Medacta Group SA
SIX:MOVE
Earnings Call Analysis
Q2-2023 Analysis
Medacta Group SA
Medacta Group achieved a robust top line performance in the first half of 2023, with revenues hitting EUR 255 million. This represents more than a 20% growth, clearly illustrating the company's robust financial health. One striking indicator of efficiency and profitability is the adjusted EBITDA margin, which improved to a commendable 28.2% despite currency headwinds.
The company's growth story extends across key regions – Europe, North America, and the Asia Pacific – with impressive growth rates of 24%, nearly 18%, and 22% respectively. Medacta also notes strong performances in its product lines, notably hip and knee replacements, extremities, and spine, which all saw double-digit growth percentages. This consistent growth story is highlighted by a compound annual growth rate (CAGR) of over 15.5% since 2019, a testament to sustained strategic execution.
Medacta maintained its gross profit (GP) margin at 68.9%, though the figure includes a 1.5% negative currency translation effect. Their ability to keep GP stable can be attributed to growth in the EMEA region and operational efficiencies that offset adverse pricing trends. Correspondingly, the adjusted EBITDA saw a slight uptick from the prior year, reinforcing the notion of careful cost management even as the company expanded its sales and logistics personnel. Reflective of this discipline, their profit for the period stood at EUR 29.1 million.
The first half saw significant capital expenditures of around EUR 40 million, with a considerable portion funneling into new instruments to support revenue growth and customer expansion. Despite these investments leading to negative free cash flow of EUR 5.3 million in the semester, the company showcases solid financial footing with a total debt under one times the EBITDA – a comfortable leverage ratio that indicates a prudent approach to debt management.
The Asia Pacific market delivered strong volume growth, although price erosion in Japan due to government-regulated price cuts impacted revenue figures. Australia could face similar issues, though ongoing efforts may stave off or minimize price reductions. Investors should note that the company's historical performance shows lower profitability in the second half; this trend is anticipated to continue due to event-related expenses and continued investments in the sales force expansion, which will likely lead to a decline in margins in the latter half of the year.
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Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Medacta Group First Half 2023 Financial Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Francesco Siccardi, CEO of Medacta Group. Please go ahead, sir.
Thank you very much, and welcome to the H1 '23 results for Medacta. I will go over the key financial figures together with Corrado Farsetta, Medacta Group CFO.On first slide, we can see our already reported top line, reaching EUR 255 million, a very solid growth, over 21% in constant currency and 20.8% reported. And we are reporting as well a good increase, both, of course, in absolute terms, but in percentage as well for our adjusted EBITDA margin reaching 28.2%. This performance is especially good considering the headwind translational effect we had in terms of currency. We increased as well our headcount, both in the quarter and in the different markets, adding close to 100 new jobs and reaching over 1,631 employees.We are delighted as well by the performance of the supply chain. Despite this tremendous acceleration, we were able to really support the growth without any disservice. And we expanded further our efforts in terms of medical education and sales force expansion, leveraging as well our new personalized solutions across the different business lines. We have already reported the revenues. And in terms of geographical performance, we really had a very strong performance in Europe with over 24% growth, close to 18% in North America, and 22% growth in the Asia Pacific region. Those are the 3 most important regional that we report, around 10% in the rest of the world market, which is overall a very, very solid performance.In terms of product lines, we continue to grow in our core product lines, both hip at 15.7% and knee close to 28% organic growth as a very robust performance. The extremities over 38% growth and spine at around 15% growth. So across all the product lines, we were extremely pleased with the performance on a global scale.In the next slide, we just wanted to report the CAGR, Medacta is experiencing from 2019 and I think it's important to show this very significant performance over time across all the business line with a CAGR for the period of over 15.5%.I would like now to ask Corrado to go over the P&L and the margin comments, and then we will go back to you for the Q&A. Thank you.
Thank you, Francesco, and good afternoon, everybody.So let's now have a look at our P&L. We just discussed at the top line. So I will start from the GP line. The reported GP in the first semester this year was equal to 68.9%, including 1.5% of negative FX translational effect, which means that net from this FX effect, it was in line or at above last year semester, and this is primarily attributable to 2 main reasons. As you have seen, EMEA was again the fastest-growing area. And this, along with the anticipated trends in the ASPs impacted negatively on our GP.On the other side, we had a significant leverage on D&A and the instruments generated by the top line, along with the limited impact from inflation, thanks to some industrial efficiency driven by volumes. So the result was the 68.9% of profitability in this semester.Moving down to fixed costs. They were equal to EUR 132 million, with an increase of around EUR 70 million, primarily coming from our continued expansion of sales sports and personnel in logistics and industrial areas to sustain and allow growth. As a percentage of revenue, the fixed cost result at 1.3% below 2022. And this is the result of the capital management of fixed cost expansion and the leverage effect driven by the revenue growth.Moving to the next slide. The adjusted EBITDA increased to 28.2% from 27.5%, including at this level, a translational effect negative for 1.6%. The adjusted EBIT was EUR 43.8 million, equal to 17.2% on revenue with an increase of roughly 30% compared to the adjusted EBIT of the previous year's semester.If we move to the financial result line, this was in the semester negative for EUR 6.8 million, and the increase from last year is almost entirely due to unrealized losses generated by the devaluation of U.S. dollar against the Swiss franc. The cost of [ My ] increased a bit compared to the previous year as well. Income tax in the first semester, they were equal to EUR 7.1 million, including a one-off negative effect from the release of some deferred tax assets and liabilities generated by the repurchase of part of our inventory in the U.S. You know that now there is active logistics up in the U.S., and then we try to optimize also this from discussion point and this is the one-off effect from an accounting point in this semester.Finally, I would say, the last line of our profit and loss, the profit for the period was equal to EUR 29.1 million.Moving to the CapEx slide. This semester, the total amount of CapEx was around EUR 40 million, out of which EUR 27 million, which represents roughly 70% of our total CapEx are represented by new instruments driven by revenue growth and new customers. The research and development CapEx were EUR 4.2 million and in line with the past trend. The rest is composed by investments in production capacity, land and building expansion. As a result of all the above, the free cash flow of this semester was equal to EUR 5.3 million negative.And moving to my last slide. The total debt of the company in the semester was EUR 127.9 million, with a leverage which remains below 1x the EBITDA. I think this was my last slide and now back to Francesco for some final remarks.
Yes. Thank you, Corrado. I just wanted to express the satisfaction we have for the very good performance in H1 and maybe leave to the Q&A session for the next minute.
This is the Chorus Call conference operator. We will now begin the question-and-answer session. [Operator Instructions] The first question is from Sandra Dietschy from Octavian.
The first question I have is on your performance in Asia Pacific. You mentioned that price reductions impacted the performance in Japan. How does it look like in Australia? Was that region also impacted by price cuts? Or should we expect that price cuts in Australia will materialize next year? Just some color on volume growth versus price for Asia Pacific would be very helpful.And the second question is on your margin guidance. This implies obviously a significant drop in the EBITDA margin in the second half. And if you can just shed some more light on the development of your OpEx costs in the second half. Is it inflated by some extraordinary costs related to events? Or is it simply the spillover from the cost from the investments into the sales force expansion during the first half?
Yes. Thank you, Sandra. On the Asia Pacific, I think it was a very good top line growth, which was all volume. And as you said, the overall volume growth would have been even higher because there is a price erosion in Japan, which is like Australia, those are 2 markets where the price is fixed by price list by the government and from time to time, they reduce it. Both markets have very high prices compared to other segments in Europe in particular. We do not expect a price cut in Australia in the second half of the year. It is possible that there will be a price cut next year, although with the inflation, there are some chances that either will be postponed or reduced something different groups, working groups in the countries are trying to utilize to protect the current price, which is already even not growing reduced by the inflation on the cost side. So overall, a very good performance despite the price erosion in Japan.In terms of margin guidance, if you take the first semester is very often historically higher in terms of profitability compared to the second semester. This is because most of the events, congresses are in the second half of the year. And as you said before, there is the full year effect of the first semester hiring, which is somehow analyzed or more robust in the second half of the year. So it is typically lower in the second half. How much lower will depend. But yes, we did expand quite a bit our sales force. And there is always customer acquisition cost, which is driving down the marginality of it in the second half of the year.
The next question is from Thando Skosana from UBS.
I just had 2 questions, please. The first one is just on what are you guys seeing on the ground in terms of volume growth and sales. If you could give us any commentary around that and whether you're seeing any benefit from a backlog? And if you have, how long do you think that's going to last? Will it take you to 2024? And then just on margin, I also wanted to ask, I'm quite surprised that this guidance was not raised despite the fact that you had 160 basis points of margin headwind. So I just wanted to get a sense, maybe Corrado if you could just size up the impact on gross margin. So I'm thinking here the improved cost inflation, your geo mix and also pricing. Just if you could size that up? And how we should think about that for the remainder of the year?
I think I will take the volume growth and the backlog. I would say there is a general tailwind in the market in several segments, geographic segments. We remember the very strong negative effect we had last year, for example, in Australia. This is clearly not there anymore. And on the opposite, we are recovering some of the backlog definitely in Australia. We see as well a positive development in Europe and in the U.S., there are no data yet in terms of the general market growth. But if you compare as well the growth of some of our competitors, you definitely see some tailwind there as well. So our estimate is between 3% and 4% of a general tailwind across the globe. And again, this is an average. On how long it's going to last. I think there are clearly some markets where 2024 should continue to have some tailwinds. There is definitely some recovery and some other markets where this is probably not going to be the case. We expect to recover most of the backlog in the U.S. in the second half of the year and probably Europe is going to be more or less the same. But this is just based on feedback from the surgeons and the waiting list that we see in the key centers. Maybe I ask Corrado to comment on the margin in the second half of the year, the geo mix, the pricing and the overall development.
Yes. So we say that in the first semester, we had several effects on our marginality. The first one is the FX effect. And then we say geographic mix and ASPs reduction that has been offset by positive effects that are basically D&A, leverage on D&A on instruments and some industrial efficiency driven by volumes. So we are not disclosing details, but basically, if you make the calculation, you see that the net from FX effect, the other effects are basically offsetting each other. So the most important, the biggest one within effects had in the first semester was the geographic mix, which means that once we are back to the, let's say, more historical usual growth rate in our countries, these effects should disappear. So deducted the geographic mix, it means that the net effect coming from the other elements of the marginality could even push the marginality into positive evolution compared to the previous year. What I can say, yes, basically again, we don't disclose details, but for the second semester, the marginality is expected to stay more or less stable at the current level given the expected evolution of the growth, which is not basically be dramatically different from the first semester. The inflation is impacting our P&L less than expected. So we'll be there, but is less important than we thought. And that is why I can say that overall the marginality should stay more or less at the same level of the first semester.As Francesco said before, if you speak about EBITDA margin, the reduction in second semester will be coming almost entirely from the, say, let's call it, seasonality of some fixed cost and full year effect of cost that are here already in the first semester, but when we will see the second semester, we will have the full year effect on all those fixed cost elements.
I just wanted to confirm, so are you saying your H2 GP margin will be similar to H1 GP margin? Or will it be similar to prior year?
No, no, sorry, similar to first semester.
Okay. Thank you.
This semester... Yes.
[Operator Instructions] The next question is a follow-up from Sandra Dietschy from Octavian.
Yes, thank you. A brief follow-up on currencies. I think you said in July that you expect for the full year a negative currency impact of around 100 bps on the EBITDA margin. Can you update us on what the impact you expect on the current rates on September stock rates?
What we see is going to happen is the full year effect affecting the region of 1% negative, which compares to 1.6% at EBITDA margin level. This is also explaining why the profitability of the second semester seems to be much higher because 0.5% comes from the different effects in the semester and on a clear basis reduction of roughly half point.
Perfect. Yes. That makes sense. And then maybe a follow-up on the question which was asked before on the gross margin. You said that we should expect it to remain largely stable in the second half. What about if you look into next year, should we expect some tailwind from geographic mix? Or again, some rather stable development on the gross profit margin?
Yes. The geographic mix, maybe Francesco can elaborate that as a mean, but basically, it really depends on how the commercial effort will be able to generate new sales in customers and some backlog evolution in the country. So for sure, there is a positive effect somewhere that we will be able to generate the moment the growth rate in APAC and U.S. to back to the historical rate. With regard to the rest, prices are expected to reduce, but this is a trend that we have been observing over the last years. Volumes should help the industrial efficiency as well as some industrial projects that we have in pipeline to increase the efficiency of our industrial production and contribute to keep the marginality at decent levels. So for 2023 full year again, I think that we should stay pretty much in line with the first semester. And then what will be 2024, I think it's early to say to speak about that. But I do not expect any reduction, a significant reduction of the current...
Yes. And I would say that what is a little bit an anomaly in those years are not really the growth rate of U.S. and APAC is the higher-than-anticipated European growth rate. And I frankly don't mind. So if we continue to keep up at this growth rate for several years in Europe as well, and this is somehow impacting because of the geo mix I wouldn't mind. I think it's all very positive to continue to outgrow the market in Europe as well.
The next question is a follow-up from Thando Skosana from UBS.
So I just wanted to just get some guidance on free cash flow just for the full year, what you guys expect here? And then maybe Francesco, if you can just comment on the Next platform, how that's going? How is momentum and how's the latest feedback you're getting? I just want to get a sense if you're seeing any slowdown?
Yes, maybe I will comment on the NextAR and leave the cash flow comment to Corrado. So on the NextAR, we continue to expand our footprint across all the product lines, as we mentioned in our press release, knees, shoulder, spine. They're all really benefiting from this technology. And on top of this technology, those lines are, in general, growing pretty well, especially I would say the knee side is independently from the technology growing in the non-technology segment as well in a very, very strong way. But the contribution from the MySolution, so either NextAR or the other technologies under this umbrella are really performing well, helping driving our top line. So NextAR and MySolution remain very central for spine, for shoulder and for knees.
Yes. And then to your question about the cash flow, let me just comment on the evolution of the CapEx because I think that the short-term growth investments that are strictly linked to the growth, we stay more or less with the same ratio that we have observed in the first semester. And this is pushed by the strong growth that we are experiencing in 2023. But this strong growth is also asking for an acceleration in other investment area, land, buildings, production capacity. So we need to accommodate a big amount of production capacity in spaces. So the cash flow for 2023 will be 0 or slightly negative. I see no reason why this should be back in positive area because basically, that's the balance we try to keep when we plan our growth. So we will be able to self finance all investments without increasing the leverage of the company and stay at a very low level. That is what we have more or less in our plan.
[Operator Instructions] Mr. Siccardi, gentlemen, there are no more questions registered at this time.
Thank you, then I would like just to thank once again all the participants to this call today, and all our employees, customers, suppliers, that really help us during this tremendous growth period. We hope to continue in this direction for many, many years to come. So if there are no further questions, thank you very much and speak to you all soon.
Ladies and gentlemen, thank you for joning. The conference is now over. You may disconnect your telephones.