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 the star key followed by zero on your telephone. May I now hand you over to Medacta's CEO, Mr. Francesco Siccardi, who will lead you through this conference. Please go ahead, sir.
Thank you. Thank you very much for the introduction. Welcome to the full year 2019 financial results. I hope everybody's doing well during this difficult time. We are here to discuss about last year performance. We will have, as well, of course, an update on the COVID, then a discussion about the outlook 2020. The key figures for the full year 2019 are on this slide number four, with revenues at EUR 310 million. We have already discussed revenues, 13.9% reported in terms of growth and 11.3% at constant currency. In terms of gross profit, EUR 226.9 million, with an adjusted gross profit of around 73%, an EBITDA of EUR 91.5 million. Percentage-wise, an adjusted EBITDA margin of 29.5%. If we go on the next slide, please. As I said, we did already release the numbers on our revenues.
Here, I think it's important to understand revenues in order to understand the evolution of profitability. On those numbers, what I would like to underline is the performance of the spine, which, you might remember, was at 11% in H1 2019. Did recover pretty well with a 23.4% full-year result constant currency. Of course, still behind a little bit the plan we had for the full year in spine. Hip and knees have been, as we said, strong, pretty much in line with our expectation, and extremities, a very good performance overall. If we go on the geographic bridge, please, on page six. What is important here to notice is a very good performance in Europe, around 8% growth, across all the different product portfolios.
North America, which did perform a good growth, 13.2%, but here as well is an important highlight, because North America, we expected a little bit more. Asia Pacific, very good re-acceleration in H2 of last year, and the rest of the world, which is growing very fast and starts to contribute, in absolute terms, a little bit more to the overall revenues. If we go on page seven now. You can see the recap. A very positive contribution from all the business lines. The core business, hip, at 5.2% growth, and knees at 13.2%. Both are significantly above market growth. A very good performance in spine, mainly thanks to the strong acceleration in the second half, where you could see a 35% growth versus 11%. This was a very good recovery, and again, very much in line with our H2 expectation. Shoulder business is growing extremely well, 150%.
A good introduction in all the key geographies in Europe, in Japan, in the U.S. market, with several product line extension cleared under a regulatory point of view in 2019. As you have seen from some of the press release, we started to build a good SportsMed product range with regulatory clearance in Europe and more recently in the U.S. and in Australia. In terms of geography, Europe has grown as expected, and although we have, of course, a higher market share in Europe compared to other markets and some price pressure driven by government price cut down in France and Belgium, we did manage to achieve almost 8% growth. Asia Pacific did not start very well 2019, but did deliver a very strong growth in the second half with an overall 13.3% growth rate. North America, a good performance, with a stronger acceleration in H2 of spine.
Overall, slightly below our expectation, which led to the guidance review we all are aware of. The expansion in other markets, through mainly third-party distributors or international distributors, helped us to grow in the remaining regions outside of Europe, Asia Pacific, and North America. The EBITDA margin was at 29.5% from 32.3% of the previous year. This is mainly driven as a result of a price reduction in certain countries, mainly Europe and certain areas in the U.S. Some increase in the OpEx costs, which were all done as we were expecting a higher top-line revenues. The losses we will see in terms of percentage point in profitability are very much linked to preparing for growth, and this growth did not fully materialize, and we, of course, are going to go much more in detail in the next few slides.
In terms of free cash flow, we have been able, once again, to fully sustain this very good growth, and on top of it, generate a positive adjusted free cash flow of EUR 22.3 million, after EUR 48.3 million of growth investments, in particular in the area of new instrument sets and R&D, as we will see in a few slides. If we go to slide number eight. I still see Yeah, thank you. If we analyze the profitability and we start from the gross profit or the gross margin, we can see that, in 2019, we ended up with a 73% gross profit versus a 74.8% in 2018. Where does come the difference? We mentioned some negative trends in terms of prices in certain key markets. France is a market where price is fixed by the government, and in the Belgium and U.S. and Italy.
This contributed by a 0.8% gross profit decrease, which was somehow known and expected by management. We have an additional 1% in terms of increase of cost of sales. 0.5% is coming from instrumented depreciation, so our additional instruments that were prepared to sustain growth that did not fully materialize compared to 2018. A 0.5% is coming from a slight increase in raw materials, around half of it, and a slight increase in royalties, especially related to some of the new products in spine, in joints, and in the shoulder segment. Usually we are able to counter, especially this price erosion, with a very good product mix and geographic mix. That's why I was referring to the miss we did in both spine and the slight miss in the U.S., which we consider for around EUR 8 million in total, EUR 5 million from spine and EUR 3 million from joint.
Those would usually help us to offset this price erosion, thanks to a better GP that is there in the spine and a higher ASP that is usually there, of course, in the U.S. market. If we go on page nine, we would analyze here the other important variables in terms of cost evolution, which are the operating expenses. Thank you. The evolution is after the adjustment, of course, which we will explain later in detail, is from roughly 52% to 54.4%. Where does it come from? There is a little bit of R&D, more, 0.7%, which is, of course, an investment in our future. It's mainly driven from an increase in G&A and sales and marketing, which accounts for almost 1.7%. Those are strengthening of operation to support the growth in our subsidiaries.
As we constantly add people and infrastructure to sustain our growth, and because you have to do those investments ahead of your sales, if the sales are coming slightly behind or below, then you have this loss of profitability, which is the reason why when we gave the revenue revised guidance, we did expect to have a reduction in terms of profitability as well. Here you see exactly the evolution and the reason behind. The 0.4% from sales and marketing comes from the slight increase, of course, again, percentage-wise of sales and marketing people, and the slight additional cost of Lugano that was not fully offset by the expected top line growth that we discussed in the past. We did have very good growth, but this miss has an impact in terms of profitability as well.
If we go to the next slide, I think Corrado will go a little bit more in details about some of cost and EBITDA margin adjustment, et cetera.
Yeah, sure. Thank you, Francesco. Good afternoon. Here what we see here is the bridge between the Adjusted EBITDA 2018 of 32.3% to the 29.5% just discussed by Francesco. We have seen 1.3% of reduction deriving from the gross profit. Another 2.5% is coming from the OpEx, and there is a positive effect in this 29.5% of 1%, which is deriving from the adoption of the IFRS 16. Just a few words to explain this 1% increase, positive effect. We, in the first semester presentation, decided to normalize the results of the period in order to allow full comparability between 2019 and 2018 first semester results. From this year-end results onward, this normalization won't be needed anymore as the numbers from now on will be fully comparable.
That is why we decided to not to normalize anymore this number to give full disclosure in this presentation and in the annual report in order to make sure that this normalization was fully understood. What you see here is the breakdown of the big amount of adjustments we had in 2019, EUR 38.2 million. This is basically composed by the already discussed stamp duty, EUR 5.9 million, related to the listing of the company. The 15.3 fidelity bonds, you do not see this EUR 15.3 million in the profit and loss as a positive. You see only the cost because the positive effect is in our accounts as a capital contribution from the Siccardi family. That is why it was needed, this correction.
There is the correction of the extraordinary EUR 14.6 million provision on the litigation in the U.S. with MicroPort. The EUR 2.8 million of the IPO cost as extraordinary cost, not recurring. There is a negative adjustment for 0.4%. This is referring to the gain we did in 2019 from the sale of the non-strategic asset, the London building, primarily rented to the Medacta for Life Foundation. This brought our profitability up to 29.5% as an adjusted result. In terms of net working capital, the 2018 percentage, working capital as a percentage of revenue was 4.9%. We ended 2019 with 5.7%. This increase is mainly due to the increase in inventory, and this increase in inventory is mainly driven by the additional revenue we did in 2019 and partially coming from the excess of instruments we already discussed before.
Basically here, in the stock and inventory area, it was easier and faster to put in place corrective actions when we noticed that the expected revenue were not in line with our. The actual results were not in line with our expectations. That's why the increase is more limited. Capital expenditure, you see 2018, it was 19.3%. This year, it was 13.4%, this is the result of two main trends. There is an increase, I'm speaking of the [DACH] area of CapEx for instruments, as Francesco just said, we invested for next revenue growth. The other positive effect in this sense, which is a reduction of our asset, is the EUR 6.3 million green area, which is a negative because it is a disposal.
The sale, as I told you, of this 5,000 square meter land and building, and 1,600 square meter building, previously rented to Medacta Foundation as a non-strategic asset for the company. The rest, research and development, and other items are more or less in line with previous year results. What you see here is the adjusted cash flow compared to last year. The adjusted cash flow from operating activities was EUR 68 million in 2018 and EUR 70.7 million in 2019. This result, again, is a combined effect from the increasing revenue and in the reduction on profitability that we have seen and discussed in terms of EBITDA and increase in net working capital. The investments, we already said, for EUR 34.8-EUR 48.3, this increase is mainly driven by the additional instrumental investments in new instruments.
The result is a reduction of the adjusted free cash flow from EUR 43.2 to EUR 22.3 million. Still positive and enough to finance investments to sustain the future growth of the company. Final capital structure. Last year, the leverage was about 1.5 x the EBITDA. This year is down to 1.15 x the EBITDA as a result of cash flow generation. There is again, this IFRS 16 to be taken into account, and in this case, in accordance with this accounting principle, we have reclassified about EUR 10 million, EUR 9.4 million, from finance debt to finance lease. For that reason, this amount is not considered anymore and won't be considered anymore within the total net debt of the company.
Now if we go back to the next topic, which is to give you an update on the coronavirus situation. If we go on page 17, please. Of course, our number one priority during this period has been to protect the health of our employees, while at the same time minimizing the impact on customer and patients, securing our supply chain, and maintain the financial health and liquidity of the company. We have been hit very early. As you know, Ticino is very close to Northern Italy, which has been, and still is, one of the worst region in the world. This somehow allowed us to prepare very early, and we went through the different step required by the authorities in the shutdown or lockdown period. We were able to adjust our manufacturing and our work environment across the whole organization.
Thanks to the experience we had here, we did put in place a systematic reorganization in each country as well, from Europe to Australia, Japan, and the U.S. Of course, each market is different and each country has their own specific guidance and regulation, but overall, very similar. If we go on page 18, we can go a little bit more in details about the headquarter general organization. We have the vast majority of our 550 employees here in the headquarters are working remotely since March 9th. This is something we started preparing in February already and is fully operational. In terms of manufacturing employees, they've been split in different subgroups, managed in a way that they work completely separate from each others in order to mitigate any risk of cross-contamination and related quarantine.
We did implement in the company all the countermeasures discussed by and is described by the government guidance in terms of social distance within the manufacturing plant, hand sanitizer, mask, daily temperature measurement, and so on, so forth. Thanks to the above countermeasures, Medacta remained fully operational in the past weeks. The supply chain and the raw material stock was increased already in January to face a possible shortage. The stock level in headquarter of implants are in line with the future needs and enable us to restart activities across all the product lines when needed. In terms of supply chain, all the stock level in all the key regions have been increased as well to face potential stop during international goods shipping, which did not face so far.
All the countries have been organized in a way that they can remain fully operational, at the level required by each different country. If we go on page 19, we will discuss a little bit the impact in terms of revenues. Starting from Italy, of course, in March, we have seen a steep decline of elective surgeries. Switzerland, France, Belgium, Austria, Australia have followed, and we expect more countries to go the same way, including, of course, U.S., where, as you know, there is a partial lockdown and is very rapidly evolving. Interesting enough, Japan was still doing elective surgeries, almost business as usual. We will see if this will be the case and for how long it will be able to continue. Similar situation we see at the moment in Austria. It's still possible in all those markets to do non-elective procedures, trauma procedures, and revision procedures.
Of course, those are usually a small percentage of Medacta business. What is important, and this is not peculiar of Medacta, but is general for all elective procedures in orthopedics at least, is that those patients will not be canceled, will be deferred. Each country is generating a longer and longer waiting list. Depending on the duration of the crisis with the coronavirus, this waiting list will start to be addressed, hopefully in 2020 or partially in 2021. All those patients will not disappear. We know for a fact that there are already hospitals and organization that are preparing and are prepared to work in the summer months or are prepared to work in the weekends to try to recover those patients as quickly as possible. In terms of cost, as we said, the cash flow and liquidity is our top priority.
We keep the situation monitored in terms of all the possible action we can put in place in order to protect cash flow. We had, of course, adjustment in terms of manufacturing in order to keep our stock level at the right level. We have been very much supported by short-time work and similar measurements that have been put in place in Switzerland in particular, but as well in other segment of our workforce, in sales and marketing, for example. We are monitoring all the available helps from the governments in order to offset mainly fixed costs. We will use them whenever possible and appropriate.
As I said, in Switzerland in particular, where we have more than half of our employees introduced this reduced workload, and Medacta is currently utilizing this support for over 270 employees, and this number will increase depending on the needs that we're going to have. Another huge cost saving, of course, is in the area of marketing. Medical education and other costs have been reduced substantially, mainly linked to the reduced possibility for traveling. We have, of course, put in place some interesting programs for online courses, and we will inform the market pretty soon about this. If we go to the next slide. One of the other measurements we announced this morning was to further protect our cash flow. The board of directors decided not to propose to the AGM any distribution of dividend for the 2019 financial year. If we go on page 22, please.
We will discuss about the outlook. This is quite a frustrating situation because the sales of the first two months of 2020 were very strong and in line with our expectation. With many of the situation we have been waiting to mature, finally maturing. We did record low to mid-teens range growth in January and February. As you have seen in March, we were still able to post a positive growth rate, although low to single digit. As you can imagine, March was already heavily affected, especially in Europe, by the COVID-19 impact. As it is impossible for us to have a proper forecast, and we don't know yet how the situation will develop. We are not in a position to provide a 2020 outlook. However, as I was mentioning before, orthopedic patients are not going to be canceling. They are generating waiting lists in different countries.
Of course, depending on the duration of the deferral of elective surgeries in several markets, a recovery should start already in 2020, and/or in 2021, and this will depend on the duration of the crisis. Overall, we don't see a mid- to long-term fundamental difference. The basis and the outlook for the market in the mid and long-term, in our opinion, did not change. This was our last slide of the presentation, and I believe the operator will open the Q&A session.
Thank you. Ladies and gentlemen, we'll now begin our question- and- answer session. If you would like to ask a question for our speakers, please dial zero 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 is answered before it's your turn to speak, you can dial zero two to cancel your question. If you are using speaker equipment today, please lift your handsets 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 our call, unanswered questions can be addressed to investor.relations@medacta.ch. One moment please for the first question. Our first question is from Sebastian Walker. Your line is open now.
Hi there. Thanks for taking the questions. I've got two, please. Just firstly, what are you seeing in terms of procedure volumes in the regions that were hit earlier by the outbreak? Are you seeing any signs of recovery, for example, in China and Japan? Just secondly, could you talk about how this potentially changes your plans around CapEx investments, product launches? Any timelines around that would be helpful. Thank you.
Thank you, Sebastian, for the question. As you know, Medacta is not active in China, so we did not see any impact in this market. Japan is very interesting. We did not see any impact in Japan. We are actually exactly on track with our forecast until end of March. They are ahead of our forecast. It doesn't look at the moment to plan for a stop. Of course, the situation is very fluid and the situation might change even in Japan very, very quickly. At the moment, that's the feedback we have from, let's say, the Pacific area, the Asian area. In terms of other regions, the procedure volume we expect to drop significantly. It's varying, depending on the different markets. There are markets like Switzerland and Belgium where elective surgery is completely banned.
Surprisingly, markets like Italy or Germany, there is still a surprising level of activity, more in the private sector than in the public sector. It's very, very fluid, so I would not dare to give you any percentage number. It's different from what I was expecting. I was expecting even worse than that. In terms of CapEx, you ask about CapEx. Of course, there is one big question that we had within the company, is very likely, as we said, hospitals will try and surgeons will try to recover those waiting list patients as quickly as possible. This will generate a huge demand of both implant and particularly instruments. If a surgical session usually runs for, I don't know, four or five cases, and they try to put seven, eight cases in a day, they will ask companies to provide additional sets.
We are preparing, or we did prepare some of those sets in any case, so we should be in the right spot. Of course, we are delaying some of the big launches in certain new products. Overall, we are not decreasing too much our product launching and instrument launching programs at the moment, because we want to be ready if and when this coronavirus crisis will stop.
Great. Thank you. Could I maybe just ask on the recovery and the speed that recovery happens at? In the discussions you're having with surgeons and hospitals, how much capacity is there for them to do catch-up growth? What could they increase their surgeon rate versus what they typically have done in the past?
It's very qualitative as well as an answer, and it's based on a conversation we are having in different markets. Of course, the surgeon, they are planning to work on weekends, which was usually not the case. I was on the phone with our German general manager. He was telling me that hospital are submitting plans to companies with 120%, 150% capacity. If 100 was the norm, it's 20%-50% more. This is passed to us as a request to make sure that company is ready to follow when this happens. This goes back to my answer before regarding making sure that we have enough implant and instruments to follow on this situation.
Even the private sector, the surgical sector, the ASCs in the U.S., that is going to be a very safe place or safer than hospital place where elective surgery could be done, and there is a lot of activity and discussion around that possibility in the U.S. It's very early in the U.S. They are still in the ramp-up phase. I expect in 30 days from now, they will really start to discuss. The beauty of orthopedics is that is one of the most important specialty in terms of profitability and revenues for hospitals. This will hopefully help orthopedic surgeon to be granted with this capacity. This is just my focus and my idea. We will see what happens. There is definitely the willingness to recover as quickly as possible.
Great. Thanks very much. I'll jump back in the queue.
The next question is from David Adlington. Your line is now open.
Hey, guys. Thanks for taking the question. Really just a bit of further follow-up from Seb. Just in terms of your expected pace of recovery, I just wondered if you expected that slope of recovery to materially differ by country or any countries you expect to be quicker? It sounds like the U.S. you might expect to be a bit quicker given the ASCs. Anywhere where you might expect to be a bit slower, any differences there? Thank you.
I think it's very, very difficult to assess anything about the future. There will be a lot of politics, a lot of lobbying. In the U.S. specific, there was already a very big war between hospital and ASCs. If hospitals are dealing with coronavirus patients, I think they're going to hate to see orthopedic patients to go even more to the ASCs. It's very much politics there. Private and public, we see in many markets that the public segment is the one addressing the most of the coronavirus patients, and the private segment, even in Italy, for example, is already planning to restart elective cases. This is in terms of structures. We will need to judge the willingness of patients to be operated anytime soon. I would be personally a little bit scared to be operated now. It depends on the psychology and the pain.
The orthopedic patients, when they needed to be operated for a total joint, for shoulder, they are in tremendous pain, and we talk about people not able to sleep because of the pain. I'm pretty sure that whenever they will feel safe to be operated, they will access the structures and making sure they had surgery as quickly as possible. I would not dare to give you any number about forecast, but we know for a fact that some markets are already discussing and preparing recovery plans, which could start much earlier than I was personally expecting. We're talking about May, June already.
Perfect. Thank you. I suppose, just on that pain issue, are we more likely to see a recovery in hips sooner than knees, then?
No, I would not expect any difference between those hip and knees or shoulder. No.
Okay, great. Thank you.
Thank you.
We have a follow-up question from Sebastian Walker. Your line is open again.
Hi. Thanks for taking my follow-ups. Just, I wanted to think a little bit as well, kind of get two splits. The first one is, are there any products or procedures in your portfolio where they're not scheduled or they're not non-essential in some way? Procedures that just have to go on irrespective, and that have to take place and cannot be delayed. I'll ask that, and I'll give the follow-up question afterwards.
Yes. There are, of course, hip fracture cases, femoral neck fractures and humerus fractures. In general, trauma cases. We see still some cases. The magnitude of those cases is relatively small, not only for Medacta, but in general, we're talking about less than 5%, 5% of hips and shoulder, maybe shoulder a little bit more. Definitely not in knees. There are the very painful revision or infections, and those are urgent as well. Usually, revision accounts for 10% of our turnover, and so that gives you an idea of the baseline we could potentially continue to count on, even during this crisis.
Again, depending on the markets, there are some areas where elective surgery is really scrutinized to make sure they pass the test, if you want, of impossible to be postponed or deferred. Did I answer?
Mr. Walker's line was unfortunately disconnected, or he hang up, but I think it was rather disconnected. At the moment, we have no further questions from the conference call. If you would like to ask a question in the conference call, please dial zero one on your telephone keypad. If you would like to ask a question via the audio webcast, please enter your question and use the Q&A function on the webcast by pressing the question mark button. At the moment, we don't have any further question in the conference call.
Excellent.
If you would like to ask a question in the conference call, please dial zero one on your telephone keypad. Mr. Walker, have we connected? Mr. Walker, your line is open now.
Hi there. Sorry about that. The difficulties of working from home, my phone seemed to disconnect. I think I caught the end of the first question. Just the second question was thinking about your cost base and how much scope there is for you to flex some of your variable costs. If you could just help us with what percentage of your costs can you adjust and what proportion are fixed.
I think what is interesting as well is that, thanks to those government support costs that we used to think as completely fixed are actually becoming variable. Switzerland did put in place this reduced workload where you basically can reduce by 100% the salaries for certain amounts of months. At the moment, you can go up to six months, the employee still received around 80% of their salary. Having the ability to basically potentially have over 550 people in Switzerland utilizing this tool allows you to flex personnel cost significantly. Similar situation have been put in place in many European countries, in France, in Italy, Germany, U.K., with different percentages of employee salary support from the government. This is, of course, a massive amount of fixed costs that are completely waived or partially waived in those markets.
The big question mark we still have is the U.S. salary cost, which we are working on to understand if and which are the best tools we can have before discussing directly with the employees some salary cuts. In the marketing areas, as you remember, we have usually around 5% of our marketing costs, which are educational-driven. Those costs at the moment are basically down to zero. All the travel and accommodation are down to zero as well. There's quite a bit of costs that have been flexed at the moment.
Great. That's very helpful. Thank you.
Thank you very much.
At the moment, we don't have any further questions from the conference call. If you would like to ask a question, please press zero one on your telephone keypad. At the moment, we do not have any further questions on the conference call.
Shall we conclude the call if there are no further questions?
There are no further questions at the moment, so Alex, this goes back to you.
Yeah. Thank you. Thank you very much to all the participants. Of course, we are available for follow-up question in the days to come. Stay safe, and I hope to physically see you soon. Thanks a lot.
Thank you.
Thank you very much.
Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect now.