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Edited Transcript of AFX.DE earnings conference call or presentation 10-Feb-20 8:30am GMT

Q1 2020 Carl Zeiss Meditec AG Earnings Call

Jena Feb 13, 2020 (Thomson StreetEvents) -- Edited Transcript of Carl Zeiss Meditec AG earnings conference call or presentation Monday, February 10, 2020 at 8:30:00am 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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* Daniel Wendorff

Commerzbank AG, Research Division - Team Head of Healthcare & Chemicals

* Falko Friedrichs

Deutsche Bank AG, Research Division - Research Analyst

* Markus Gola

MainFirst Bank AG, Research Division - VP

* Scott Bardo

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. And welcome to the Carl Zeiss Meditec AG conference call regarding analyst conference 3 months figures 2019/2020. (Operator Instructions)

Let me now turn the floor to your host, Mr. Sebastian Frericks.

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

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Yes. Good morning, ladies and gentlemen. Thanks for joining us to our 3 months analyst call. I'm Sebastian Frericks, Director of Investor Relations. And with me, as usual, our President and CEO, Dr. Ludwin Monz; and our CFO, Justus Wehmer.

I will hand over to them now to give you an introduction to our financial statements of the first quarter. And afterwards, we look forward to taking 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. This is Ludwin Monz speaking. I also would like to welcome you to Carl Zeiss Meditec's Analyst Conference on our First Quarter of '19/'20.

Please turn to Slide #2 of our presentation, which shows the outline of today's conference call. As always, in the first section, I will start with an overview on the results. Then Justus Wehmer, our CFO, will provide you more details on the financials in the next section of the presentation. Afterwards, I will share some highlights, including some comments on the situation in China, in light of the coronavirus epidemic. And finally, I will talk about our outlook.

So let's continue on Slide #3. I'm really glad to report that Carl Zeiss Meditec could use the momentum of last fiscal year and was again able to grow substantially in Q1 compared to the same quarter of prior year. Revenues reached EUR 370 million with strong contributions from both SBUs also in terms of regional split. We do not depend only on 1 region. We had significant growth in all of the 3 regions, Americas, EMEA and APAC. In total, the growth rate was at 14.2%. On a hypothetical constant currency basis, the growth rate was 12.7%. In other words, we had some currency tailwinds, and Justus will go into the numbers more in depth and will discuss growth contributors specifically.

The EBIT margin increased to 15.4% versus 14.9% in prior year. Please keep in mind that we had some positive impact from R&D capitalization in Q1 of prior year, which means that the improvement on a like-for-like basis was even higher this year. But we will address this later in the presentation.

The margin improvement was supported by a positive development of the product mix. And once again, we increased the share of recurring revenue. But also, careful cost management helped, and we have worked with the organization on the OpEx awareness.

Our net income reached around EUR 39 million, which corresponds to earnings per share of EUR 0.43. In prior year, it was EUR 0.32. So earnings per share increased due to the EBIT increase and due to the absence of hedging losses that occurred in prior year.

Okay. So overall, the performance developed really nicely, and I now would like to hand over to my colleague, Justus, who will shine some more light on the details of our results. Justus?

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

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Thank you very much, Ludwin, and also good morning, and welcome from my side to everybody in the call. We are going to Slide 5, please. And I'm now going to give you a more detailed overview of our financials starting with the performance of our strategic business unit, Ophthalmic Devices.

Revenue came in for Ophthalmic Devices with EUR 269.4 million compared to prior year. Reported growth is at 12.5% and currency corrected 11.1%. There was strong growth across the portfolio and, again, good recurring revenue share. We see continued positive effects from innovations. We've launched like the CLARUS 700 or the CIRRUS 6000, benefiting our diagnostics portfolio. The Refractive Laser business continued its strong performance from the past year, especially our SMILE technology continues to develop nicely.

Again, also a positive trend in Surgical Ophthalmology, driven by the ophthalmic microscopes, where, as you know, we have launched the ARTEVO microscope towards the end of last fiscal year.

The SBU EBIT margin decreased slightly compared to last year due to some extraordinary or seasonal effects. As Ludwin mentioned earlier, last year, Q1 was affected by R&D capitalization, and we also have to remember that IanTECH is included fully in the first quarter of this year's financials. Last year, indeed, the acquisition was consolidated only in mid of December of 2018. So from that perspective, we also have an additional expense built into the R&D expenses of this fiscal year. So we were supported by a more favorable product mix, the solid share of recurring revenue and higher operational leverage.

Let's turn over to the next slide and cover our SBU Microsurgery, which, again, delivered outstanding performance. Revenues have reached the EUR 100 million threshold versus previous year, EUR 84 million. This is a revenue increase of around 19.1%. And at constant currency, still remarkable 17.4% growth. There is a continued strong revenue development growth in neuro/ENT, supported by our Robotic Visualization System, KINEVO, but we also see a good trend for the new TIVATO 700.

EBIT margin is still very strong and improved even further due to volume effects on the one hand side, but also the regional mix and the cost awareness in our organization contributed to that remarkable performance.

Let's now take a look at the regional performance. You can see, again, a fairly well-balanced regional split across the 3 regions. The Americas now showing the EUR 109 million of revenue, a strong increase of 18.5%. And at constant currency, 15.5% over last year. The U.S. market itself contributed strongly with the growth of 15%. We also, in that region, benefited from the CLARUS 700 and CIRRUS 600 -- CIRRUS 6000, sorry, introduction and also a good contribution from our MCM -- MCS business. Also, the Latin American markets, which last year were somewhat disappointing, showed increasing performance.

EMEA with EUR 111 million and an increase of 7% and at constant currency 6.9%, again, with good growth rates. The performance is somewhat more heterogeneous. Some markets, major markets like Germany, France, developing with growth rates in the mid-single digits, and some other markets a bit weaker than last year. But overall, we are satisfied with the performance in the first quarter.

And last but not least, Asia Pacific, with EUR 150 million revenues and an increase of 16.9% and at constant currency 15.5%, again, contributing strongly to the overall growth. China, with good contribution, but also South Korea and Japan.

With that, we move over to the P&L. You can see here an increased gross margin with roughly 56% compared to previous year due to positive product mix, especially our share of recurring revenue. OpEx in terms of absolute numbers increased. But OpEx margin, overall stable, with roughly 40% of sales.

Increase in R&D ratio. As we mentioned before, we had the capitalization in previous year and also investments in some of our strategic development projects, which we have outlined in previous calls in the field of Surgical Ophthalmology are contributing to the higher expenses for R&D. EBIT of EUR 57 million, significantly above prior year. And EBIT margin, as mentioned before, at 15.4%.

If we move on to the next slide, the adjusted EBIT margin reached 15.7%. That's an improvement of 0.6 percentage points versus previous year. There, as you know, are only rather small effects in terms of purchase price allocation-related, explaining the difference. And here, the increase is mainly now from the PPA of IanTECH.

Moving on, finally, to a quick look on the cash flow statement. Operating cash flow reached EUR 26 million. That is above prior year and is mainly driven by the positive EBIT development. Cash flow from investing activities in comparison to last year is mainly affected by the fact that, in last year, we had the IanTECH acquisition. And cash flow from financing activities is mainly influenced by changes in our receivables and payables in our treasury accounts.

With that, I will then hand it back to Ludwin.

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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. That brings me to the highlights section. And as I said before, I would like to start with some words on the coronavirus outbreak in China, as you may wonder how that will impact Carl Zeiss Meditec business. And it's a little bit explained on Slide #12.

As you know, public life in some regions of China was basically shut down over the last 2 or even 3 weeks. However, it's really important to note that China had the Chinese New Year holiday break anyway, and this break was extended because of the coronavirus epidemic. But nevertheless, it looks like people are returning to work starting today. It was in the news this morning, and we really hope that we will return to normal very soon. As we do not have much information from the end customers yet, it's really difficult to assess the impact of the crisis on our business, but let me a little bit explain our thinking.

The Chinese New Year holiday period is typically a period with high volumes of surgical procedures. Our customers had prepared for this, and stocks of consumables were at a high level going into this period. Due to the coronavirus epidemic, many hospitals had closed temporarily or at least restricted their service of nonessential treatments, and refractive surgery is such a treatment. Therefore, the consumption was probably lower than expected and demand for replenishment of the consumables might drop temporarily. However, our working assumption is that most of the procedures will only be postponed, but not canceled. So we might see some headwinds on our consumable sales in China over the next 1 or 2 months, but the loss revenue should be moderate.

Currently, we do not expect the coronavirus epidemic to have a significant impact on our profit and the margin of the full year. And therefore, we confirm our guidance for the ongoing year, although it will be somewhat more difficult now to get to these numbers given the crisis.

Obviously, a key question is how long the corona crisis will last and how fast the recovery will be. Nobody knows that, and we will keep you updated on this topic as the situation evolves.

So let's move to the next topic on Slide 13. I would like to talk about the reach of our products. As procedures with Carl Zeiss Meditec devices or consumables have grown strongly in recent times, more and more patients get in touch with ZEISS products. That's a very interesting fact. And here, I have some fun facts on this slide. Basically, 2 examples with our visual health platform, and we talked about that before. With that platform, which was piloted in India and is currently being rolled out to other countries, we have successfully introduced a new digital business model. The system provides screening for certain eye diseases through mobile stations even to patients who do not have direct access to ophthalmic specialist care. With this model, we could reach more than 300,000 patients since the introduction in 2015, an even bigger reach we have through our consumable business for our refractive and cataract surgery. In 2018/'19 alone, we delivered more than 1.4 million intraocular lenses, which contributed to restoring eyesight and improving the quality of life of patients.

On the refractive side, we sold more than 1.3 million contact glasses for Visumax for both SMILE and LASIK. So really significant numbers.

I believe it's also worth mentioning that our FORUM platform, our digital platform for data management, is currently being used by more than 30,000 health care professionals on a daily basis. So also, that creates a big visibility of size in the ophthalmic market.

Yes, that were our 2 highlights. So that brings me to the last agenda item, which is our outlook. So please go to Slide #15. The growth drivers for the medical market in general and the microsurgery and ophthalmology market, in particular, are fully intact, and these drivers will lead to further profitable growth and presumably.

Let me mention some of the well-known growth drivers, aging of the population in major parts of the world, and growing affluence in countries like China and India, but also others; increasing information access and health awareness. These all lead to more patients. And as a consequence, the patient load and cost of the health care systems will go up.

Carl Zeiss Meditec will continue to follow this strategy, which has been successful over the last years. We will continue to focus on our strategic priorities, which further expand recurring revenue, drive rollout of SMILE Refractive Laser surgery, extend technology leadership in cataract and lead neuro/ENT market by turning next-generation products into business growth. And finally, I would like to mention that digital solutions will play a key role going forward.

Now for fiscal year '19/'20, we confirm our guidance, which are: number one, that we want to grow at least as fast as the markets grow; number two, we will keep an attractive EBIT margin between 17% and 19%; and number three, mid-term, we expect an EBIT margin sustainably above 18%.

Now ladies and gentlemen, this concludes our prepared remarks. So we are now happy to take your questions, and I turn 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) And your first question comes from Mr. Scott Bardo.

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Scott Bardo, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [2]

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Yes. So I wonder if you could share some additional insights into the potential disruption for refractive laser consumables in China. Obviously, these are quite lucrative business lines for the group. And presumably, your investments into R&D won't moderate as a result of this near-term disruption. So I guess the nature of the question is, do you still anticipate the prospects for the full range of EBIT margin guidance to be in play? Or do you now think more prudent to adopt more the lower end? So that's question number one, please.

And second question in Microsurgery. Some very good margin dynamics and growth dynamics in the first quarter. I wonder if you could talk to the sustainability of these margins at these levels. Is it abnormal? Or is this the new level that Carl Zeiss sees? And perhaps some feeling on how significant or important the TIVATO product is within this divisional mix.

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

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Yes. Scott, thanks for your questions. I will start with the first one, and Justus takes the second. The question whether -- given the prices in China, we will rather end up with low end of our EBIT margin, or the high end is really incredibly difficult to tell. As a matter of fact, it very much depends on what I said before, whether the procedures are just postponed within the fiscal year or whether they are canceled. And we don't know that yet. So we just have spoken to 1 or 2 clinics, and they are still optimistic, but even they don't know yet. So I think we need to be a little bit patient and see how things develop. It's clear that things are becoming more difficult, right, if actually some of the profitable revenues would be canceled, but that's speculation for the time being, right? And from what we see and know so far, we would expect that the effect will not be as significant that it would lead us out of the range. But again, I really can't predict whether it will be below or the high end of the range. We need that range because of that uncertainty. So I ask you for your understanding.

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

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Yes. Scott, I think the second question referred to the Microsurgical business and, as you said, the good dynamics and the question about the sustainability. I think, overall, we definitely acknowledge we have now a portfolio, which is as refurbished almost as it could be. It started with the KINEVO almost 2 years ago. We extended to the TIVATO and EXTARO. And from that point of view, yes, we definitely benefit right now from the fact that all products seem to be well received in the market. So portfolio is good.

Secondly, we have seen through the last 2 years, mainly Europe and U.S., contributing to the growth in neuro. As we have reported about August of last year, we got the approval for China that could indicate that, for this year, we can hopefully -- and provided that corona is not going to be a lasting issue, that could mean that we also see this year a growth contribution for MCS from China.

So in a nutshell, we definitely have some optimism for this fiscal year when it comes to sustainability of that growth rate. As you know, we deemed that market for MCS is one which is rather, let's say, niche market, and we already command a pretty strong position. So with all the, let's say, pleasure with which we see the current growth rates, but we believe there will be some natural kind of ceilings to it. So maybe that is -- yes.

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

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Maybe I can add one more thought. The -- when you look at the margin in Microsurgery, there are 2 factors to it. The one is certainly the growth, right? And so we now have more revenue to cover our cost base, and this is what Justus just explained, is that growth or at least the revenue level actually can be maintained, that will help with the profitability.

The other factor is the profitability of the products, right? And new products -- the new products that we have introduced are profitable, very profitable, and that also -- that might go down a little bit. The price level might come down a little bit. But the first effect remains.

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Operator [6]

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Okay. The next question comes from Mr. Daniel Wendorff.

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Daniel Wendorff, Commerzbank AG, Research Division - Team Head of Healthcare & Chemicals [7]

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And the first one is on the revenue contribution coming from your refractive surgery product suite overall. Can you give us an indication how big this line item is meanwhile and both in terms of instruments and consumables?

And my second question would be on the margin development in Ophthalmic Devices. You mentioned already the R&D topic. So my question would be, how important was product mix for the margin development in Ophthalmic Devices?

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Ludwin Monz, Carl Zeiss Meditec AG - President, CEO & Chairman of Management Board [8]

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Yes. Regarding the Refractive Surgery business, how large is that, I really must ask you here for your understanding that we do not break down our revenues to product lines, and that has very simple reasons, which is competition. We don't and cannot make this transparent to our competition, how large and how profitable the individual product lines are.

Let me say this, refractive surgery has become a substantial and very important business for us. That's pretty clear. But I cannot provide numbers for this, unfortunately.

Regarding the margin development of Ophthalmic Devices, it's indeed a question of product mix. The trend, which we have been discussing here for many years is that we work on increasing the share of recurring revenue. And recurring revenue is implants, but also consumables. And that class of products tends to be more profitable than the equipment business, and at the same time, it tends to have a different cycle when it comes to economic ups and downs. And this is why we are interested in further increasing and growing the recurring business. And we see a constant shift of our product mix from the equipment to a larger fraction of recurring revenue, and this clearly is an important contribution to the margin development, which we have seen over the last years. Did that answer your questions?

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Daniel Wendorff, Commerzbank AG, Research Division - Team Head of Healthcare & Chemicals [9]

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Well, partly.

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Ludwin Monz, Carl Zeiss Meditec AG - President, CEO & Chairman of Management Board [10]

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Sorry for that. But no numbers on product lines. I'm sorry.

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Operator [11]

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Okay. And the next question comes from Mr. Markus Gola.

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Markus Gola, MainFirst Bank AG, Research Division - VP [12]

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So my first one is also a follow-up on the coronavirus. I wonder whether you can give us some additional color how the KINEVO rollout has been progressing so far this year, given that they think here, the period January to March is quite important for that rollout and the effects you mentioned in the conference call that most clinics have been busy with other stuff at the moment?

And my second question is on your cost base. So will you be able to postpone some or at least some of the cost buildup you have anticipated if your top line growth slows down noticeably in order to protect your margins?

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Ludwin Monz, Carl Zeiss Meditec AG - President, CEO & Chairman of Management Board [13]

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Yes, I'll start with the first one on the coronavirus. Well, we have received approval for KINEVO in China actually beginning of this fiscal year or end of last, I don't remember exactly. But we are now in the process of ramping up demos. This is a large-ticket item for our customers. So they definitely want to see a demo, they want to try out the product before they actually acquire.

And the other thing to keep in mind is that, given the large amount we are talking about, customers have to reserve funds and in some cases, have to apply for funds. So typically, it takes a while until the money is available and they can actually do purchase the product. So in other words, the timescale here is rather months, if not quarters of a year, right, and not weeks. And the corona crisis now slows down the country hopefully for not more than a few weeks, right? So I would not expect a significant impact on -- of the coronavirus on the rollout of the KINEVO because it's just different timescales.

The -- yes, the second question for Justus.

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Justus Felix Wehmer, Carl Zeiss Meditec AG - CFO & Member of the Management Board [14]

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Yes. I think you were asking about to what extent we can basically brief or adjust our OpEx behavior if we were hit by -- negatively in our top line. The answer is we have already, a while ago implemented in our organization, concept of what we call resilience, which basically means that if we feel the need to adjust expenses, we are kind of prepared or know or where and what we may consider in order to postpone along the cost items and expenses by types that we have, and this includes sales and marketing as much as G&A and R&D.

So from that perspective, I can only tell you that we -- I think we have the instruments. However, to what extent we have to make use of it, of course, right now remains to be seen. But there is clearly a portion on our OpEx that is variable and that we will manage with a lot of scrutiny if need be.

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Ludwin Monz, Carl Zeiss Meditec AG - President, CEO & Chairman of Management Board [15]

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I would also like to mention that in last crisis, actually, we did not stop our R&D investments, and that paid back when we came out of the crisis. So if we can afford it, and that really depends on what the crisis would be if there was one, right? Right now, we don't see a crisis. But if there was a crisis, and then we would need to make that judgment, as Justus described. So we are prepared. But again, if possible, we would continue to invest at least in research and development.

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Operator [16]

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And the next question comes from Mr. Falko Friedrichs.

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Falko Friedrichs, Deutsche Bank AG, Research Division - Research Analyst [17]

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I would have 3, please. Firstly, on China, can you expand a bit on your supply chain there in terms of how much is produced in the country and how the rest is brought into the country currently?

And secondly, on your IOL business, can you update us on the approval process in the U.S.? What are the next steps here? And is everything on track for launch next year?

And then thirdly, on your diagnostics business, which showed very strong growth again. After launching new products, how long do you tend to benefit from that in terms of growth until the competition catches up, just based on your experience from the past?

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Ludwin Monz, Carl Zeiss Meditec AG - President, CEO & Chairman of Management Board [18]

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Yes. Thank you, Mr. Friedrichs. I start with the China question, the supply chain. Well, there are 2 things to look at. The one is our own manufacturing in China. So we do manufacture also in China, but not to a very large extent. So given the few weeks of slowdown that we see right now, I would not expect a major impact of that. Going forward, difficult to predict. So if the corona crisis would last for, let's say, 2, 3, 4 months, of course, we would see something. But for the time being, 2 weeks, we can certainly bridge.

Then there is the other component, and that is the supply of components, which we purchased in China and which are integrated into our devices elsewhere in Europe, in Americas, in Asia. And this is mainly electronics components. So we depend on electronics components, which are manufactured by several or many companies in China and then are supplied to us. And here, the same thing applies, right? Right now, we don't see an effect. If the crisis would last longer, that definitely will change. But again, I have no idea how long it will take and how large the stocks in -- with our suppliers are actually are, right? Because typically, suppliers have stocks of electronics components, which we can consume and we would need to find out. But again, for the time being, I believe we are okay, and I think that this crisis will be over in a few weeks.

Regarding the IOL business in the U.S., there's no news, which is good news. So we are currently conducting our clinical trial. That goes as planned. So there's nothing new on that. So I would expect that we can hold the time plan. However, keep in mind, in the end, the final approval will not only depend on us. We need to provide the clinical study results to the FDA and some more documentation, but then it's up to the FDA how long it really takes until we get an approval or if they have further questions, nobody knows. So that still has some uncertainty. But again, there's no news here, which I believe is good news.

And your third question was on the Diagnostics business, when there's something new, how long does it take until competition catches up. A general answer is also difficult because I believe it depends on the product. There are certain -- and of course, on the feature. So in some cases, for example, let's take an OCT. And you remember, a few years ago, we introduced OCT and geography. And then it took maybe a year until competitors had something similar. Our main competitor were still struggling because their hardware was not prepared for this. So they -- although they had some similar feature, it was not as good. So then it took them relatively long.

If you take a typical product and a competitor would need to develop that product from scratch, so starts, we come up with something new and assume the competitor would say, "Oh, we should have something similar." And they started development. Then the time until that competitive product in diagnostics would hit the market is between 3 and 5 years. So it really depends. It can be faster if it's just a minor modification of an existing product. But if it's something entirely new, it's several years.

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Operator [19]

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And there are further questions from Mr. Daniel Wendorff.

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Daniel Wendorff, Commerzbank AG, Research Division - Team Head of Healthcare & Chemicals [20]

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Yes. And I would have a follow-up question on the performance of your rather old legacy products in Microsurgery. Can you comment on this? How well these products still did in the quarter?

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Ludwin Monz, Carl Zeiss Meditec AG - President, CEO & Chairman of Management Board [21]

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Yes. I'm just thinking what our old legacy products. I mean, in Microsurgery -- in neurosurgery, excuse me, in neurosurgery, our flagship product used to be the PENTERO, which is now replaced by the KINEVO. And the idea of KINEVO introduction is to really replace the PENTERO. So it's just natural that the PENTERO sales goes down as the KINEVO sales goes up. So what we typically do is we basically add the 2, right? So PENTERO sales plus KINEVO sales. And here, we clearly see some growth. And this is what results in the overall growth of MCS, so I believe we are good there.

And if you take the TIVATO, that replaces the OPMI VARIO, which really was an old product. You could call it legacy product. And here, it's basically the same. So the idea is that the new product will replace the old one. So also, the old one goes down, and it will basically be taken from the market at some point in time. The timescale, by the way, to do this -- such a transition depends on the approval situation. So for example, PENTERO, we are still selling PENTERO in China to a large extent. We will also keep the PENTERO in the market in a lower market segment, but the high end will be fully replaced once we have the approval in all countries, which in the meantime for the KINEVO is basically the case. So overall, the legacy products are in the process of being replaced, and that's actually the intent.

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Operator [22]

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And there are no more questions. (Operator Instructions)

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Ludwin Monz, Carl Zeiss Meditec AG - President, CEO & Chairman of Management Board [23]

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Okay. If there are no further questions...

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Operator [24]

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There are no further questions.

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Ludwin Monz, Carl Zeiss Meditec AG - President, CEO & Chairman of Management Board [25]

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Then I would like to thank you, dear ladies and gentlemen, for your interest in Carl Zeiss Meditec. We will keep you posted on the development and latest after Q2. We'll talk to you again in our Q2 call. Thanks, and have a good time.