Carl Zeiss Meditec AG
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Carl Zeiss Meditec AG
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Dear ladies and gentlemen, welcome to the Q1 2017/2018 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 Mr. Sebastian Frericks, Director of Investor Relations, who will lead you through this conference. Please go ahead, sir.
Thank you, and good morning, ladies and gentlemen, to our 3 months '17/'18 analyst conference call. I am Sebastian Frericks, Director of Investor Relations, and with me, as usual, is our President and CEO, Dr. Ludwin Monz; and our CFO, Dr. Christian Muller. I would like to hand over to our management now to give you a short introduction to our quarterly financials of the first quarter of '17/'18. And afterwards, we are open for your questions.
Yes, good morning, ladies and gentlemen. I'm Ludwin Monz. I also would like to welcome you to the analyst conference on the Q1 2017/'18 report of Carl Zeiss Meditec. We will follow our standard agenda, as outlined on Slide #3. First off, I will give you an overview about the 3-month results; and then my colleague, Christian Muller, we'll discuss some more detail of the Q1 financials. Afterwards, I would like to talk about new highlights. In particular, I will discuss our expansion of our digital offering. And then finally, I will provide an outlook for this fiscal year.Yes, please turn to Slide #4. I'm really glad to report that Carl Zeiss Meditec was able to grow substantially in this period compared to prior year, that's true both in terms of sales and profitability despite of significant negative currency effects. Our revenues reached EUR 295 million, which corresponds to a growth of 5%. The constant currency growth rate is nearly 10%. As you will see in the next slide, the strongest growth contribution came from the SBU Microsurgery and from the region Americas. This is very encouraging, as we now start to see the effects of our new products in Microsurgery as well as the effect of our investments in the sales and service setup in the U.S.Our EBIT is below prior year as we had a special effect in Q1 of prior year. You might remember the one-off gain from the disposal of noncore assets. These assets were related to the hydrophilic IOLs in Ontario, which we sold off at that point in time. However, if we correct for the asset sale and also PPA effects, our adjusted EBIT margin is 13.5%. This compares to last year's adjusted EBIT margin of 13.4%. The slightly positive development in EBIT were supported by a favorable product mix, whereas we had -- as I said before, we had a higher level of investments, particularly in sales and marketing, but also in R&D.I would like to note that the currency exchange headwinds accounted to around 50 to 100 basis points in the EBIT margin in the year-over-year comparison. In other words, the EBIT margin would have been roughly 0.5% to 1% higher on a constant currency basis. Our net income reached EUR 28 million, which corresponds to earnings per share of EUR 0.32. Prior year, it was EUR 0.38. The reduction is not only due to the onetime gain in the past year but also due to a higher number of shares outstanding now.Okay, so much about the overview. So overall, I believe the performance developed really nicely. My colleague, Christian, will now discuss these results more in detail and give you more background. Christian?
Yes. Good morning, and welcome, also, from my side. And as Ludwin stated, the year has started with a very solid financial performance. In spite of more heavy headwinds from the currencies, we achieved good top line growth and stable operational profitability margins overall, and also, both of our 2 strategic business units contributed to that.Let me start with the strategic business unit Ophthalmic Devices. Revenue for Ophthalmic Devices came in with EUR 216 million. So compared to prior year, a reported growth of 4.2%, and on a constant currency basis, we were growing by 8.2%. So around about 400 basis points currency effect compared to last fiscal year. Within this strategic business unit, we see -- in spite of the ongoing high competitive pressure in the diagnostic segment, we see a continuation of the positive trend for our business here. The measures taken regarding sales effectiveness; the initiatives we've taken in digital; and in addition, also, the launch of the new product, for example, our new ultra-widefield fundus imaging system, CLARUS 500; are the main drivers for this positive development. The business with our Refractive Lasers systems, which has been performing quite well in the past, has also continued its strong performance. Here, especially, our SMILE technology continues to develop very nicely.Again, also a positive trend in Surgical Ophthalmology, driven by a growth in the intraocular lens segment, with market share gains and good progress in both premium as well as standard IOLs. The EBIT margin for the strategic business unit Ophthalmic Devices is at a similar level compared to last year, close to 10% if we exclude the one-off gain from the sale of the noncore assets at the Ontario site that was included in last year's figures. So positive product mix effects on the one side, including, for example, increased share of recurring revenue and higher operational leverage allowed to fully compensate negative currency effects on the one hand and also higher levels of investments in innovation and sales and marketing on the other hand.Now moving on to Microsurgery, Slide 7. Also, the strategic business unit Microsurgery delivered a solid performance, with revenues of EUR 78 million. So an increase reported of 8%. Strong currency headwind there. So current currency-corrected growth rate would have been a 13%. So that's good growth with our products in the neuro/EMT segment and also in the office/dental area. In both areas, we see positive contributions from the innovations that were introduced during the course of last fiscal year, so the KINEVO 900, the Robotic Visualization System for neurosurgery, as well as the EXTARO 300, the surgical microscope for dentistry. So both launches are developing quite nicely.EBIT margin in Microsurgery remained above 20% despite the headwinds from the currency and some increases in OpEx due to the launch of the new products.Regionally, the split across the 3 regions, you'll see on Slide #8, is -- it's, as you know, overall very well balanced. All 3 regions represent comparable shares. We'll start with Americas. In Americas, we achieved sales of EUR 94 million, which was an increase of 4% on a reported basis and roundabout 12%, nearly 12% on a currency-corrected basis. So significant currency effects here due to the U.S. dollar development compared to prior year. Here, strongest contribution from the U.S. market, significant increase in the U.S. So we see this -- here a positive development in the U.S. market, also due to our new product launches, but very positive developments also from our initiatives that we launched in the U.S. South America was rather weak in Q1, especially Brazil. We saw less demand than in the Q1 of the year before.EMEA, Europe, Middle East, Africa; with EUR 91 million of sales. Overall, an increase of 9%; currency-corrected, 11%. Here, continuation of the heterogeneous picture we've seen also in the past, stable and positive development in some of the core markets. Again, good growth in Germany, in France, but also, for example, in Spain, and more challenging situation in Middle East and some other countries.Asia-Pacific, lower growth reported 3.5%. So constant-currency-wise, 6.6%. Again, strong revenue growth in China. So no signs of a slowdown in general, but situation, of course, difficult to predict. South Korea and Australia also showed strong growth. More difficult was Japan, only a slight growth here, so -- currency-wise. But on the reported basis, we saw a decrease due to the currency headwinds in Japan. But in general, a reduced growth dynamic in this country.Then let's have a look at the P&L line on Slide 9. The gross margin was 55%, stable. So some positive mix effects as well as cost-management measures, but of course, also currency effect on the other hand, which had an effect here. OpEx overall on a stable level, around about 42% of sales. The OpEx in terms of absolute numbers have increased due to expansion of our sales and marketing activities on the one hand and increase in R&D investments on the other hand.As already indicated during our last call, I would also like to mention that we decided to wind down the R&D project in the area of femtosecond cataract. Reasons, on the one hand, the market for this technology has collapsed; on the other side, also clinical study so far could not prove any significant clinical benefits. So that has led to the decision, final decision, to discontinue this project. So this will definitely provide us with certain relief in the R&D costs, but somehow limited.The EBIT of EUR 39 million is below prior year. But of course, in the prior year's number, we had the onetime effect of the sale of the noncore assets at the Ontario site included. Though, excluding that, of course, our EBIT margin would be higher. The EBIT margin of 32% compared to 15.8% last year, a slight increase if we correct for the -- this one-off gain from the disposal of the noncore assets.So -- and we, of course, I already mentioned currencies. The estimated negative effect of the currency headwinds on our EBIT margin is somewhere between 50 and 100 basis points.On the next slide, Slide #10, you see the adjusted EBIT margin, and the main effect is the noncore asset sale of last year. If you look at last year's numbers, our adjusted EBIT margin reached 13.5%; previous year, 13.4%. So at nearly the same level, only minor acquisition-related effect in this fiscal year, which are related to depreciations to purchase price allocations.And then last slide on the financials, Slide #11, the cash flow statement. The operating cash flow is slightly below previous year, it's with minus EUR 1.7 million. Slightly negative, partly due to inventory increases related to some product launches, which we already mentioned, that led also to some realignment in our supply chain; hence the decrease, also, of accounts payables related to payment to suppliers at the end of December as well as higher tax payments.Cash flow from investing activities on a relatively low level. Main effects in prior year, here, the -- to mention the sale of the noncore assets at the Ontario site and the cash flow from the financing activities is mainly influenced by the development of the short-term deposits at our group treasury account.
Yes. Thank you, Christian. Then I would like to continue with our highlights. As I said before, today, I'm going to talk about the expansion of our digital portfolio offering. So please turn to Slide #13. As we announced in August 2017, Carl Zeiss Meditec acquired the start-up company Veracity Innovations, LLC. That start-up is based in Temple, Texas in the U.S. The acquisition expands Carl Zeiss Meditec's offering in the field of digital solutions. Specifically, the company develops a software called Veracity. On the right-hand side of our slide, we have outlined what this product actually does. It allows cataract surgeons to manage the 4 necessary steps of cataract surgery. The first step is to clinically prepare and plan the surgical procedure with a patient. Then the second step is the logistics, which needs to be managed. So we are talking about ordering the IOL or making an appointment for the surgery and other logistic steps. Then the third step is to execute the surgery itself, where Veracity makes available all the necessary data in the OR. And then finally, the fourth step is to follow up on the outcome with the individual patient, but also to do some quality statistics.Veracity is designed to help surgeons improve their treatment outcomes, to reduce the risk of human error in the workflow, and also, to improve workflow efficiency. The software is cloud-based. It integrates seamlessly with the electronic medical records in the clinics or the ambulatory surgery center, and therefore, the software is relatively easy to install and also to maintain. Currently, we focus Veracity on the U.S. market only. Yes, along with our medical data analysis system, FORUM, we are now able to meet the growing needs of our customers in digital space, and we further build Carl Zeiss Meditec's innovation leadership in this field of ophthalmology. Veracity was launched successfully in November 2017 at the meeting of the AAO in New Orleans. We expect to roll out the product in the course of this fiscal year. I would like to point out that the goal of the product is not so much to generate revenue through licensing or the -- selling the software, it's rather to provide an infrastructure. And that infrastructure integrates best with our diagnostic and treatment devices, and thus, facilitates our traditional business.Yes, this brings me to the last agenda item of today's presentation, which is the outlook on Slide 15. Given the unchanged megatrends of an aging population, of urbanization and of improved health care availability in the rapidly developing economies in Asia and South America, the growth drivers for the medical market in general and for microsurgery and ophthalmology in particular are fully intact. We expect that the markets will continue to grow substantially, and obviously, Carl Zeiss Meditec will benefit from this growth. We will continue to follow our strategy, which has been successful over the past couple of years. The strategic priorities are listed on the left-hand side of our slide. We will continue to drive customer focus of our organization. We want to create an outstanding experience for our customers by focusing our offering on their needs and by providing excellent service. Our solutions are meant to improve patient outcomes and to achieve higher efficiency in the management of patients. Digital solutions, obviously, play a key role, as I just discussed. Carl Zeiss Meditec has been a leader in the digitalization of ophthalmology for some years, and we will continue to broaden our portfolio in this field.In the area of Refractive Laser surgery, we will certainly continue to grow the market with our minimally invasive technology, SMILE. We will continue to grow the share of recurring revenue in order to lower the dependency on the equipment sales.Our guidance for the fiscal year and the midterm is outlined on the right-hand side of the slide. We confirm our previous guidance. We want to grow at least as fast as our markets grow, and we want to reach an attractive EBIT margin in the range of 14% to 16%. We believe that this range gives us enough flexibility, which we need for investments into our business and also to deal with the volatility that currency fluctuations may create. I should mention that the range, 14% to 16%, is meant to be understood on adjusted basis, so we factor out acquisition-related and other special-effects.Yes, ladies and gentlemen, this concludes our prepared remarks. We are now happy to take your questions.
[Operator Instructions] We'll proceed to first question, it comes from Scott Bardo.
So first question, please, just relates to intraocular lens business. Just wondering if you could give us some comments as to how that business is tracking and also talk a little bit about AT LARA. How is that being received in the market? And how is that contributing to growth? Similar product-related question. It seems that you've had some early initial success with your CLARUS 500. Can you talk a little bit about that? Whether that's a bolus of demand or whether you expect this dynamic to continue, please? And last questions just relate to some P&L lines or some profitability impacts. I think, before, when you discussed the femtosecond cataract laser project, this was contributing around 100 basis points to additional R&D ratio in the past, and when you referred to some release, now that you've terminated that project. Do we think of a similar magnitude? Or we now reinvest those gains partly on EBIT margin? Can you -- I'm pleased to hear that you still maintain your guidance despite currency volatility, but can you give us some feeling as to what you expect the full year impact to EBIT margin will be at current FX rates, please?
Yes, maybe I'll start with the product questions, and Christian can comment on the femto cataract impact. So overall, we are quite happy with the development of our IOL business. As you know, we basically try to achieve 2 things. One is to grow our share of what we call the standard IOLs. And here, the LUCIA, actually, is the key product, and we actually make nice progress also in this field. That's very important to balance a little bit our premium IOL business. In the premium segment, and I would add LARA also to that field, we also see nice progress. LARA has been received really well. It certainly will still take some time to grow that further, but we are on a good way and we continue to be optimistic about our IOL portfolio. Today, it's really -- we are attracting all the different subsegments of the IOL market. Your second question was on CLARUS 500. Yes, that's a very promising development. I should mention, we are still at the beginning with that, but all the feedback we get is really very positive. So I would expect this positive trend to continue, and I really believe in the potential of the widefield fundus imaging market. Christian, maybe you can comment on femto cataract.
The P&L effect on the femtosecond cataract and the winding down of femtosecond cataract project. Yes, so we are now starting to wind it down. We definitely will also have some costs over the next couple of months to that -- related to that. And these are, of course -- there are 2 parts of it. There's -- on the one side, there are internal costs, and on the other side, there are costs that are related to partners to outsourced activities. The outsourced activities will go down now over time to 0. The internal resources, we will mostly, let's say, reallocate, also, internal resources also for other projects. So yes, there will be, say, a certain release, I'd say. We gave an indication of around about EUR 10 million, which we have invested in the last years on a year by year basis. So first quarter is already over, but if you assume that, we probably might see a release of roundabout EUR 5 million for this year. But on the other side, we, of course, also have other activities like the project that Ludwin has just presented, Veracity, for example. So investment in digital are now higher than in the past. So to expect that we will see a significant increase in the overall margin based on the stop of the femtosecond project is not very realistic. And on the other side, also to mention all the expenses which we had in the past, so we did not capitalize any of them. So we will also -- you will also not see any negative effect now from the decision to wind this project because everything has been expensed so far in the last year.
Very good. And just a question on what you expect the full year currency impact margin to be, please.
Well, if the currencies remain as they are, I would expect that we have similar effect also on the full year. The last quarter of last fiscal year, we've seen already some kind of an inverse trend. So -- but it's, of course, difficult to predict where the currencies will be at the end. But on the current level, I would assume that we will have somehow similar effect on the full year. Top line wise, a little bit slower perhaps; bottom line wise, in that magnitude, 50 to 100 basis points.
The next question comes from Falko Friedrichs of Deutsche Bank.
I would have three questions, please. And firstly, a follow-up to Scott's question on the CLARUS. Is there maybe some placement target or financial target for this imaging system this year? Then secondly, it would be great if you could give an update on the SMILE Refractive Laser ramp-up in the U.S. And then thirdly, given that the diagnostics business seems to have performed quite nicely in the U.S. in Q1, was this more of an outlier? Or is it fair to assume that the weakness we saw here last year is at least getting less, especially now with your new product introductions?
Okay. So first of all on CLARUS financial targets, please understand that we cannot breakdown our financial targets product by product because that has a big competitive significance. So I cannot comment on that. You can estimate the segment of the widefield fundus imaging by looking at our competitors. That's the market size, and certainly, we envisage to capture here a significant part of that market. Regarding SMILE in the U.S., we've started to sell SMILE in the U.S. We've placed some systems, and also sold some systems. Of course, the -- what we actually found is that the indication range, which currently has been approved by the FDA, is -- well, it's limited, it's not the full range. What we are lacking right now is the approval for astigmatism corrections. And so we expect the ramp-up to be relatively slow until we get that approval, and that will -- again, it's very uncertain. So -- but I would say in a year from now, maybe a bit longer, we will get that approval and then ramp-up will accelerate. But we are on our way, and the relatively slow ramp-up also gives us the opportunity to build up a sales and support field force, which is necessary to sustain this business. So we are on our way. And then diagnostics in the U.S., I -- we've done 2 things. The one is we've strengthened our product portfolio, and CLARUS is part of that; but also in the OCT range, I believe that we've made some good progress; same is true for HSA. So we have really a very competitive and more competitive product portfolio now than we had in the previous years. The second thing we did was to improve the setup of our sales and service organization in the U.S. And I believe that the growth which we see now is a result of both effects. And because of that, I would also believe that we will continue to see now some growth in the U.S., maybe not at that rate. I can only reiterate what we've said many times before, and you know that 3 months are just too short to over interpret and see trends, so we need to wait 1 or 2 more quarters. But nevertheless, I believe that the U.S. will continue to grow.
Great. If I could just squeeze in one short follow-up. Are you able to give us an update or comment on any potential M&A activity this year?
Well, if there was something to report, we -- there is a requirement to publish. And the other way around, right now, there's nothing I can -- could add to that. I can reaffirm that we are continuously working on that. We are screening opportunities and trying to build according to the strategy, which we announced a long time ago. So we are looking for opportunities to complete our product portfolio on the one hand and to strengthen our regional set up on the other hand. These are the 2 directions which we are looking. And of course, we will publish any developments in that field.
At the moment, there are no further questions. [Operator Instructions] We've received a follow-up question of Scott Bardo.
So Mr. Monz, you referred to some of the changes in organizational setup in North America on the -- and I just wondered if you could talk a little bit more as to what specific initiatives that you've implemented in the U.S. and how that changes versus the past. And also, perhaps if you could comment a little bit on the Asia-Pacific region, which has been a tremendous source of growth for you in recent history, that slowed a little bit this quarter. I'm just wondering if you can highlight whether that's something we should could be concerned about or whether this is just seasonal fluctuation.
Yes, the -- let's start with the U.S. In the U.S., we've done basically 2 things regarding our setup. The one is we've improved our service. And the service organization has 2 components again. The one component is field service. So we've hired more field service engineers, we've trained. People training is key to good service. And it takes a long time to get service people up to speed, so we've made really good progress on that. The other component of service is front support, right? So we really invested in our infrastructure, in people who answer the calls and so on. So service has been a big focus. We measure, actually, customer satisfaction, and we see that the customer satisfaction has improved significantly in the U.S. as a result of these investments into service. So I'm -- this is the reason why I'm quite sure that the service investments actually were successful or has been successful. Then the other area is the setup of our sales organization, and here, it's a couple of things. The one is we have completed our setup in terms of coverage. So we now have a better coverage than we had in the past. And we've targeted our salespeople on the 2 large segments of the market, the one is the optometry segment and the other is the medical doctor, the ophthalmologist segment. So yes, very comprehensive initiatives. Very comprehensive, and it took -- because of that, it took quite a while to get to this point. Yes, then APAC. I believe it's -- as you said, this is just quarterly fluctuations. We are now comparing first quarter of last year with first quarter of this year, so you should not over interpret. We see that the dynamics in the markets is unchanged. So there is no slowdown that we could observe, and that is why I'm optimistic, here, also going forward. Of course, we have to watch how things develop when we add more quarters. But right now, I believe unchanged situation.
Just to add to that, so this quarterly perspective, the first quarter in Asia-Pacific typically is the weakest quarter. And in the last fiscal year, here, we also have some kind of a base affect here for Asia-Pacific. Because in the last fiscal year, we went into last fiscal year with a high order backlog, so we had to catch up with deliveries in the first quarter last fiscal year. And if you look at our numbers of Q1 last year, we were growing by nearly 30% in Asia-Pacific, so this was an extraordinary strong quarter there. So this explains a little bit. But from the market itself, from the demands in the markets, we do not see a change in the pattern.
Very good. And perhaps just one last follow-up then from me, please. I mean, obviously, some encouraging dynamics in Microsurgery, am I correct to assume that almost all of this growth is being driven by the KINEVO 900? And also, we're starting to see some, actually, some reasonable margin progression year-over-year in this division, which is perhaps a bit of a surprise to me given the ramp-up effects of the new launch, so just wondered if that's something we should also continue to expect going forward with the rollout of your new product.
You're right, it's the KINEVO, but it's also the EXTARO. So both the new products contribute to the growth. So we are still in this phase-in, phase-out period regarding the neuro platform, as in some countries, there's not the approval for the new platform yet there. But it's -- yes, it's an effect of this, I'd say, new models which are in the market now, this margin development that we've seen so far. And there should be, I'd say -- but it's -- again, it's a little bit early, it's 1 quarter now. And we are at a high level in Microsurgery. Our goal is to, I'd say, defend this high level of profitability, and I think we are on a good way there.
We've received another follow-up question of Falko Friedrichs of Deutsche Bank.
I would have two. Firstly, given that the KINEVO seems to be ramping up quite nicely, could you share what you are seeing in terms of the ramp down of the PENTERO? Is that all in line with your expectations? And then secondly, what is driving the good growth in your more established European markets, such as Germany and France in Europe at the moment?
Yes, I'll start with the KINEVO. You're right that midterm the KINEVO will replace the PENTERO, at least in the high end, right? However, that's a slow process, and the reason is the approvals for the product. So when we introduce a new product, for example, to China, it takes us typically 2 years to get the approval. In other words, yes, we already see some good effect of the KINEVO, but that comes from Europe, it comes from the U.S, Asia is behind, so that transition is slow. And we knew that, right? And this is why we've prepared for this, but -- so we must be a little bit patient to ramp down the PENTERO and replace it with KINEVO.
Actually, I'll take the one regarding EMEA growth in EMEA. The drivers for the growth in EMEA are the same as in the other regions. Perhaps there's 1 element which is not as a strong in EMEA as, for example, in Asia-Pacific, this is the Refractive Laser business. But other than that, we also see strong demand for Microsurgery now for the new products, we also see good development in Surgical Ophthalmology with our intraocular lenses for example and for our diagnostic portfolio as well.
And we grow faster than markets. In other words, we gained market share.
As there are no further questions at the moment, I would hand back to you, gentlemen.
Yes, ladies and gentlemen, thank you very much for joining us for our today's analyst conference. We're looking forward to talking to you again after the second quarter. Thank you very much, and have a nice day.
Thanks, bye-bye.
Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.