Medistim ASA

OSE:MEDI

Earnings Call Transcript 2023-Q4

[Kari Krogstad, executive]

Good morning, everyone, and welcome to Medistim's Fourth Quarter and Preliminary Full Year Results for 2023 presentation. My name is Kari Krogstad. And together with CFO, Thomas Jakobsen, we will take you through the results. And as always, we will go straight into the highlights for the fourth quarter.

So, in this quarter, in Norwegian currency, we see a decent quarter for sales, absolutely not great, but decent because we're comparing to the strongest quarter we have ever delivered. So, a revenue of NOK 135.6 million means a decrease in Norwegian currency of 4.4%.

In this picture, we see that our own products are decreasing by 5.8% while the third-party products is growing by 4.3%. And we are segmenting our business into Imaging products and Flow products, also Vascular business segment versus the Cardiac business segment. And we see, for this quarter, that all are down with the exception of Vascular sales. And it's good to see that. That is still growing at 21.2% this quarter.

We also see that currency continued to play an effect here. So when we're looking at the currency adjusted sales, we see that total sales is showing a decline of 13.7%. The currency-neutral decline for our own products was minus 17.4%.

And we can see that all regions this quarter is down. Americas is down by 14.3%, and this continues to be related to a lower amount of sales of capital systems, in particular of the flow and imaging type.

In EMEA, we see a decline of 20% this quarter. It has been, I would say, a lumpy ride for EMEA this year. We started out a bit weak in the first quarter, then we delivered 2 strong quarters, and 4 quarters is [indiscernible] EBIT down. So we will see, for the year, it is slightly up.

Asia Pacific also down for the quarter, 13.9%. For the quarter, we are still impacted by the transition that we are going through from going from a distributor sales channel to establishing our own sales organization in China. But we're also impacted from lower-than-normal sales to Japan and other Asian distributors.

So, I would say, all in all, we are still impacted on a more general macroeconomic situation where virtually all parts of the business is slightly down. This leaves us at an EBIT margin for this quarter at 16.4%. So, this is, of course, pretty painful to present such a low EBIT margin. It's not what we are used to. But it's, of course, a direct consequence of the investments that we have been doing this year by establishing our own organizations in China, in Canada, and in Sweden.

And we're increasing also this year the headcount in our operations, in production, in order to allow for a second shift. We also have other expenses that my colleague will go through later on.

EBIT, this result for the quarter, the Board is suggesting a dividend at the same level as last year, so NOK 4.5 per share.

Let's move into the highlights for 2023. So, it's good to see that we are exceeding NOK 0.5 billion in sales for the first time. And we're also seeing that our own products is increasing by 7.4% and third party is growing by 4.7%. So while the Flow sales is up, Vascular sales is up, Cardiac sales is up, we see that Imaging sales is slightly down. And again, we are relating this to a less inclination to buy the more expensive flow and imaging systems.

We continue to see, for the whole year, a positive currency effect. And when we're adjusting for this, we are seeing that, currency neutral, the total sales is going down 2.5% after 2 very good years of growth, a currency-neutral decline for our own products at 5.1%, and we are seeing that, with the exception of EMEA, both Americas and APAC is down. So, Americas, the same story for the whole year, less number of capital sales, in particular, affected by less imaging system sales as capital is influencing the overall result in Americas. In EMEA, as I alluded to, we had a slow start and 2 strong quarters and then a somewhat slower fourth quarter, ending up at a slight growth of 2.6%, currency neutral. And Asia Pacific in total for the year is down by 7.1%. But actually, China is coming back pretty strongly, and we're seeing, for the year, that, currency-neutral, China is flat compared to last year and actually, in Norwegian currency, we are growing. So, Asia Pacific is down for the year due to a weaker performance in Japan, which also is a big part of the Asia Pacific region.

The EBIT margin then ends at 25%, so a more decent result, still slower than the previous year and related to the same factors that I just mentioned for the fourth quarter, so directly influenced by the direct establishment and the investments that we are making for the future.

So, with that as highlights, we will go further into the details.

[Thomas Jakobsen, executive]

Thank you for the introduction. I will, as usual, go through the numbers in more detail. Kari will take us through sales figures later on related to the geography split and product split. So, I will dive directly into the expenses, as usual.

And I will start with cost of goods sold. We do have a higher level of cost of goods sold this fourth quarter. There are 3 major reasons for this. First of all, we had an inventory write-down of NOK 1 million related to an inventory count in the fourth quarter. We also have a royalty expense, which is unusual in Medistim, to our former distributor in China of NOK 1.7 million. And last but not least is related to product mix. We have an increase in sales of third-party products and a decrease in sales of our own products compared to last year. And the major market, U.S., has softer sales this fourth quarter compared to last year and is obviously a large contributor to Medistim's profit. So, these 3 factors are affecting cost of goods sold.

Salary and social expenses Kari mentioned briefly, the 2 major things that affect our expenses in the fourth quarter. We've introduced a double shift in product production in order to meet future growth, but also the direct representation and the direct markets that we now are represented in, which are new for Medistim in 2023, China, Canada and Sweden. Of course, when we build organizations here, we need employees and the expenses increase as a consequence. The latter is also the reason why other operating expenses are increasing related to these new initiatives and expansion in the 3 new markets I just mentioned.

EBITDA ends at NOK 29.3 million. Depreciation is increasing by NOK 1 million. The majority of the increase is related to lease contracts. We have new facilities in China, and we also have a new facility for R&D in [ Horton ] related to our R&D initiatives.

Operating profit ends at NOK 22.3 million, yes, a disappointing 16.4% EBIT percentage, which, in Medistim history, is considered to be very low. We are normally between 25% and 30% on EBIT margin.

Financial expenses and income is a net positive contribution of NOK 4.1 million and related to foreign currency, either realized or unrealized gains. So, our pretax profit ends at NOK 26.4 million and profit after tax ends at NOK 19.1 million. Last year, it ended at NOK 32.5 million.

If we then look at numbers for the year, when it comes to the expenses, the explanations are the same as for the quarter, only larger numbers. I don't think I need to go into those details for the year.

What I can mention though is that the EBIT margin for the year, that ends at 25% and is affected, obviously, by the fourth quarter weak EBIT margin. When we went out of September, our EBIT margin was at 27.9%. And yes, we had expenses increasing every quarter compared to 2022 in the first, second and the third quarter. But then we had also an increased top line. We don't -- we are not able to produce an increased top line for the fourth quarter, and therefore, it affects our total EBIT margin also for the year. So, it's not at the 28% range rather than -- but it ends at the 25%.

Net finance is still positive, NOK 3.8 million. Pretax profit ends at NOK 35.2 (sic) [ 135.2 ] million. And profit after tax ends at NOK 103.8 million versus NOK 14 million last year. So, the weak end of the year is the reason why we are not having a higher profit this year than compared to 2022.

Looking at the balance sheet, tangible and intangible assets are increasing mainly because of increased efforts in especially R&D and product development. Inventory is still high, and we mentioned earlier that we need to secure critical components for our products, have regulatory approvals and also end-of-life components related to long regulatory approvals.

When it comes to accounts receivable, we've done a good job. We've been collecting cash quite nicely throughout the year, and receivables is down from over NOK 100 million to under NOK 75 million when we go out of 2023.

Equity and liability. Yes, we have a very strong balance sheet, equity at almost 80%. The long-term debt here is not a traditional long-term interest-bearing debt loan from a bank with covenants and such. This is related to our lease agreements. NOK 9.2 million and NOK 4.2 million is related to deferred revenue related to our extended warranty contracts and service contracts.

And yes, with that, I leave the word again to Kari to continue the presentation.

[Kari Krogstad, executive]

Okay. So, let's have a look at further details on sales here.

So, taking a look first at the Imaging probes and systems in unit sales, here, we can see that we have 6 less Flow and Imaging units sold this quarter, but also recognizing that we're actually selling 5 more in Asia Pacific and China had actually a good finish of the year in that respect. So, this is the result for the quarter.

For 2023, we are then 8 imaging systems down for last year. And of course, the impact of these declines is greater than when we are going down on flow systems only since the price of these types of devices are about twice as high as flow only.

When we look at the Imaging probes and units, we see that that is pretty flat or stable, so not a particular impact here. Then when we move into Flow probes and systems, also in units, starting with looking at the flow systems, we see that this is also at a sort of normal level. We are seeing that the Asia Pacific is down for the quarter by 11 systems. And this is, of course, also related to this transition that we are going through, a lot of variation in this part of our business right now.

When we look at probe sales, we see that, in total, it is decreasing significantly. But in isolation, the sales of probes this quarter is not bad at all. But we have this very, very strong comparable of Q4 2022, partly related to this transition in China that we have been talking about, but also related to an announced price increase from January 2023. So, this is clearly also impacting the overall sales in all the regions.

This is a slide going through the development in Norwegian currency for the various regions and also taking into account the variation between these numbers and the numbers in units. So, to make sense of that, we had to consider both currency effects. We need to consider the sales channels. So, are we selling our products through the direct sales channel, of course given both higher sales and margins, or the distributor sales channels? The type of business model also plays into this picture in the U.S. Are we selling in as PPP or lease? Or are we selling us capital? And also, to a less extent, the system configurations also comes into play here. So, I don't intend to go through the comments in detail here, but this is to explain these variations.

Similarly, we can also look at the revenue performance by product categories. So here, we can see the procedure sales in the U.S.A. going down in Norwegian currency by 9% for the quarter but going up 7.3% for the year. I'm coming back to this. And we can also see that flow probes being down for the quarter, up for the full year and so on. And here again, there are discrepancies between the numbers in Norwegian currency and the units. So, there are some explanations here in details.

I think we'll move forward to providing some comments on how we are implementing the strategy. And first, I want to highlight that, during 2023, we've also done some market research to get a better understanding of the size of our vascular surgery opportunity, in particular looking at peripheral bypass surgery and also [ AB ] access surgery. And the good news from this research is that we have confirmed our suspicion that we have been very conservative, and we have estimated the size of the vascular surgical market opportunity for Medistim. So after this research, we're actually doubling the market opportunity in vascular from NOK 2 billion to NOK 4 billion. So, this takes the total annual revenue opportunity for our products in the target segments that we are addressing up to NOK 7 billion. So, these are, of course, very good news to bring into the future.

U.S.A. contributes with almost 50% of our sales from our own products and is also the most important growth area for us. So, we are paying particular attention to what is happening in the U.S.

So, as we have said, currency neutral, not a good year, 14% down for the quarter, 6% down for the year, and it's due to soft capital sales. So, looking at this in detail, for the quarter, we're selling 7 units this quarter compared to 9 last year, and for the year, 39 units compared with 49 units in total last year, so 9 fewer flow and imaging units. That is actually meaning an estimated loss in sales of around NOK 18 million. So, just to illustrate that, it's very important to keep up the level of capital sales of Imaging products.

Some good news here is that, when you're looking at the total number of procedures, when we are counting both procedures from our PPP smart card sales and also from the flow probe sales that we are selling to capital accounts, we're seeing a good 14% uptake for Q4 and a slight 4.4% growth also for 2023. So, this indicates that we still have very, let's say, loyal and also indicating an increased utilization within our current accounts. So, this is a healthy signal. Also for the year, we're seeing that we have this growth. So, we are now at 89,500 procedures for 2023.

We are keep winning new customers, but not at the same pace as we did last year. Still, this is, of course, also very important and encouraging when we are now entering into 2024.

This map is illustrating where Medistim are direct in this orange color. And this year, we have been able to paint the map quite more colorful in orange due to our increased sales footprint in China, in Canada, and in Sweden. So why are we doing this? Well, first of all is, of course, to increase the top line and also to acquire more of the margins in this value chain. By now, we have local teams in place in all 3 countries, which have been trained and are up and running and really getting active with their building close relationships with all our current users and also building new relationships with new potential users in these geographies.

In all markets, we have great opportunity to convert Flow system installed base to Imaging and also to develop the vascular markets in these geographies. So, we went direct in China from April, in Canada from May, and in Sweden from November last year.

Looking at China, we typically want to enter a market where we have already built a strong position with CABG based on the Flow technology. And that's certainly true for China, where we have about 70% of the more than 60,000 CABG procedures that are being performed every year.

So, we are also well positioned with numerous devices in all the top 10 centers, cardiac centers, in China. So it's a great starting point and it's a great position when we know that China is one of the highest growing markets for CABG surgery, growing at high single digits.

When we see -- look at the revenue development for the year, so last year, we made NOK 37.2 million in sales to our distributors. Distributor in China from this year, of course, it's been a mix of sales to our distributor and then from Q4 through our direct sales channels, but we actually achieved NOK 42.6 million at the end of the year, so a very strong Q4 there. And currency neutral, it's about flat, but in Norwegian currency, this means a 14.5% increase. So, it tells us that now we have been able to start our operations in China in a solid way, and we are expecting this also to continue in 2024, although we have to expect some ups and downs also from quarter to quarter.

When it comes to Canada, it's about the same story. We have a strong position. We have about 37% of the 18,000 CABGs being performed. We are in 15 out of the 38 cardiac centers. And we have a very strong key opinion leader, Professor Teresa Keiser, which has been really a long-standing advocate and key opinion leader for medicine and our technology for years.

Also, in Canada, we've had good development. So, in 2022, we had revenues of NOK 3.3 million. And this year, we are making NOK 6.7 million. Of course, there are currency effects here as well, but just reminding us that it has been a good start, although somewhat challenging in total.

In Sweden, we went direct in November. We have a strong position here as well. I would say, for all practical purposes, a saturated market when it comes to the use of flow measurements in CABG surgery. We also have a solid position in vascular, although there are still room for growth here, and there is certainly also room for conversion to imaging.

But perhaps even more interesting, we are, by this latest addition, establishing a broader Scandinavian distribution franchise, so meaning that Norway, Denmark and Sweden is creating this Pan-Scandinavian operation and making us much more attractive for international manufacturers to select Medistim as a representative in the Nordic or Scandinavian region. And 2 great examples of this are the Swiss company, A.M.I., and also the U.S. company SysGenix, which has -- are the first examples of this Pan-Scandinavian type of agencies that -- where we are covering all 3 markets. So, this is also providing very interesting growth opportunities for our third-party business.

By that, I'm going to finish off just mentioning that, this year, we are actually going to celebrate our 40th anniversary since the inception of Medistim. And although we feel that we have had some headwind out of 2023, we remain very optimistic and positive with regard to the opportunities that lays ahead.

So, with that, we will open up for questions.

[Unknown Executive]

We have a few questions here. The first one is on the EBIT margin. The EBIT margin was weak in Q4. Can you elaborate on that?

[Kari Krogstad, executive]

Yes.

[Thomas Jakobsen, executive]

And the second also, this one? Yeah, a weak EBIT margin in Q4. Well, there are a couple of comments that we can link to that. First of all, we, throughout 2022 and 2023, which, in general, strengthened our organization, but very specifically, we introduced a double shift in production. We have also been very expansive in establishing direct representation in 2023. Looking at medicine history, doing this in 3 countries at the same time, of course, there will be expenses related to that when you do this establishing in these 3 markets.

And I would also like to mention product mix. We've seen an increase in the third-party products and a decrease in our largest, most important direct market, the U.S of A. in the fourth quarter. And this, of course, affects margin quite heavily.

And also taking one step back, looking at 2023 in total, we've seen these expense increases actually in all quarters, and I hinted to that in my presentation. First quarter, second quarter, third quarter, we had, in percent, higher expense growth compared to 2022 when we compare to 2024. But then we were able to increase the top line as well. And we have experienced also that, from one quarter to another, sales can vary. And definitely, we were not able to match last year's revenue or even exceed it. And I think that is the major reason for our weaker EBIT in the fourth quarter, as such. But we think that this is a little more of a random character and that we will come more strongly back going into 2024. When it comes to sales and then EBIT margins, we will be more back to what we in Medistim call normal, 25% to 30% range.

[Unknown Executive]

Yeah. And the next question is about the areas regarding the new markets. When will the new markets contribute with higher profitability?

[Thomas Jakobsen, executive]

I guess I can try to answer that as well. Well, our experience is that always when there is a transition from a distributor and we are entering a market, going direct, there is a short and negative effect on expenses. It is quite -- and we've also seen that in China and in Canada.

Nw, typically, a distributor will strive to take out all of the potential with the efforts that they've made in the market before a takeover, boosting sales before Medistim takes over. And we've seen that in both China and in Canada this year and -- that Medistim is taking over. Inventory has been filled up at the hospitals and such. So, we see a soft start when we go direct. So, this is a natural thing. How long that effect will last is varying very much case by case, but we have seen positive effects now in 2024, both in China and in Canada. And we did have a strong fourth quarter also in 2023 in China. So, there are some good signs that things will be back on track.

When it comes to Sweden, we -- for all practical reasons, were direct in the last 2 -- 1 or 2 months in December. So, we haven't really seen the effects there yet. But in total, Sweden is a much smaller market for Medistim, so we won't see those large effects as a consequence of that. However, our experience is that, over time, being direct is really driving sales in Medistim. So, this is also what we believe for all these 3 new markets that we now have gone directly in, in 2023.

[Unknown Executive]

Yes. And the next question is on the U.S.A. U.S.A. has been a growth driver for Medistim for years. Are you concerned to see that sales in the U.S. are weak? Especially the capital sales are down in 2023. When do you expect U.S.A. to be back on track?

[Kari Krogstad, executive]

Well, first of all, I mean, we have lost no confidence in our U.S. setup. We have a very strong sales force there. We have a very good position with our customers. And we've also strengthened actually the sales force last year, so making us even stronger when we're entering into 2024.

So, yes -- no, we remain very optimistic. We are not seeing or believing that the macroeconomic factors that we have talked about is going to last forever. Of course, there's still uncertainties in this regard, but I think the sentiment is positive and the people are expecting to see some relief on that part. And we believe that there are hospitals and especially new projects that we're working on that there will be a higher [ intonation ] for actually embarking on adopting new technology for new prospects.

So, exactly how quickly this development goes remains to be seen, but we remain very positive when it comes to U.S.A. going forward.

[Unknown Executive]

Yes. And in the Q4 report, a study on the vascular field is mentioned. What can you say about this project? And how will it impact Medistim's results going forward?

[Kari Krogstad, executive]

Okay. Yes, so first of all, I mean, the Vascular segment has been a strategic target for Medistim, and we've talked about it for a number of years already. Over the past several years, we have worked diligently in order to build very strong relationships with the top performers at KOLs also on the Vascular side. At the same time, as we have learned more about the Vascular business, and I'm also alluding to this market research that we did last year, we found that, in particular, peripheral bypass surgery both represent a large market opportunity with about 500,000 procedures being performed per year and also a very interesting and positive clinical fit with our technology for both flow measurements and also for high-frequency ultrasound imaging. So, there's a good connection there.

And as we have developed these relationships and talked to our surgeons, we have noted an increasing interest in actually doing a clinical project to document the clinical value of using Medistim's equipment in peripheral bypass. So, this is something that is -- that we are currently planning and which we are also very excited about. But I will come back with more specific information about this project in due time.

[Unknown Executive]

Yes. The next question is as following. Studies have shown that Ozempic and [ Regovy ] can reduce the risk of heart diseases. Given how promising these drugs seem to be, it's a credible threat to our industry. What is your point of view on this matter? And how are you dealing with the situation?

[Kari Krogstad, executive]

Yes. First of all, I think these medications certainly is expected to impact on, well, cardiovascular health in the future. Still, it remains, I think, open to see to what degree and what impact it will have overall. We don't know yet do need to stay on these drugs and medication for their lifetime? What would then be the long-term adverse effects of such a plan? And also, of course, the cost issue, will the medication be available for just everybody? So that's one factor.

On the positive side, you could also say that fighting obesity could also actually help in the sense that you need to have not too high BMI to be eligible for surgical procedures. So that's another factor.

But I would say that, for Medistim, we are looking at also growth factors for the number of procedures that we are targeting, and in particular, the split between PCI and CABG surgery, for instance, which is maybe typically, on average, 10:1. We believe that split will change in favor of more CABG surgery going forward, also driven by, hopefully, the implementation of new technology such as CT angio combined with FFR, which would then put the radiographer more in responsibility for the diagnostic part, and we will get away from the cardiologist always being the gatekeepers. And we know that that has -- well, is a factor for the further follow-up of the patient.

So, I think there's various factors here. Of course, we do believe that this medication will have an impact. There might be fewer cases for -- in the cardiovascular diseases. But also, in the big scheme of things, there's a huge market out there. There's a growing [Technical Difficulty] population. People might only postpone the onset of disease. Today, we are addressing about 37% of CABG surgery, a much lower percentage when it comes to vascular surgery. So, there are huge growth opportunities for Medistim still when we're looking ahead. So, it's not a great concern.

[Unknown Executive]

Thank you. The last question from the web here is on the third-party business. What is the reason behind your continuing focus on third-party products despite weaker profitability?

[Kari Krogstad, executive]

Yes. So First of all, I can remind that the third-party business is -- we call it a legacy business. It's where we're coming from. We started out as a distributor of third-party products on behalf of a number of international manufacturers. And I would say that it is a well-driven part of our business. It is actually delivering pretty good margins compared to other distribution businesses out there. So, it's a very lean and efficient part of our business. And it provides market insights. I mean, through these many distributors and products that we have in our portfolio, it also adds a lot of information about what's going on out in relevant fields for us, not only in cardio, but in surgery in general and also in medical technology in general. So, we are not in any hurry to sort of divest our third-party business.

[Unknown Executive]

Thank you. That's it on the Q&A.

[Kari Krogstad, executive]

Then we say thank you, and we will meet again for the first quarter presentation. Thank you very much.