Medistim ASA

OSE:MEDI

Earnings Call Transcript 2023-Q1

[Kari Krogstad, executive]

Good morning. This is a [ Great ] Oslo reporting in, so welcome to Medistim's First Quarter 2023 Presentation. And my name is Kari Krogstad. And together with CFO, Thomas Jakobsen, we will take you through the quarterly results. And we will follow the same agenda that we are used to going through starting with the highlights.

And we're starting with quarterly sales of NOK 129.3 million in revenues this quarter. And this is the second best quarter we have delivered only beaten by the fourth quarter last year. But as we see here, the majority of the contribution to growth comes from currency. If you look at the growth in Norwegian currency, we see 15% growth in sales of our own products. And we can also see that all the product categories and marketing segment categories are contributing to this growth. When it comes to the third party, those are down this quarter by 4.5%.

Then if we look at the currency neutral growth, we see that this is a very modest 1.2% in total. When it comes to our currency-neutral growth for our own products, that is also a modest 2.5%. And as I said, we need to see this in relation to a very strong finish of 2022, very strong fourth quarter there. This was influenced by some inventory buildup also driven by a warrant price increase from January 2023.

We can see that Americas and Europe and Middle East is down and that Asia Pacific has a very strong quarter this first quarter. This is related to the changes in business that we have set up in China, where we have now decided to go direct, and we see the effect of the lost sales that we are doing to our former distributor for China. So that is actually a NOK 9 million extra revenue compared to last year.

So these are really the most important news for the quarter that they're going direct, both in Canada and also in China, and I will comment more on that later in the presentation.

When it comes to the EBIT, it is more or less the same as last year, a little bit lower on the margin side, and this is related both to high activity. We've had a lot of traveling to China, so one of the things. Also some timing issues with regard to some QA audits, inflation currency also contributes to the higher expense level. And Thomas will go through a little bit more detail on this.

And the last point here on the highlights is that yesterday, the General Assembly decided to pay out a dividend of NOK 4.50 per share.

And by that, I will leave the floor to Thomas.

[Thomas Jakobsen, executive]

Thank you, Kari. Good morning, everyone. I will, as usual, go through the P&L in a little bit more detail. When it comes to sales and split of sales per geography and per product, Kari will go through this in more detail later on in the presentation. So I will not spend time on that here, but explain the expense lines in the P&L, as I usually do.

When it comes to cost of goods sold, we are at the same level as last year. That means 20% of sales is related to cost of goods sold, the same level as in the first quarter '22. Salary and social expenses are up NOK 3.8 million. Kari mentioned that we have currency help on the top line. We also have currency when it comes to expenses. So NOK 1.6 million of the salary and social expenses is related to exactly that currency. Another NOK 1.5 million is related to salary adjustments from last year. We had an adjustment on average 4% in April 2022, and that affects obviously the first quarter this year.

The remaining expenses is related to us increasing our resources in our organization. Other operating expenses is up NOK 7.2 million, so that's quite a lot for this quarter, and there are some reasons for it. One is the regulatory audit, and there was an expense of NOK 1.7 million. This audit comes a little bit different from year to year. And the first quarter last year, we did not have a similar audit. Another NOK 900,000 is related to a onetime commission to a distributor. We had a letter of credit agreement with an end customer and based upon this agreement, there is a return commission to the distributor, and that is NOK 900,000 and it's a one-timer.

We also had additional expenses related to our direct operations in China and Canada, and then thinking about recruitment, around NOK 600,000 is related to that. Another NOK 1.6 million in increased travel expenses is also added for this quarter. This is much in connection with the establishment in China, but also in Canada. But I would also like to mention our vascular initiatives and our activities related to that is also demanded travel activity.

When it comes to EBITDA, we end at the same level as last year, NOK 39.2 million and also EBIT ends at the same level as last year, NOK 33.5 million. Net finance is positive. Weak Norwegian krone helps us, and we have a realized and unrealized gain on our positions with NOK 750,000 for this quarter. So these results that we end up with a pretax profit of NOK 34.2 million. That's up 4% compared to last year. And profit after tax ends at NOK 25.7 million, that's up 8% compared to last year.

When we look at our balance sheet, intangible assets are increasing, and that is a natural consequence of increased activity in our R&D departments, developing products. No major investments on our fixed assets, and therefore, it's been reduced. All in all, intangible and fixed assets slightly down compared to how it was when we entered the year. Inventory is by our intention up the supply chain situation that we were really feeling in the early 2022 has improved and is much more normalized. So it's on purpose that we have secured critical components and end-of-life components and therefore, increased inventory.

We also have an increased customer receivables. This is explained by the sales profile for the quarter with a hockey stick sales profile, relatively slow sales in January and February and a large -- much of the orders have been entered into March. These 2 things increases our working capital, and it is also the explanation for our cash position being about at the same level as it was when we entered the year.

Equity and liabilities. Well, we have no traditional interest-bearing debt, that means loan from the bank. Our Equity is -- or balance sheet is in general, strong. Our equity is about [ 80% ] What is recorded here as long-term debt is related to lease obligations. In total, Medistim has NOK 15.3 million in lease obligations, where NOK 8 million is recorded as long-term debt and the remaining NOK 2.2 million is related to our service contracts and it's therefore deferred revenue.

Well, yes, as Kari mentioned, the General Meeting decided to pay out a dividend yesterday, NOK 4.5 per share. And this will be paid out to our shareholders by the 5th of May. And by that, I transfer the word to Kari.

[Kari Krogstad, executive]

Okay. So let's take a look at the business segments update, starting with the imaging probes and systems in units. And from what we will see here, we are seeing a very flat quarter when it comes to our sales of imaging systems and also our imaging probes. And again, a little bit affected by a strong finished last year, at least for the system side. One quarter doesn't mean that much. I had to remind about the finish last year, we grew 44% in our imaging sales portfolio. And also 40% of the systems we sold last year was on the imaging platform. So definitely, there is continued very strong interest for our imaging technology, and we are expecting this to continue to pick up in the following quarters.

When it comes to the flow probes and also systems in units, we see a good development this quarter, number of flow systems sold as capital is up 33% from the first quarter last year. And this is, to a high degree, influenced by this change in China. We have had a large sort of last time buy to our former distributor for China which is driving the growth in Asia Pacific. When we are adding up sales of systems, both flow systems and the combined flow and imaging systems, then we see a growth of 11 units this quarter, so 19%, which is also very encouraging for us to see.

Then we can see the fourth quarter here, really, really strong, and we are seeing then this quarter, lower sales of our flow probes going down 5% from the same quarter last year influenced by inventory buildup due to this price increase that we went into in the 1st of January this year.

If we look at the revenue performance now by region. So we can see the region split here. And when we're comparing the developments in a number of units, I'm trying to make sense of that in sort of the Norwegian currency. I just want to stress that there are several factors that are influencing these numbers so that it can create some discrepancies both in the positive and in the negative direction. Of course, number of units, it will be influenced by currency. To what extent we will see the same level of growth in Norwegian currency. It also depends on which sales channel these products are going through. So of course, direct sales channels will provide higher revenues compared to the distributor sales channel.

Also, our business models in the U.S., we have our paper procedure business model, also our lease models compared to the capital sales that we are doing all over the world. So this will also influence. And then lastly, the system configurations. Sometimes we are selling really high spec systems and products. We have an ultimate version of our technology, which is at a higher price compared to lower spec versions. So this is just a reminder.

If we then take a look at the various regions here in Americas, we saw that the revenues increased with 10% in Norwegian currency, declined 4.5% currency neutral. If we look at the U.S.A., which is the majority of Americas, in Americas now, we are counting also Canada and Latin America. But U.S.A. constitutes the majority of this region. And in the U.S.A., the currency-neutral decline was 8%.

Moving to Asia Pacific. As already highlighted, we had a great increase in sales this quarter, 79% in NOK, 64% currency neutral, related to the transition of our China business from distributors to our whole sales organization. In Europe and Middle East, revenues were down both in NOKs and also currency neutral by 12.4%. And here, Europe constitutes the majority of these regions and showing 1.9% growth in Norwegian currency, declining 8.3% currency neutral. And third party, as mentioned, was down 4.5% this quarter.

If we look at the same numbers now divided by product category, we will see that the procedures sales in the United States, the number of procedures increased by 9.8%, and it is both a favorable currency or the favorable currency actually in entirety, that is explaining the higher growth that we're seeing in NOKs. When it comes to flow probes, the number of units we sold was 4.9% lower than last year. Again, related to this inventory buildup and increase in Norwegian currency driven by -- the NOK is driven by the currency and also the price increase that I mentioned.

Flow systems number of unit sold was up 33%, high-level sales through distributor channel is resulting in a lower increase in Norwegian currency. When it comes to the imaging systems and also the imaging probe, number of units sold was the same level as last year. Sales in NOKs shows low growth for system and decline for probes. And due to the favorable currency effect was here outweighed by higher sales through the distributor channel. So a little bit complex to understand the different parameters that is impacting on the overall development.

Okay. Let me continue with some comments on activities this quarter to implement the strategy. And our strategy in -- yes, on a high level is, as we have explained several times to continue to convert routine flow market to flow in imaging market in the markets where we already have a very strong position with the flow technology. And then to continue to develop those markets where we do not have a strong position in the CABG such as the U.S. and U.K. and France as examples. Continuing into the emerging more price-sensitive markets with our entry-level solution, concentrating on building also the vascular surgery and also expand our direct market coverage. This is high level, our growth strategy.

And as we have pointed out several times, the U.S.A. remains to be a very high target and important market for Medistim. And as mentioned, this quarter, we see currency-neutral sales declining by 8%. When it comes to the total number of procedures, this is actually quite positive, 5.7% up in Q1. Flow procedures, up 4.3% and imaging procedures up 11.8%. Capital system sales is a bit lower than the same quarter last year and of course, impacting on the overall results of 12 units sold this quarter compared to 15 units last year. We are continuing to keep winning new customers, 6 new customers this quarter compared to the 13 last year.

I think it's pertinent that we are also starting to comment a little bit more on our progress in vascular surgery. Since we have stated very clearly that we are aiming to build and strengthen our position there. So just a little reminder here to say that our MiraQ system is a tool, which is just as relevant for the vascular surgical procedures that we have targeted just as in CABG. And it is peripheral bypass, it's carotid endarterectomy and it's AV access, which are the targeted application areas that we are focusing on.

When we're looking at the market size, we see a market based on the size of -- or the number of procedures performed in key markets more than 900,000. So it's actually a larger market in terms of procedures compared to the cardiac market for us. Little bit lower in terms of market opportunity in NOK, which is related to more -- a little bit more price-sensitive market compared to the cardiac. Still very interesting. And how are we doing when it comes to growing this vascular segment? Well, we can see over the years that we have had a steady progress. And last year, we were growing 27%. This first quarter, we're growing 21.5% currency neutral. This is a bit lower, 8.8%, but still continuing in a positive fashion.

Yes, as pointed out, it's a larger market than the CABG market and it is driven by the same underlying factors that we're also seeing in CABG. So increased diabetes which is also associated with increased risk for disease blood vessels. We are applying and bringing with us all the experience that we have from the cardiac market when we are now getting into the Vascular segment as well. So we are very much busy with relationship building with key opinion leaders, performing clinical collaborations, product development, also together with key opinion leaders. And we are increasingly participating in Vascular conferences and congresses exhibitions all around the world.

This quarter, we participated both in the European Vascular Course and also in the Society for Clinical Vascular Surgery in the United States. Yes. In the vascular treatment alternatives are also dominating in the vascular space just as the situation is in CABG. But there are also new information that may drive some change to this fact. And there was a very interesting new study presented at the end of 2022, the so-called BEST-CLI study where they wanted to look at what is the best surgical therapy in patients with critical limb threatening Ischemia. And it was a large study, more than 1,400 patients. It was a prospective randomized study involving 150 sites. So a very important work. And the conclusion from this clinical study was that bypass surgery should be offered as a first-line treatment option for suitable candidates with CLTI.

So this is an example, and we believe there will be more publications going forward that will stress the importance of the open surgical alternatives as sometimes a better choice than the endovascular, which is, of course, very good news for Medistim. I already mentioned that the most important news this quarter was our going direct in more markets. And starting with Canada. So in Canada, we already have a strong position in the coronary artery bypass grafting market. In Canada, there's about 18,000 CABG procedures performed and based on our probe sales so far, we can state that about 37% of these procedures are supported with our technology. 38 cardiac centers in Canada, 15 of them are already using our technology. And I also want to mention that we have a longstanding advocate and friend, [ Theresa Keiser ] working out of Calgary, which has been a tremendous supporter for Medistim's technology over a number of years.

Medtronic has been our distributor in this market for a long time. We always enjoyed a very positive and strong collaboration with Medtronic, but now we have decided to continue this journey with our own sales reps.

Yes. So Medistim Canada was formerly established actually back in 2022. Now we have recruited sales reps both in Ontario and Quebec, in addition to also the West Coast and we also are dedicating resources from our Medistim, USA Inc. office to support the Canadian team. And we see that we -- based on this strong position already, we have a great starting point to continue the CABG growth continue or accelerate the imaging adoption. This has not come very far in Canada. So there's a lot of growth opportunity there and also when it comes to vascular targeting, which has, I would say, barely started.

The second country and the point I want to make is that we have gone direct also in China. And China is obviously a very, very important market for us to make a very strong presence. We've had a distributor there working out of Hong Kong and overseeing China for us, using local distributors internally in China and for a number of years, and they have really been able to build also a very strong position for our technology in this market.

Currently, more than 60,000 CABG procedures are performed per year. So far, about 70% of them are supported by Medistim technology. But I think the most important thing about this market is that it's one of the highest growing markets when it comes to CABG procedures in the world and expect it to continue to grow high single digits going forward.

We are present in all the top 10 cardiac centers, good relations to some of the key opinion leaders there, but of course, we see opportunity to get closer to our customers as we now are establishing ourselves with our old team.

Now we are starting to build our own organization and on the first recruitment. We also have very strong local third-party support. So we feel that we are already up and running and able to start up the business in China. Again, the situation for further growth is expected to come from continued CABG growth. So we will grow with the market. And also, we will be -- we believe, better equipped to drive the imaging adoption. Here again, it's quite a low adoption rate at present. And then lastly, vascular is also a new opportunity in this space.

I would like to round off with just a few comments on the recent Capital Markets Day that we arranged. So on March 21, and we were very happy to have 2 excellent speakers, both Professor John Puskas and Professor Pirkka Vikatmaa gave their opinion about, well, the future of surgery and also Medistim's role in this future. And I think both of them were able to really stress the severity and burden that cardiovascular disease has put on people and on society. It's still the #1 cause of death globally. And they explain how modern lifestyle with increasing population suffering from diabetes, obesity which are really conditions that are risk factors for cardiovascular disease, how this is influencing also the need for treatment alternatives going forward. It also means that younger and younger people get these diseases. And of course, it's very important that they get access to treatment alternatives that are really prolonging their lives. And there are clinical studies -- many big clinical studies proving that, for instance, CABG surgery has survival advantages compared to stenting. So it's really pushing that argument.

We also heard during these presentations, we got introduced a new term peak stenting. And we just really set expectations for future growth for open surgical alternatives. So we felt it was a very interesting reflections from both of these surgeons, and I would really encourage everybody to listen in to the recording, and you can find that on medistim.com.

By that, I'm done, but we might have some questions.

[Unknown Executive]

We have 1 question, it says how do you expect your EBIT margin to develop going forward?

[Kari Krogstad, executive]

Yes. As we have indicated before, we believe that we will be able to improve our EBIT margin over time. And this is both due to an increase in growth of our own products. It is also due to sort of -- well, the size of the business and how everything is developing. I mean from quarter-to-quarter, we will continue to see variations. And it will be influenced also by the investments that we are just making at the time this quarter, as you understand, much influenced by the new activities in the new regions, both China and Canada and then also some one-off effects. From quarter-to-quarter, I cannot promise to have improved EBIT margins, but over time, we certainly aim to deliver.

[Unknown Executive]

Another question. You mentioned that there was some inventory destocking at clients or distributors after good volumes in Q4. How long are the inventory cycles typically? And do you expect Q2 to be hampered by the same issue?

[Kari Krogstad, executive]

Well, when it comes to inventory buildup in the -- at the distributors, of course, we don't have full insights into that. But from what we can understand and interpret, I would be surprised if that is going to be continued to affect the sales going forward. I think most of that effect is seen now in the first quarter. But of course, we don't have 100% insights into how that looks.

[Thomas Jakobsen, executive]

Here's another question. It's related to China. Establishing direct operation in China is very interesting. Are you considering setting up manufacturing in China? And how do you see growth potential using your own sales force compared to using selling through a distributor?

[Kari Krogstad, executive]

Yes. Good question. And we do not have any plans of setting up either R&D activities or manufacturing in China. So this is purely a sales operation with our own sales team. And to the second question, yes, we've seen in the markets that we have done directly before, the importance of really having your own expertise on the ground, which are able also to sell and push the more challenging parts of our portfolio and that meaning the imaging. In many places, we see that with distributors, you are able to gain a good position with the Flow Technology but we also see that selling in the imaging is a little bit more demanding. So we have seen that it's better to have that local Medistim expertise on the ground.

[Thomas Jakobsen, executive]

And here's another question. I think you've partly answered it, but it says, when do you expect the market growth to normalize after the destocking ahead of your price increases? Can you remind us how much you have raised prices by?

[Kari Krogstad, executive]

Yes. The prices was roughly raised by 10% as of January. So of course, we have to give notice in time about the price increases like that, so both distributors and also some large customers then got the opportunity to build up some inventory in the fourth quarter. So that is what we are seeing an effect of now in the first quarter. And I think I commented that we don't have full visibility into the effects of that, at least not when it comes to our distributors. But we would be surprised if it should be continuing big impact for the second quarter and beyond.

[Thomas Jakobsen, executive]

And [indiscernible]. In terms of traveling, how do you see the growth in this activity for the rest of 2023 versus 2022?

[Kari Krogstad, executive]

Yes. For sure, we've had a very high activity level now in the first quarter since we have prepared for this going direct into major markets. China, of course, as maybe the more challenging. So I don't think the activity level when it comes to traveling, et cetera, will be as high going forward for the rest of the year. But the ambitions that we have in the vascular surgical field, it requires us to be engaged in more conferences and also to travel out there and meet more customers, and we also want to make sure that not only sales reps are meeting our customers, but also representatives from our marketing and medical department. So it's an investment that we are making in building this vascular market.

[Thomas Jakobsen, executive]

And the last one here, as mentioned, inventory buildup impact cash flow in Q1. When do you expect cash generation to normalize? And I guess I could probably answer that, Kari.

[Kari Krogstad, executive]

You can.

[Thomas Jakobsen, executive]

Well, we've seen a much improvement of the supply situation, and we've been able to secure more of our critical components and end-of-life components. By the end of this quarter, we are very happy to see that. So we think that the inventory position will be more stable going into the second quarter, and that will, of course, improve cash -- the cash position. And when it comes to receivables, it is yes, expected that we will receive payments from customers throughout the second quarter. But again, it's dependent upon how sales -- the sales profile develop in the second quarter and this can vary some time -- from quarter-to-quarter. So it's a little bit hard to be exact on that answer. But in general, I think that in the second quarter, we will see an improvement in cash from operations. However, we will be paying out a dividend of NOK 82.1 million. So that will, of course, affect our cash position.

[Kari Krogstad, executive]

And I think it's fair to say that this quarter, we were extremely backloaded when it came to timing on some large orders that we have, both in relation to China, but also in the United States.

[Thomas Jakobsen, executive]

Yes. I could then add that about 50% of all the sales for the quarter was in March. So that obviously affected our receivables.

[Unknown Executive]

Have sales rates normalized by now?

[Kari Krogstad, executive]

Have sales?

[Unknown Executive]

Have sales rates normalized by now?

[Kari Krogstad, executive]

If that's the question whether April has changed the picture. That's -- I think it's early in the quarter and it's very difficult to say.

[Unknown Executive]

And one final question. How and where are your products produced today?

[Kari Krogstad, executive]

Yes. We are assembling the products in our operations facilities in Horten in Norway. Okay. We have tried to answer all the questions. So thank you, everyone, for joining us today, and we will meet again. Thank you very much.