Biomet Inc Q Earnings Conference Call January 6, 2015

Transcription

1 Biomet Inc Q Earnings Conference Call January 6, 2015 O: Operator/coordinator J: Jeffrey R. Binder, CEO and President D: Daniel P. Florin, Senior Vice President and Chief Financial Officer O: Good afternoon. My name is Bridget, and I will be your conference operator today. At this time, I would like to welcome everyone to Biomet FY 2015 Q2 conference call. All lines have been placed on mute to prevent any background noise. If you should need assistance during the call please press * then 0 and an operator will come back online to assist you. Some statements made during this call may be considered forward-looking statements. The company's most recent press release as well as the 10-K for fiscal year 2014 and a 10-Q for Q1 of fiscal year 2014 identify certain risk factors that could cause Biomet's actual results to differ materially from those projected in forward-looking statements made during the call. The press release, the 10-K, and the 10-Q are accessible on Biomet's website at or by request. Biomet undertakes no obligation to publicly update forward-looking statements, whether as a result of new information, future events, or otherwise. Unless stated otherwise, sales rate during this call will be quoted at constant currency which is a non-gaap financial measure, as well include certain non-gaap financial measure that align with how Biomet s management views the company s performance. Detailed reconciliations of reports to adjusted results and certain other non-gaap financial measures were included in today s press release which is posted on Biomet s website. Reconciliations of any remaining non-gaap financial measures are also posted on the company s website. And now, I would now like to turn the call over to Mr. Jeff Binder. Mr. Binder, you may begin your conference. J: Good afternoon and welcome to Biomet s fiscal Q2 call for the 3 months ended November 30, On today s call, we will not be commenting on the pending transaction with Zimmer. Any questions regarding the process and/or status of the pending transaction should be directed to Zimmer. We will use our traditional format for the call with the exception of Q&A which will be excluded once again in this quarter. I will begin with the fiscal Q2 sales revenue. Dan Florin will provide the overview of our financial performance, and I will wrap up the call with a few summary comments. Our consolidated net sales grew 4% to $844 million dollars worldwide during fiscal Q2. Net sales in the US increased 4% to $512 million while net sales in Europe increased 1% to $206 million. Net sales in our international region increased 10% to $125 million during the quarter. Our international region primarily includes Canada, Latin America, and the Asia-Pacific region. During the fiscal Q2 of 2015, we recorded approximately the same number of selling days compared to the prior year period. Revenue related to the acquisition of Lanx provided benefit of approximately 100 to 150 basis points to our consolidated net sales rate. As we will discuss later, Hip and Knee sales in the quarter were flat in the United States. We attribute our deceleration in sales to a combination of very strong year-on-year growth comparisons, remember that the calendar of Q4 of 2014 was one of extraordinary growth for Biomet in the industry as well as some modest sales force attrition due to the pendency of the Biomet Zimmer transaction. I will now start our sales review for Knees. Knee sales increased 2% to $264 million worldwide and were flat in the United States during the fiscal Q2. We were up against very strong competition of 8% both worldwide and in the US in the prior year period. Sales growth for Knees was attributable to increased demand for several key systems including the Oxford Partial knee, the Van Guard XP Total Knee, the Van Guard SSK 360 Revision System, and

2 the OSS Orthopedic Salvage System. During the fiscal Q2, we launched the XPA Bicruciate Preserving Arthroplasty Category at the DKOU conference held in Germany and at the annual AAKHS meeting in the United States. This unique category of arthroplasty represents to our commitment to ACL preservation by offering the industry bicruciate preserving options for both partial knee arthroplasty and total knee arthroplasty with the Oxford Partial Knee and the Van Guard XP total Knee. Approximately 300 healthcare professionals worldwide received Oxford training during the fiscal Q2. We continued to be very happy with Oxford s resurgence which we attribute to a combination of implant and instrument upgrades, promotion of our strong clinical and patient satisfaction data, and our warranty program. During the quarter, 120 additional surgeons completed training for our Van Guard XP Bicruciate Preserving Total Knee. Over 550 Van Guard XP Total Knees were implanted during the fiscal Q2 for a total of 1650 Van Guard XP Knees implanted to date in nine countries. We also began supporting local directed patient advertising during the quarter for the Van Guard XP Total Knee. This campaign was launched in several spot markets during the quarter. Additional directed patient ads were scheduled to run during the fiscal Q3. Next, we will review our Hip performance. Hip sales increased 3% during the quarter to $168 million worldwide and were flat in the US. Key contributors to our fiscal Q2 Hip sales with the Taperloc family of implants including the Taperloc Microplasty, a stem designed to facilitate minimally invasive approaches such as the direct anterior approach. The G7 Multi Bearing Acetabular System and the ARCOS revision stem. Additionally, the GTS Hip Stem continued to receive strong market adoption in EMEA and other international regions. The GTS Hip is not available in the United States. We continued to see strong sales of the G7 Multi Bearing Acetabular System during the quarter. Designed to improve OR efficiency with unique color coded implants and instruments, the G7 family of products continues to grow. During the fiscal Q2, we launched the G7 Bispherical Shell in Europe. The G7 by spherical shell is differentiated among shells of this design philosophy in that it offers either a highly cross-link polyethylene or a surrounding bearing in a single thin titanium acetabular component. The G7 Bispherical Shell is not available in the United States. During fiscal Q2 we received a CE mark for the G7 OsseoTi limited and multi hole acetabular shells. These implants are created via proprietary additive manufacturing process that generates a porous material design with a structure that mimics human cancellous bone. OsseoTi porous metal technology allows us to build a fully integrated part with solid and porous regions while maintaining consistent porosity and strength to facilitate tissue and growth and implant stability. In December, surgeons in Italy implanted the first G7 OsseoTi components. We also received FDA clearance in December for the G7 OsseoTi Limited and multi hole acetabular shells. A limited release of these products is currently underway and our full commercial launch is planned for later this fiscal year. The G7 platform now features three unique shell designs with fixation options to suit a variety of surgeon philosophies. All versions of the G7 feature are patent pending color coding technology and efficient instrument platform. Later this calendar year, we expect to announce further extensions to the G7 brands including more shell variants and bearing options. Now we will provide results for SET which includes Sports, Extremities, and Trauma. Sales of SET products increased 2% during the fiscal Q2 to $161 million worldwide with growth of 3% in the United States. Within Sports Medicine, sales growth during the quarter was driven primarily by increased market penetration of our Juggerknot and ToggleLoc in our EMEA and international regions. The rollout of our JuggerKnotless all suture labral repair system continued during Q2 in the United States. We expect to launch the JuggerKnotless technology in the European markets during the fiscal Q3. Within Extremities, I am very pleased to announce our 28 th consecutive quarter of double digit Extremity sales growth. It is an impressive record that is attributable to the strong brand reputation that we have built with our Comprehensive Shoulder System. The Comprehensive portfolio includes anatomic, reverse fracture, and revision components with a broader ray of options including wide range

3 and sizes, customizable offset, and the potential for enhanced fixation. Additionally, we continued to see strong market adoption of our signature patient specific Glenoid Guide during the fiscal Q2. The guides are designed from the patient s CT scan and are used to assist the surgeon with glenoid implant positioning for either an anatomic or reverse shoulder system. We now produced and shipped over 1200 signature patient specific Glenoid Guides to the various markets throughout the world. During the fiscal Q3, we expect to launch the Signature Glenoid Guides in Japan. We also plan to begin beta testing a new generation of software during the fiscal Q3 and facilitate more effective 3D shoulder planning and case review and include auto segmentation technology that is expected to increase the speed of the case design process. This new platform has been designed to offer the surgeon the ability to review and make any necessary adjustments to the case on an Ipad. Finally, to complete our SET category, within Trauma during the fiscal Q2 we continue to see strong market adoption of the DVR Crosslock Plating System and the epak single use delivery system, which are used to treat distal radius fracture. The epak system is a presterilized kit that includes all of the fixation components and instruments needed for the procedure. We plan to launch the epak system in Japan during the fiscal Q3. Within the Lower Extremities subsegment, we continued to receive strong demands during the quarter for the AFFIXUS Hip Fracture Nail System. The AFFIXUS nails are designed to treat a wide range of hip fractures by combining the principals of a compression hip screw with the biomechanical advantages of an intramedullary nail. Within Foot and Ankle, during fiscal Q2, we continued a limited commercial launch of our ALPS. or ALPS Calcaneal Plating System which was initiated during fiscal Q1. We expect the launch of this system to continue throughout the second half of the fiscal year We will now take a look at our performance in our Spine, Bone Healing, and Microfixation businesses. Sales of our Spine, Bone Healing, and Microfixation products grew 19% during fiscal Q2 to $105 million worldwide with a growth of 18% in the United States. Within Spine, sales were driven by cross selling synergies during the quarter as a result of continued success with the integration process following the acquisition of Lanx as a reminder of the Lanx acquisition anniversary during the fiscal Q2. During the quarter, we initiated a wide release of the Alta system, a spherical interbody fusion device that includes a peak intervertebral spacer, titanium plate, and screws. The Alta system is designed to opt for less invasive surgical option with comprehensive plate options giving surgeons the flexibility to accommodate varying anatomic requirements in a simplified procedure. Also during the quarter, the first procedure was completed using the pre-sterilized single use MaxAn One Anterior Cervical System. The single use system is designed to help reduce hospital and ambulatory surgery center costs. During fiscal Q2, we saw healthy sales growth in our Thoracolumbar category principally from increased adoption of our Polaris Degenerative and Deformity Systems as well as the Timberline Lateral Fusion System and the Timberline MPF Modular Plate Fixation Lateral Fusion System. The Timberline System is clearly differentiated by its innovative low profile and radiolucent modular retractor. The recently launched Timberline MPF System offers the first modular anchored cage for lateral approach. Additionally, the first procedure was completed using the new Timberline MPF Hyperlordotic Lateral Fusion System, a modular plating and hyperlordotic spacer system designed to help facilitate acute sagittal correction via the lateral approach when used in conjunction with supplemental fixation. The Timberline MPF Hyperlordotic System is the first of its kind formally cleared by the FDA for use in a lateral approach. In the osteobiologics category, the Cellentra Advanced Allograft continued to receive strong market adoption during the quarter. This matrix supplies to the three essential properties necessary for robust bone formation, osteogenic, osteoinductive, and osteoconductive. Within Microfixation, our Microfixation sales remain strong principally due to the continued market demand for out flagship titanium plating systems, HTR-PEKK implants and thoracic products including the SternaLock Blu sternal closure system and Pectus Bar. HTR-PEKK is the first laser centered polymer implant cleared by FDA and it is currently undergoing testing to the Japanese with an anticipated clearance expected there during the first half of calender 2015.

4 Next, we will transition to Dental. Dental sales decreased 2% to $68 million worldwide during the quarter. In the US, dental sales increased 1% during the quarter. Our T3 implant continued to gain market acceptance during the quarter and we received approvals for the T3 external hex and low profiles abutments in Japan. The T3 implant incorporates a contemporary hybrid surface with seal integrity and integrated platform switching. Sales of cement, biologics, and other products grew 4% during the fiscal Q2 to $59 million worldwide with 7% growth in the United States. Sales of Biologics contributed to growth in this category during the quarter, growing at a double-digit rate. Cerament injectable Bone Void Filler and the BioCUE blood and bone marrow aspiration concentration system continued to receive strong market demand during the quarter. Also, StaGraft Demineralized Bone Matrix and DermaSpan Acellular Dermal Matrix continued to gain market acceptance. We continued to seek increased global market acceptance of our StageOne cement shoulder spacer molds during the quarter. We launched the StageOne shoulder molds in Australia during the quarter and we plan to launch this product into the Canadian market during our fiscal Q3. That wraps up our sales review for the quarter. Next, Dan Florin will provide the financial review. Then, I will conclude the call with a few summary comments. D: Thank you Jeff. I will briefly provide a review of the financial results for fiscal Q2 ended November 30, 2014, starting with our income statement followed by a review of our balance sheet and cash flow. As Jeff mentioned our net sales totalled $844 million during the Q2 of fiscal 2015, which was a 2.2% improvement over the prior-year period on a reported basis and a 4.2% improvement excluding the impact of foreign currency. As a reminder we closed the Lanx acquisition on November 1 st, 2013, and our adjusted our consolidated growth rate in the Q2, included a benefit of approximately 100 to 150 basis points from the acquisition. Foreign currency fluctuations negatively impacted net sales in the quarter by $16 million or 2%. European sales were negatively affected by foreign currency translation by $9 million or 4.1% primarily due to the Euro weakening against the US Dollar when compared to the same period in the prior year. Our international sales were negatively affected by $7 million or 6.3% during the quarter largely due to the weakening of the nearly all currencies against the US Dollar with the greatest impact related to translation of the Yen. On a consolidated basis, we had approximately the same number of selling days in the quarter compared to the prior-year quarter. Turning to special items, during the Q2 we recorded pre-tax special items of $72 million which included approximately $78 million of non-cash amortization and depreciation, primarily related to purchase accounting, and non purchase accounting special items which totaled a net credit of approximately $6 million dollars. The non purchase accounting special items were positively impacted in the quarter by $75 million due to favorable resolutions with certain insurance carriers related to our metal-on-metal litigation. Recognition of this resolution contributed to a total credit of $18 million in the special item category of product liability and other litigation reserves settlement fees and recoveries. In addition, we incurred $8.3 million of cost associated with the Lanx acquisition and the Zimmer merger during the quarter. We have provided a detailed schedule of special items in today s release as well as the schedule of special items by income statement line items. As I move on to the rest of the income statement I will focus on adjusted amount that exclude these special items. Adjusted gross profit as a percentage of net sales was 73.6% during the Q2 of fiscal year 2015 which compares to 73.3% in the same period last year. The increase in adjusted gross profit as a percentage of net sales reflects primarily the impact of lower other cost of sales items including lower requirements for inventory reserves and royalties and improved productivity in plant network. These items were partially offset by lower average selling prices and unfavorable foreign currency translation due primarily to the effect of the weakening Yen on sales. Our adjusted SG&A expense was approximately $335 million or 39.7% of net sales which was flat as a percentage of net sales to the same period last year. Additional marketing expenses to support our Vanguard XP knee and other new product launches were offset by lower expenses in our direct-to-consumer marketing campaign. Our adjusted R&D expense was

5 approximately at $43 million or 5% of net sales which was flat as a percentage of net sales to our fiscal Q2 of last year. Our adjusted EBITDA during the Q2 totaled approximately $295 million or 34.9% of net sales which compares to $285 million or 34.6% of net sales in the prior-year quarter. Adjusted interest expense decreased during our fiscal Q2 to approximately $79 million which compares to $84 million for the Q2 of last year, primarily due to lower average interest rates on our term loan. Our adjusted net income increased 13.2% to approximately $134 million or 15.8% of net sales compared to $118 million or 14.3% of net sales in the prior-year period. Turning to the balance sheet, our accounts receivable totaled $565 million compared to $577 million at May 31 st, This represents a worldwide DSO of 59.3 days which represent a 3.4-day decrease compared to May 31 st, 2014 and more than a 2-day improvement from the same period in the prior year. Our net inventory at November 30 th came in at $722 million compared to $693 million on May 31 st Our adjusted inventory turns declined to 1.23 turns compared to 1.31 turns at May 31 st, The increase in inventory during the quarter was primarily driven by new product builds. Looking at cash flow, our reported cash flow from operations totaled $160 million for our fiscal Q2 compared to $120 million for the three months ended November 30 th, This increase is attributable to the timing of tax payments and tax refunds combined with the lower cash interest payments. Capital expenditures during the Q2 of fiscal 2015 totaled $71 million or 8.5% of net sales and that includes $49 million of instruments as 5.8% of net sales which were primarily associated with the launch of new products including our Vanguard XP knee system as well as additional instrument investment tied to our growth strategy in spine and certain emerging markets. Total CAPEX in the prior period was $52 million or 6.3% of net sales. Our free cash flow for the quarter came in at $89 million compared to $68 million in the prior-year quarter. Turning to our debt position, as of November 30 th, 2014, our reported gross debt was $5,715 million and our cash and cash equivalent totaled $277 million resulting in a net debt of $5,438 million compared to $5,473 million at May 31 st, 2014, a decrease of $35 million. Lastly, we finished our fiscal Q2 with a senior secured leverage ratio of 2.46 times our LTM adjusted EBITDA and a total net debt leverage ratio of 4.81 times LTM adjusted EBITDA at November 30 th, And with that I will turn the call back to Jeff! J: Thanks Dan. To summarize although we reported a softer quarter for US hip and knee sales, we are particularly pleased with the mid single digit growth we recorded for hip and knee sales outside the United States. Of special note, this was our fourth consecutive quarter of strong knee sales growth in Europe and it is a recognition we believe of the positive long term clinical results of our Vanguard Complete Knee system. Also, the Oxford Partial Knee which has been available in Europe for more than 35 years continued to report very strong growth there during the fiscal Q2. Once again the key highlight for our SET business was yet another greater quarter of extremity sales growth. Within our spine and bone healing division, the integration of Lanx provided additional cross-selling synergies during the quarter and our microfixation business continued to perform well with a sales growth that remained strong. And finally our biologics franchise has shown considerable improvement in sales performance over the past year and was the main contributor to our sales growth in our cement biologics and other products category during the quarter. We believe there is a lot of potential within biologics in terms of both current and future applications. As this may be our last quarterly call I would like to share a few words of reflection. It has been a great honor to lead this extraordinary company during the past eight years. I appreciate the wisdom and guidance that Dave Miller, our founder and long-time CEO has provided as a director. I am extremely proud of our Biomet team members and the accomplishment the team has achieved and I am humbled by the confidence they have put in me as their CEO. I appreciate our investors and their trust in our

6 team and I have enjoyed working with the analysts that have covered Biomet and participated in these calls. And lastly, I wish Dan Florin who has done an outstanding job as our chief financial officer. All the best as he prepares to transition into the CFO role for the new Zimmer Biomet. While we performed extraordinarily well for 37 years as an independent company, I believe that the combination with Zimmer will form a very strong entity in the medical device market. I also believe that the combined scale of the new organization will extend the reach and influence needed to deliver products and services to our customers that they treat patients throughout the world. Thanks to each of you for joining our call. O: Thank you, this does conclude today s conference call. You may now disconnect your line. Copyright policy: All transcripts on this site are the copyright of BioMedGPS. THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES BIOMEDGPS ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS. If you have any additional questions about our online transcripts, please contact us at: info@biomedgps.com. Thank you!