periods. Nothing to report in this regard. I would spend one second to discuss about the tax.
You see a positive number in this line, which is strange. This is due to a one-off effect of about EUR 2 million deriving from the Swiss tax reform, which reduced the company tax rate from 18.6%-17.3%. This EUR 2 million of positive one-off effect is coming from the recalculation and the release of deferred tax assets and liabilities in accordance with the new tax rate. As Francesco said, we continue to invest. We invested about EUR 20 million, compared to the EUR 26 million last year. You see that the biggest chunk of investments is composed by instruments, and those instruments are needed to basically both cover the demand coming from customers and the expected recovery demand that we forecast for the next months. Research and development, we continue to invest, which is the vast majority of the line intangible.
It is more or less in line with last year. I would say there is a slight decrease due to some savings in consulting expenses and some minor delays due to the COVID effect in the first semester. The timing delay of the key projects will be recovered by the end of the year. The free cash flow came in at EUR -7.9 million. Let's see. Just wait for a second. The delay. Yes. The free cash flow came in at EUR -7.9 million after we discussed the EUR 20 million investments and additional EUR 10 million of new implants of additional stock. This increase in stock was decided to support both the expected increase in demand and the possible disruptions coming from shortage in supply chain in case of second wave of COVID or other issues that could occur in the second semester.
The free cash flow, adjusted by abnormal, was equal to EUR -4.7 million, which compares to a EUR +3.5 million of the prior period of adjusted cash flow. As you see here, the net debt of the company remains very low, EUR 115 million at the end of the semester, starting from EUR 106 million at the end of 2019. As you see, we have EUR 235 million of credit lines, out of which EUR 179 million are committed. We think that we have a strong liquidity position, and I would say that we are ready to sustain the future growth. This brings me to the end of my section. Francesco now will go through the next section for some conclusive consideration. Thank you, Francesco.
Thank you, Corrado. I think what matters the most is, of course, our future. We have seen a very good performance in June, July, and August. This double-digit growth is, of course, very positive. We managed to have this performance, although, as we know, many markets are still not able to work at full speed. Without COVID, the positive effect would have been even bigger. We see in different markets, different bounces at very, very unpredictable pace. We had countries with extremely high growth over months like August, which are usually very, very slow. At the same time, we have seen new stops in areas where we were hoping that the situation was normalized. It is, as I said, extremely unpredictable and, giving the uncertainties around this COVID-19 development still in H2, we cannot provide a short-term guidance.
At the same time, I think we have all experienced how resilient is the orthopedic market in general. I think Medacta was able to show in some of our product lines, even positive growth during the pandemic. If the conditions around us will allow us, we expect good growing trajectory in the remaining months. Extremely relevant for our future is, of course, the build-up for 2021. The stronger R&D focus, not only with the new products we have already cleared, but as well with the additional projects we have in our pipeline. Even more relevant is the restart of the Medacta MORE education activities, which are the key elements behind our growth, together with the continuous expansion of our sales force. We know in many markets, we are just, if you want, scratching the surface in terms of market share.
We have restarted all our hiring plans already in H2 in order to make sure we go back to a very strong momentum in 2021. We have further refocused our activities on our ASC programs in the U.S. This is linked to the acceleration that COVID had on the shift from inpatient to outpatient orthopedic procedure in this market. This is definitely in line with our previous strategy and even more relevant for the months to come. All those activities have to be supported by a re-acceleration in investments, in instruments and inventory to support our growth. This was my last slide. I would like to ask the operator to open the Q&A session. Thank you very much for your attention. We are both available for any Q&A.
Ladies and gentlemen we will now begin our question and answer session. If you are on the conference call and 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 was answered before it was your turn to speak you can dial zero and two to cancel your question. If you are using speaker equipment today please lift the handset before making your selection. If you participate via the audio webcast you can send in questions via the Q&A function of the webcast by pressing the question mark button. At the end of the hour all unanswered questions can be addressed to investor.relations@medacta.ch. One moment please for the first question. The first question is from Alex Gibson, Morgan Stanley.
Your line is now open. Please go ahead, sir.
Hi. Good afternoon. Thanks for taking my questions. I have three questions. My first one is just on the double-digit growth that you talk about in July and August, which are seasonably low months. What sort of level of growth would that mean for September to December if the level of revenues that you're seeing today in July and August continued for the rest of the year? Would you still deliver growth for the full second half, or do the comps get that much harder, that you need things to actually improve significantly for the rest of the year to deliver growth? That's my first question. My second question is just on the overall investments you're making to reengage with customers and drive business.
The planned investments that you have for sales, marketing, and education, are they going to be at or above or below the levels of investment that you would have previously spent to drive sales? Here I just want to understand if you can generate the same amount of business at less cost, or if you think you are actually going to spend more to try to regain lost ground. Then my last question is on the breakdown of the double-digit growth. Could you perhaps be more specific within the divisions, what you're seeing in hips and knees, in particular, these low teens type of growth, higher, lower? Thank you.
Thank you, Alex. May I just ask you, I just want to make sure that the first question is clear to me. Are you referring to the H2 growth or the overall yearly growth?
The H2 growth.
The H2. Yeah. We, of course, have been pleasantly surprised by the acceleration we had already in June, July, and August. We were expecting an acceleration, but both the timing and the magnitude were kind of a surprise to us, especially if you consider, and this explains if you want, or address partially your third question about the breakdown, especially if you consider that some geographies did restart and restop, affecting the overall performance in a negative way, of course. We do expect in H2 to be able to deliver a solid growth if the conditions around us will not further deteriorate. This, if you link it to the breakdown of double-digit, we had very strange growth. We had, in some of those months, extremely high double-digit growth in certain of our core product lines in hips, and the following month, exactly the opposite in knees.
We had regions like Asia Pacific, which was driving our growth or delivering good growth as well in H1, that is now more affected than other markets. You know that both Australia and the Victoria State, the state of Victoria, as well in Japan, where, especially past months in the region of Tokyo, the COVID spread was re-accelerating. This was negatively impacting mainly the psychology of the patients and the concern, we have seen delays and postponement again. It is very, very difficult to predict the future, what we have seen is that as soon as the condition allow patients to go back to surgery, then we see those extremely high re-acceleration. You are right, July and August are usually, in terms of seasonality, less relevant months, they are usually, in any case, significant enough to support or not a semester growth.
I would say we cannot complain, and we should be happy of having July and August with such a very good performance, which will allow us to potentially address some slowdown in the future months if the situation is going to negatively impact. In terms of marketing investments, in H2, we plan to go back to our normal level of investments in terms of marketing medical education. Those are the key activities that Medacta is building to make sure our pipeline is not, as I said before, drying up. The overall marketing investment, though, is probably still below what we spent last year, simply because many of the third-party event have been canceled. We have reallocate some of the resources we usually use for third-party events to Medacta specific events, which is for us, the most relevant activity to refill our pipeline.
I hope I did address your question in a proper way.
Yeah. That's actually helpful. Just following quickly up on that sales and marketing, I think you said, the overall level of investment would be less than last year. You're talking about the EUR 60 million odd in sales and marketing you did last year. That should be what we're thinking would come in the second half this year.
Yeah, absolutely. We are slightly below overall, simply because some of the activities are still not possible. T&E is definitely lower than last year. We did reinvest, as you correctly ask in your question, in order to re-accelerate and recover some of the educational activities we could not do, but there's a limit to that re-acceleration. We are going to have a lower marketing cost overall. That's our expectation.
Okay. Thank you.
Thank you.
The next question is from David Adlington, JP Morgan. Your line is now open. Please go ahead.
Hi. Thanks, guys. Thanks for the questions. Two, please. Just one of the orthopedic players has indicated that they've kept an eye on pricing as we come out of the other side of COVID. Actually, maybe a bit earlier, I just wanted to get your views in terms of what sort of pricing environment you're expecting on the other side of COVID. Secondly, just again, on selling and education costs, have you learned anything from COVID or having to change the way you do things in COVID that could be a permanent impact on how you do your sales and marketing and education? What potential implications does that have for your costs and margin going forward? Thank you.
Thank you, David. Pricing, I think, we are all well aware that orthopedic implants have been under strong pricing pressure for many years now. We have seen technologies coming in the market trying to protect this price. We have not seen yet a dramatic increase in price pressure. We had some attempts from some hospital administrators, especially in the U.S. market. This pressure, I would say, did disappear when they posted their own results, showing a dramatic increase of their profitability. In terms of short-term pricing, we are not seeing anything new in particular, but it is fair to say that the pricing pressure is already a very strong factor in our market. We did not see a dramatic change. It is possible that in certain markets, this trend will simply continue. That's what we expect.
In terms of education cost and potential redesign of activities, I think we showed how quickly we have been able to redesign our marketing and education activities. I think we did understand as an organization that there are alternatives and additional tools that can complement our offering. Some of the offering is here to stay. It will help us to both, either simply increase our exposure by adding those activities on top of what we were already doing. There are definitely some activities that will be replaced by some of the newer activities that we have launched this year. We are preparing an announcement about an additional web-based activity that will, in my opinion, support a very good level of medical education, while at the same time, hopefully allowing us to do it at a much lower cost. Some is already out there.
Some other activities will be announced, hopefully in a few weeks. Those new activities will help us definitely to further improve our education at a lower cost.
Great. Thank you.
Thank you.
The next question is from Chris Gretler, Credit Suisse. Your line is now open. Please go ahead.
Thank you, operator. Good afternoon, Francesco, Corrado. I have now two questions left. The first, just on gross margin, going into the second half now, could you provide maybe some of the puts and the takes now that we should think of and kind of how that develops in the second half now with, kind of the relatively solid growth you have now seen so far, in the second half? Also maybe, comments on, kind of how mix will impact the now gross margin. The second question is just, kind of in your remarks, you mentioned that some of the markets now have not been back at full speed. Could you maybe indicate, what those markets are and where you basically see, still kind of the biggest backlogs, so to say?
Hi, Chris. Thank you for your question. If you don't mind, I will take on the last question. I will let Corrado elaborate on the gross margin and mix. While I'm on the phone, I will answer on the country-specific situation. There are some markets which have less of an impact on Medacta, which are still heavily affected. I would say probably the U.K., Spain, are example of markets still affected by COVID heavily as a market. At the same time, there are regions within many markets which are temporarily affected. Australia is a good example. I think it will help you to understand what's the reality we live on a daily basis, what I'm going to tell you about the U.S. In the U.S., there are states like Florida, which is almost homogeneously, or at least the southern part, affected by COVID.
We are facing situations where maybe a surgeon is affected by COVID, or a friend of a surgeon or a son of a surgeon is affected, and he's quarantined for two weeks. This has a huge effect if those surgeons are some of our key accounts in the U.S. market. That creates, of course, a lot of complexity and impossibility on our side to forecast, because those are situations which are really surgeons related, but we know how relevant single accounts can be on a monthly performance of a company like Medacta. That's a little bit the situation we are facing. It's not only the geography, the country, it's the region, and within certain region are single people. That's the difficulty and the complexity. If you're fine with that, I will ask maybe Corrado to elaborate on the margins.
Mm-hmm. Thank you.
Thank you.
Hi, Chris. Thanks for your question. This is Corrado. I would say that about the gross margin of the company, we discussed it before, that the biggest impact on the gross profit margin in this semester is generated by the higher D&A due to underutilization of the existing set of instruments in the market, plus the additional investment that we had to do to sustain, to prepare for the growth and to, let's say, to feed the new customers. This was a negative effect that we expect for sure to be absorbed by the additional revenue per instrument that we expect to see in the next few months.
How fast this will happen, it's hard to say, because we have a lack of visibility in the next month, but it is for sure expected, the positive effect in this regard. In terms of magnitude, I can tell you that I would say more than two-thirds of this drop is attributable to the D&A effect of underutilization of instruments. The second component is a more standard, let's say, effect in the market, which is the negative trends in pricing. As you know, normally, we are well positioned in terms of geographies because of the mix and the increase in revenue coming from the highest price market is normally helping to offset the biggest part of this negative trend. In this specific semester, we have seen U.S. declining, we have seen Europe declining. Within Europe, we have also seen increasing shoulder and spine.
The growth in this product line was, let's say, in country with the pricing less favorable. What we have observed in this semester is a geographic mix which didn't offset as we expected due to this change in mix. Again, is this going to change? We expect this will happen. How fast and how big will be the recovery is hard to say because of lacking visibility. As we have seen, the increasing, let's say, contribution from the U.S. and the continued contribution from the other Pacific countries should bring the company to a level of profitability more in line with the last results. Overall, we do not expect to recover entirely the gap, but we expect for sure to be more in line with last year.
Going down to the profit and loss, of course, this reduction at the gross profit margin level should be at least partially offset by, I wouldn't call savings, but let's say inefficient and volume effect at the EBITDA level. The profitability at that level, the EBITDA margin, is expected to improve as well.
Okay. That's very helpful. Thank you, Corrado. Appreciate it.
Thank you, Chris.
There are currently no further questions on the conference call. Ladies and gentlemen, as a reminder, if you would like to ask a question via the telephone, please press zero and one on your telephone keypad now. We've received another question from Ruben Boyagian, Finanz und Wirtschaft. Your line is now open. Please go ahead.
Hello. Thank you for taking my question. How much of the growth you have seen from June is a catch-up, and how much is going back to normal? If there is a major catch-up effect, is it already over, or will it continue for a couple of months more?
Yeah, that is a very good question, and we did dive into this analysis in order to understand how much of this growth was here to stay and how much was just a temporary catch-up. The analysis did reveal that we had a significant amount of sales coming from accounts that were not Medacta accounts in 2019. There is definitely a contribution of both. There is as usual, the contribution coming from three different factors. The growth of our base of customers. There is the growth of our new customers of 2019 that did contribute at a higher level, at least in the good months of 2020. There are sales coming from the surgeons that just started in 2020. I can tell you the contribution is from all those elements.
When you read those double-digit growth, you have to understand that it is coming from countries which are maybe delivering at 30%, 35%, 40%, or even 50% growth rate. It's easy to imagine that those countries have a huge portion of this growth, which is a recovery. For us, this analysis has to be done country by country, line by line. It's even more associated to new accounts in those lines, which were already delivering a very solid growth, such as spine and shoulder. We did dive. We are relatively fine with the fact that this growth is not only a recovery, but it is coming from new accounts that have been activated in the last semester, which is for me, very important because it means they will continue to grow in the second half, and more importantly, in 2021.
Okay. Thanks a lot for this clarification.
Thank you for the question.
We have a follow-up question from Alex Gibson, Morgan Stanley. Your line is now open again.
Hi. Thanks. Just a couple more. You kind of answered it there. Given the backlog that you've seen, are you finding surgeons and hospitals more or less receptive to switching to Medacta if they're spending a lot of their time just trying to get through surgeries? How hard is it to actually get those new surgeon accounts on board?
I would say this is, of course, a very important aspect. Surgeons which are playing catch up at 50%+ because they've been blocked for two, three, four months, they will definitely not take time to go to cadaver courses because they have to do their work. At the same time, we have seen many that were close to switch. They took advantage of the break to fully gain exposure and knowledge about Medacta product. When they switched immediately after the release of the lockdown, they really started at very high pace. This played in both direction. I would say that those which have been busy working in the last two, three months, they are the one which are in our pipeline for the September, October, November activities. The interest, let's say, was still part of their mindset, interest in switching to Medacta.
They might have postponed by a quarter, because of very busy period in recovering their activity.
Okay, great. The very last one from me is, I'm just trying to understand if this is a rebasing of your sales or not at the end of the year because of the need to get new surgeons on board. I know you don't want to give guidance for 2021, let alone this year, but should we be thinking about 2021 being able to show almost growth over a two-year basis over 2019? Is the fact that you haven't got these surgeons on board over the last six months make that unreasonable? I'm just looking at my estimate, the consensus estimates, and we all basically expect 2021 to be a recovery back to your prior trajectory. In your guidance, you specifically say the growth trajectory shouldn't change, but do you think the absolute level of sales, we should think about 2020 being a rebasing?
I think it is very important to see what's the level of education activity we're going to be able to actually deliver in this second part of the year. We all know that the growth of 2021 will be based, at least partially, on surgeons that are expected to start in the second half of this year. I would say some of the lines did show a very strong trajectory, which incorporates a lot of new customers that did not participate in 2019 and 2020 H1 top line revenues. Their activity in 2021 will come for 12 months at a decent level of their ramp generation. I would say that without COVID, in a normal year, 2021, we should see a good trajectory of growth.
The only major question mark we have is how much of educational activity are we able to deliver in these four months, which are hopefully back to normal. If we are not able to engage as many surgeons as planned, this might potentially affect our trajectory in 2021.
Okay. That's great. Thank you.
Thank you, Alex.
We haven't received any further questions on the conference call.
Thank you all for your participation. I would like, once again, to thank as well all Medacta's employees for the support they gave to the company's performance in H1 and the commitment they have and continue to deliver in H2 in those more challenging conditions. I have to say I've been very proud of the overall reaction of the company. If there are no additional questions, I would like to thank you all, and I look forward to speak to you soon next time we have important news to deliver.
Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.