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Edited Transcript of AFX.DE earnings conference call or presentation 9-Aug-19 7:30am GMT

Q3 2019 Carl Zeiss Meditec AG Earnings Call

Jena Aug 16, 2019 (Thomson StreetEvents) -- Edited Transcript of Carl Zeiss Meditec AG earnings conference call or presentation Friday, August 9, 2019 at 7:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Justus Felix Wehmer

Carl Zeiss Meditec AG - CFO & Member of the Management Board

* Ludwin Monz

Carl Zeiss Meditec AG - President, CEO & Chairman of Management Board

* Sebastian Frericks

Carl Zeiss Meditec AG - Director of IR

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Conference Call Participants

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* Falko Friedrichs

Deutsche Bank AG, Research Division - Research Analyst

* Markus Gola

MainFirst Bank AG, Research Division - VP

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the 9 months 2018/19 Quarterly Analyst Conference Call of Carl Zeiss Meditec AG. At our customer's request, this conference will be recorded. (Operator Instructions)

May I now hand you over to Sebastian Frericks, Director, Investor Relations, who will start the conference today. Please go ahead, sir.

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Sebastian Frericks, Carl Zeiss Meditec AG - Director of IR [2]

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Yes. Good morning, ladies and gentlemen, and thanks for joining our call today. My name is Sebastian Frericks, I'm Director of Investor Relations. And with me, as usual, our President and CEO, Dr. Ludwin Monz; and our CFO, Justus Wehmer. I would like to hand over to these gentlemen now to give you an intro to our financial statements and some prepared remarks on the first 9 months of fiscal year 2018/'19. Afterwards, we are happy to take your questions.

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Ludwin Monz, Carl Zeiss Meditec AG - President, CEO & Chairman of Management Board [3]

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Yes. Good morning, ladies and gentlemen. My name is Ludwin Monz. I would like to guide you through the first half of our presentation. Welcome to our 9 months conference.

I hope you have received our slides. On Slide 2, you see our agenda of today's conference call. The first agenda item is a brief overview about the Q3 results. Then my colleague, Justus Wehmer, will provide more details on the numbers in the second part of the presentation. Afterwards, I would like to talk about our digital initiative in the highlights section. And finally, I will provide an outlook for the full year and the mid-term horizon.

Yes. So please turn to Slide #3. I'm very glad to report that Carl Zeiss Meditec was able to continue its growth path. We had a particularly strong performance in our third quarter, which resulted in a substantial growth also on a year-to-date basis compared with the same period of last year.

We crossed the EUR 1 billion landmark after 9 months and reached revenues of EUR 1,028 million. We achieved good contribution coming from all our SBUs. In terms of regional performance, EMEA and APAC were the growth drivers, in total 11%. We had some currency tailwind. On a constant currency basis, the growth rate was 9%. So some more detail will follow from Justus in the next section of our presentation.

EBIT margin increased significantly and reached 17.9% versus 14.6% in prior year. The increase was driven by a positive product mix and a high share of recurring revenue.

Yes. Our net income reached EUR 110 million. That corresponds to earnings per share of EUR 1.22. Prior year was EUR 0.92. The improvement was mainly due to the EBIT increase, which I explained, and currency effects were at about the same level of last business year.

Yes. So much about the overview. Overall, I believe a nice development. And now my colleague, Justus, will provide more background and more detail.

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Justus Felix Wehmer, Carl Zeiss Meditec AG - CFO & Member of the Management Board [4]

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Yes. Thank you, Ludwin. And good morning and warm welcome from my side.

If we now move to Slide 5, I will give you here some more detailed overview on our financials starting with the performance of our SBU OPT, Ophthalmic Devices. Revenue came in for OPT with roughly EUR 763 million compared to prior year. Reported growth is at a level of 12%. And at constant currency, this is 10.1%. Although competitive pressure in our Diagnostics segment remains tough, we have seen an acceleration of the business in the third quarter and also look towards business year-end with cautious optimism as we are launching practically as we speak further innovation with our CLARUS 700 product.

The Refractive Lasers business continued its strong performance from the past. Here, especially our SMILE technology continues to develop very nicely, and there is so far no sign of a slowdown in the important Asian markets for laser surgery.

Again, also positive trend in Surgical Ophthalmology driven by ophthalmic microscopes, but also by our IOL business. Both in the standard and premium category, we are growing faster than market.

The EBIT margin increased compared to last year. We were supported by a more favorable product mix and an increased share of recurring revenue and higher operational leverage.

So let us now move on to the MCS numbers on the next slide. So Microsurgery delivered a steady performance with revenue of roughly EUR 265 million versus EUR 245 million in the previous year. Revenue increase, therefore, came in at around 8% and at constant currency at 5.7%. This continued strong revenue growth in the neuro/ENT part of the business supported, especially by our Robotic Visualization System, KINEVO; also the launch of our Visualization System for spinal surgery, TIVATO, is progressing in an encouraging way.

EBIT margin came in strong, slightly improved year-over-year. Changes in product and regional mix and cost awareness in our organization play a part, but also the currency environment was favorable.

So next, let's take a look at our regional performance. As you know, the Meditec group has a balanced range of business activities worldwide. The APAC region, particularly due to the strong growth in China, is now contributing more than 41% of our consolidated revenue. But let's take a look here at the other regions first.

So Americas saw a revenue of EUR 293 million, which represents an increase nominally of 4.7% at constant currency. However, it is slightly below last year, it was minus 0.3%. U.S. had a strong growth in the quarter with 7%; at constant currency, 2%. However, significantly improved in the isolated Q3 versus prior year, and we saw a very positive -- where we saw, sorry, in the prior year a very positive input from the CLARUS and KINEVO launches in Q1.

The Latin Americas were decreasing given also the critical economic situation, which is unfortunately ongoing in some of the countries in that region.

EMEA achieved a revenue of EUR 308 million. Overall, an impressive increase of 9.3%. At constant currency, even 10%. It continues to be a somewhat heterogeneous picture in EMEA. We see growth rates in the developed economies ranging from 5% up to 15% and even beyond that percentage. And however, we also have some countries in Europe where it's somewhat slower. But overall, we are very satisfied with the development.

And now coming back to Asia Pacific, which delivered the strongest growth, achieving EUR 427 million of revenue, which is an increase of 17%; and at constant currency, 15.4% over last year. Again, unexpectedly high consumable revenue growth in China. As we mentioned, we do not yet see signs of slowdowns in this region. However, we have to caution there's not a lot of visibility particularly on the consumables side of the business, but we are confident that, for the time being, we should see continued good numbers. South Korea also came in strong as well as good contributions from Japan.

So on the next slide, we have a look at the P&L by lines. We increased gross margin to roughly 57% compared to previous year due to positive product mix especially, as mentioned before, the high share of recurring revenue. OpEx in terms of absolute numbers increased. But OpEx margin, overall, decreased, still on a level of roughly 40% of sales.

G&A expenses increased in absolute terms mainly, however, due to a shift in representation of expenses of sales controlling in Americas, which moved from selling and marketing expenses to general administration, and also the consolidation of IanTECH accelerated somehow the increase in OpEx in absolute terms.

We see a slight decline in the R&D ratio, as discussed before, partly still due to past year's decision to discontinue a strategic project on the femtosecond cataract development. For the coming business year, we expect R&D ratio to increase again. More on that later.

EBIT at EUR 184 million, significantly above prior year. And EBIT margin with 17.9% versus 14.6% last year, again, mainly, as mentioned before by Ludwin, driven by higher share of recurring revenues.

A quick look on the next slide on our adjusted EBIT margin, which reached 18.2%, which is a plus of 3.3 percentage versus prior year. There are only rather small effects related to purchase price allocation-related depreciation in both periods.

And with that, we can actually move on to the next slide where we have a short look on the cash flow statement. Operating cash flow was EUR 124 million versus EUR 102 million in last year, above prior year due to the positive EBIT development increase in depreciation and a slight decrease in trade payables versus strong increase in previous year.

Cash flow from investing activities, this is mainly the effect of the IanTECH acquisition and cash flow from financing activities is mainly influenced by the development of our short-term deposits held at our group treasury account. Treasury receivables decreased as a result of the IanTECH acquisition and the corresponding purchase price paid in Q1 of this fiscal year.

And net liquidity, as you can see, maintaining last year's level of roughly EUR 600 million.

And with that, I hand it over to Ludwin again.

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Ludwin Monz, Carl Zeiss Meditec AG - President, CEO & Chairman of Management Board [5]

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Yes. Thank you, Justus. In the next section, the highlights section, I would like to spend a few minutes on our digitization initiative. As you are aware, the medical market is in the middle of a digital transformation. Customers use information technology to streamline their processes, and industry tries to provide new medical insights with digital technology. And patients want to get hold of their data, and patients are more and more informed about their treatment options. The -- this development is driven by new technologies like cloud computing, artificial intelligence and the general digitalization on the one hand, but also by the need of the health care systems to more and more reduce costs. So a lot is going on in digital.

I believe that size with the current portfolio of digital solutions, we are already leading the ophthalmic industry in that field. We support productivity, efficiency and clinical safety goals for doctors and also surgeons. We have shared with you in the past some of the connectivity and products and solutions for clinical planning, for patient management. We talked about the analytical features that clearly differentiate our products such as FORUM and Veracity.

We have also been focusing on making it easier for our customers to order and reorder devices and consumers online. Our clinical equipment benefits from specialized workplaces with high-level analytics for use cases like retina, glaucoma or cataract. However, we feel that this is just the beginning of a much larger transformation. We see clear opportunities for our company and plan to make bold investments into this area in the future.

I'm very pleased to announce that Dr. Euan Thomson has joined Carl Zeiss Meditec as Digital Transformation Officer and Head of our digital business development activities. He is excellently qualified to lead this long-term effort with a PhD in physics from the University of London. He went on to hold various management positions and digital innovation positions most recently at Johnson & Johnson Medical Devices. And he will now be responsible for refining our digital transformation strategy and for developing digital platforms and products. Dr. Thomson will join our Executive Committee, and we welcome him to ZEISS and wish him well for his new role.

Yes. So much about that topic, and this brings me to the last agenda item of today's presentation, the outlook. So please turn to Slide #14. There is basically no news on the long-term trends. We believe that the macro trends will remain to be positive for health care in general and ophthalmology and Microsurgery in particular.

As preannounced in July, we have adjusted our expectations for the full business year due to the very positive business development in Q3 and also the previous quarters. We expect consolidated revenues for '18/'19 to be at the upper end or slightly above the range of EUR 1,350 million to EUR 1,420 million. Furthermore, we expect the EBIT margin to exceed the corridor of 15% to 17.5% due to the strong surge for -- of recurring business in this year.

As we already announced in our ad hoc release in July, we will define our mid-term target for the EBIT margin towards the end of the year, and we will announce it in the publication of the year-end results in December.

Now we will take -- in that mid-term target, we will take into account both the positive developments that we have seen in the current business year, but also the relatively large investment program into digital technologies that we are planning for the next couple of years, and I was just talking about that a minute ago.

Yes. Our -- the cost will grow due to the strategic investments in the field of digital solutions, but also due to some other topics. Keep in mind the IanTECH acquisition, also our road map for IOL and the phaco business in the U.S. and globally.

Taken together, these investments will add more than EUR 20 million in operating expenses in the coming business year mainly in the form of R&D expenses. Again, a more specific guidance will be presented in December, but our early analysis shows that next year, there will likely be no room for a sustainable expansion of our EBIT margin beyond the currently very high level.

However, we feel that we have reached quite a comfortable EBIT margin level, and we really believe that it is wise to use the tailwind that we see right now for strategic investments, which we'll pay back at a later point in time.

Now ladies and gentlemen, this concludes our prepared remarks. We are now happy to take your questions. I hand back to the moderator to explain the procedure.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question received is from Falko Friedrichs from Deutsche Bank.

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Falko Friedrichs, Deutsche Bank AG, Research Division - Research Analyst [2]

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Yes. Three, please. Firstly, so you have raised your guidance for the second time now this fiscal year. Could you share what developed so much better than anticipated at the beginning of the year or in which areas you might have been too cautious?

Then secondly, could you provide an update on the SMILE contribution in the U.S. and the procedure trends here and whether this was in line with your thinking and expectations?

And then thirdly, could you also provide an update on the U.S. approval process for your intraocular lenses?

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Ludwin Monz, Carl Zeiss Meditec AG - President, CEO & Chairman of Management Board [3]

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Yes. Thank you for the 3 questions. First one was what developed so much better than originally thought. And as we were explaining in the numbers, it's really the development of the recurring revenue. We've reached in the meantime really a high level between 36% and 38%, and that is a very profitable revenue and that has contributed to the increase of our EBIT margin. So it's -- we could say it's the product mix, right, and that really has developed very nicely and better than we had expected originally. So that's really good news and the reason for the positive development.

Second question was on SMILE in the U.S. Yes, it's in line with our thinking there. And no surprises, neither positive nor negative. As we always said, it's going to take quite a while to really achieve high market penetration with SMILE in the U.S. It's a saturated market. The patient numbers are only growing very slowly. So it's really about replacing. It's about replacing the existing excimer laser base with the SMILE laser, and that just takes time, right? It takes time to convince the community of the advantages of SMILE, but that's not unexpected. As I was saying, it's really in line with our expectations. Right now, the contribution in terms of revenue and profit is relatively small from the U.S. So the U.S. is clearly not the reason behind the unexpected growth that we have seen.

The development on the IOL side. Also no news there. As we already announced a while ago, we are in the middle of a clinical trial on -- in the field of IOLs. So we are collecting clinical data, which will then be used to get the approval for our first intraocular lens in the U.S. We expect actually that in the course of the next fiscal year, we will get, well, a better feeling about the timescale. But we are still talking about 1 to 2 years to be in the market, and it's highly uncertain because it's not under our control. In the end, it depends on the FDA as the FDA might come up with more questions or requests, and that's very difficult to predict.

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Operator [4]

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The next question received is from Markus Gola from MainFirst Bank.

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Markus Gola, MainFirst Bank AG, Research Division - VP [5]

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Yes. First of all, congratulation on your remarkable performance this year. And my first question is also related to your sales guidance. You decided to increase it slightly with the final results. So could you elaborate a bit what made you more positive since the prerelease just 2 weeks ago?

My second question is on your open corridor for the EBIT margin. Assuming the usual seasonality in your business and the ongoing shift in your product portfolio towards consumables, is it fair to say that the EBIT margin this year could reach up to 19%? And if so how sustainable is this mix shift in your portfolio going forward?

And maybe last, could you provide us with an update on the regulatory approval for the KINEVO in China?

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Ludwin Monz, Carl Zeiss Meditec AG - President, CEO & Chairman of Management Board [6]

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Yes. Let me just make a note here. Okay. The first one, why do we say now slightly above? Well, with every day further into the quarter, we get a better understanding how business is developing. And that's why we say, okay, it can also be slightly above. Before, we said it will be at the upper end. It's really difficult to predict, believe me, because the -- in particular, September, which usually is a strong month, that's highly -- how should I say, there's fluctuation, there's uncertainty. And it's really difficult to predict this in a range of plus/minus a couple of million euros, and that's the difference between the upper end and above. So we feel that we have good chances to be above. But again, I cannot really quantify this. It's just -- we see that the business is going well, and that's why we now would not exclude to be slightly above the upper end of our revenue range.

In terms of the EBIT margin, well, similar story, right? It's -- the consumables, particularly to countries like China and also Korea, are sold in large batches, right? And it's very difficult to predict now how many of these batches will be sold this year and what will come in October, and that is what then makes a difference in terms of the EBIT margin. And that is why it's so difficult to make a precise prediction how things will develop. Again, we will be above the 17.5%. That's the upper end of the range. Whether 19% here is achievable or not, I don't want to speculate. I hope you understand that.

The sustainability. Again, I would say, yes, probably it's sustainable because the recurring revenue will not go away, at least as we look at it for the time being. However, we also realize that, given the economic development, the demand might fluctuate, right? That we don't know, and that's about sustainability as well. So if the demand would go down, we would clearly see that. But other than that, I believe it's sustainable. Competitive situation might change that might also create some impact. But overall, I believe it's not a onetime effect.

KINEVO in China has gone well. That's like always with the approval processes, hard to predict when will it really be through. We are in constant contact with the Chinese authorities. We provide the data they are requesting, and it's now up to the authorities to really give us the approval. So my expectation is that it's not going to take very long. But again, that's hard to say.

And yes, KINEVO, next year, it should actually be approved. That's at least the hope. Okay. I hope that answers your question.

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Markus Gola, MainFirst Bank AG, Research Division - VP [7]

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Yes, it does.

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Operator [8]

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(Operator Instructions) As there are no further questions, I hand back to the speakers.

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Sebastian Frericks, Carl Zeiss Meditec AG - Director of IR [9]

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Okay. Ladies and gentlemen, so thank you very much for your interest in Carl Zeiss Meditec. It was a pleasure to presenting you the results of Q3. I'm looking forward to our next conference, which will then be the presentation of the year-end results in December. Until then, I wish you a good time and talk to you next time. Bye-bye.

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Operator [10]

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Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.