Carl Zeiss Meditec AG

Sebastian Frericks - Director of Investor Relations Ludwin Monz - President and Chief Executive Officer Christian Mueller - Chief Financial Officer

Richard Latz - HSBC Oliver Reinberg - Kepler Cheuvreux Veronika Dubajova - Goldman Sachs

Good morning, ladies and gentlemen, and thanks for joining us today. Welcome to the nine months 2015/2016 analyst call of Carl Zeiss Meditec.

My name is Sebastian Frericks, and I’m Director of Investor Relations. And with me as usual are our President and CEO Ludwin Monz; and our CFO Christian Mueller.

I would like to hand over to our Board of Management to give you a short introduction through our quarterly financials of the nine months of 2015/2016 and afterwards we are open to take your questions.

Yes, thank you Sebastian. This is Ludwin Monz.

I would like to welcome you all for analyst conference on the nine months report of Carl Zeiss Meditec. On slide number 3, you see the trend of today’s call.

I will start to give you an overview of the Q3 results then my colleague Christian Mueller will give you more detail on the financials in the next section of the presentation. And afterwards I would like to provide you some background on the personnel and structural change which we announced recently.

And finally I will talk about our outlook for the fiscal year. Okay, let’s start with the overview on slide number 4; Carl Zeiss Meditec was able to grow substantially both in terms of sales and profitability in the period compared to last fiscal year.

Our revenues reached about €800 million which is almost 7% above prior year. As we reported in our last call, our growth was supported by positive currency effects in the first half of the year.

During the third quarter, currency effects were minimal but of course on a year-to-date basis there is a still a positive currency effect. Top-line growth would have been 4.5% at constant currency.

We will hear about the growth contributors from Christian in detail, I just would like to mention that SBU surgical ophthalmology and the reach in APAC contributed most to our growth. The EBIT increased by 23% to €111 million which corresponds to an EBIT margin of 13.8%.

Last year EBIT margin was 12.0% at this point in time, the positive trend in EBIT was supported by favorable product mix as well as the results of strict cost containment measures. Adjusted EBIT margin was 14.2%, a 1.5% increase over the previous year.

Last year numbers did contain some special effects, Christian will comment on this later. Our net income reached €69 million which corresponds to earnings per share of €0.83.

The increase versus by a year was driven by the EBIT development which I mentioned, and similarly to last year we had a negative hedging result which was caused by the relative strength of the Japanese Yen versus the Euro. So, overall the performance developed nicely.

My colleague Christian will now discuss these results in more detail and will give you some more background.

Yes, good morning. And welcome also from my side.

And as usual, I’m now going to give you a more detailed overview about our financials. And now on slide number 6, starting with the performance of each of our three strategic business units and starting with ophthalmic systems.

For ophthalmic systems, revenues came in with €305 million. So, compared to prior year, this is a growth reported of 7.5% so quite a remarkable growth rate there.

Also to mention that we had benefits from the currency in ophthalmic systems on a constant currency basis, the growth was about 5%. So, while also after nine months the diagnostic segment, the area where we have been facing high competitive pressure now for some time, so this segment continues to grow.

But of course growth there is only moderately. On the other hand, the refractive laser business, the second business within this business unit, continues with its strong performance from the past, so here especially our SMILE Technology continues to develop very nicely.

On the cost side, we continue to see positive effect there from our cost measures that we’ve initiated in ophthalmic systems previous year, which finally led to an EBIT margin of 7%. So, further improvements there.

We were supported here by our favorable product mix and also the, let’s say ongoing effects from our cost reductions I mentioned before so of course positive effects here. Also to mention that ophthalmic systems top-line let’s say comparison basis of last year was quite a tough one.

So, we’ve seen 25% growth in Q3 2015 to be seen or to be taken into consideration. Moving on to slide number 7, surgical ophthalmology.

Surgical ophthalmology again delivered a strong performance, growth of 8.5%, on a constant currency basis around about 7% growth. Absolute revenue number amounted to €281 million.

So, again in this business unit we clearly outperformed the market especially here due to our strong growth in the IOLs, where we’ve seen market share gains again in both areas in the standard as well as the premium IOL segment. The EBIT margin in surgical ophthalmology was around 15%, so significantly above prior year’s level.

Here supported by positive volume effect on the one hand and of course higher operational leverage that could be achieved in the first nine months of this fiscal year. The last, the third business unit, microsurgery, slide number 8.

The microsurgery business unit delivered a performance top-line wise comparable to last year’s business with revenues of around about €230 million. So, this is a revenue increase of 3% reported also some tailwinds here from the currency side.

So, on a like-for-like basis the growth is at 0.6%. Here also to mention against a particularly tough comparator in Q3 2015, where we had around about 9%, growth in that year, so the comparison basis here also tough.

The EBIT margin about 20% so remains on a high level, but on a year-over-year basis, down by around 1% mainly related to higher OpEx especially in the R&D field where we’ve seen increased investment in R&D in this fiscal year. So, let’s take now a look at the regional split on slide number 9.

Our regional split continues to be well-balanced across the three regions, so all-in-all, all regions represent relatively similar shares. Let’s start with the Americas, Americas we had sales of €257 million which is an increase of around about 1% on a reported basis.

On a constant currency basis a slight decrease of around about 3%. So, the currency effect that we’ve seen mainly comes from the U.S.

dollar. And here we have of course the two regions, the U.S.

on the one side and mainly South America on the other side, the U.S. increase by around about 3% and on a constant currency basis nearly flat due to the let’s say here we continuously see intense competitive environment here in the U.S.

On the other side, Latin America, we’ve seen a slight decrease there and this decrease mainly comes from Brazil, where we see let’s say more difficult economical situations in Brazil and this also - it’s reflected in the numbers here. On the other hand, we see quite-good let’s say strong development for example in Mexico.

In Europe, Middle-East Africa, we’ve seen a stable development here so, an increase of 0.2%, on a constant currency basis 0.6%. Strong base here in this region also from let’s say comparison year, so, in 2014/2015 had very strong growth especially here in Q3.

The picture EMEA in the core markets in Central Europe is positive, very positive to some extent or key markets like Germany, France and U.K. continue to grow with considerable growth rates.

The situation especially in Middle-East is more challenging given all the political and economic turbulences in these regions. Here we’ve seen quite significant decrease there and also a decrease in some countries in Southern Europe.

Asia Pacific, the region with the strongest growth rates so 20% growth. Also some tailwind from the currency here, so on a constant currency basis the growth rate is 17%.

This region remains to be the region with the highest growth contribution. And again, we’ve seen strong growth in China and also strong growth contribution from Southeast Asia from South Korea.

So these countries performed pretty strong. Japan, more let’s say flat development here on a constant currency basis, even a slight decrease.

So we’ve seen some signs of saturation in the Japanese market, with let’s say reduced growth dynamics compared to the prior years. Let’s now have a look at the major P&L line items, on slide number 10.

Gross margin with 52.9%, so an increase of roughly 0.5 percentage point. So mix effect that played a role here as well as of course cost management measures, slight positive currency effect also on the gross margin.

On the other side, the OpEx development that was of course present by the currency effect some extent, but in spite of that the OpEx ratio was slightly reduced which is clearly a result of our focus on managing our costs very carefully leading finally to an EBIT of around about €111 million. So the EBIT margin improved, the EBIT margin is now at a level of 13.8%, previous year was 12% so, 1.8% improvement there.

So, good trend in the EBIT margin which was of course supported as I mentioned before by our OpEx containment measures. Then, as you know since the beginning of this year we have introduced the reporting of adjusted EBIT margin.

The adjusted EBIT margin reached a level of 14.2%, so previous year was 12.7%. So, more or less the same picture as the unadjusted picture.

The overall level of adjustments is relatively low. The previous year if you see the numbers here, previous year contains some restructuring and M&A effects mainly related to the Aaren scientific acquisition and the let’s say reorganizational measures we took in the diagnostic business.

Then, a short look on the slide 12, at the cash flow statement. Here we reported positive operating cash flow, €86 million compared to the €10 million of previous year, so significant improvement here.

This comes on the one side from the positive operating profit of course, the positive EBIT and on the other side, mainly from the working capital development especially improvements that we’ve seen from the accounts receivable development. Also to mention here shifts between cash flow from investing and financing activities.

This is related to €110 million fixed term deposit which expired in Q1 2015/2016 and has not been A-standard so far. So, then on slide 13, finally let’s have a look at some of our key financial ratios.

The equity ratio here was 67% is slightly below prior year, still at a very high level. Trade receivables and inventory development in relation to revenues all-in-all relatively stable development here.

Since the beginning of this year, the increase that we see in the inventory turnover more or less offset by the improvements that we’ve seen by the DSO figure here. On the other side, the net cash position here of €319 million, so an increase here, significant increase here.

Shows a healthy development compared to the start of the business year. And this let’s say positive cash flow development also to be considered we have the dividend outflow in April of around about €30 million.

So, this was more than compensated here. Net working capital €250 million here, minor decrease here.

So, all-in-all, again I think we can say we delivered another convincing performance in Q3. And the very solid overall financial situation of the company remains more or less unchanged.

Having said that I now hand it back to Ludwin again.

Yes, thank you Christian for this discussion of the financials. I would now like to talk little bit about the changes in our organizational structure and also the changes which we announced a few weeks ago.

You find some information on this on slide number 15. As you know, Carl Zeiss Meditec operates in two distinct market segments, in microsurgery and ophthalmology.

While customers in the microsurgery market are neurosurgeons, ENT surgeons, dentists and others, the customer base in ophthalmology is more homogenous. In ophthalmology we serve ophthalmologists and in some countries also optometrists.

It has been our strategy for many years to complete our product portfolio in ophthalmology. Today, we do not have only a complete range of diagnostic products and a market-leading portfolio in refractive surgery, we also have a systemically developed and offering for surgical ophthalmology comprising of both equipment and IOLs.

The structure of our company grew organically. Originally there was only the diagnostics business in the SBU ophthalmic systems.

Then we added refractive lasers to this unit and then later we acquired IOL Tech and added the SBU surgical ophthalmology so really organically grown structure. Now that our product portfolio in ophthalmology is pretty complete, it is time to ensure a consistent deliver of our value proposition to our customers.

And this is the reason why we have combined the two ophthalmology SBUs, OPH and SUR into a single new SBU ophthalmology OPT is the abbreviation. This measure has managed to create market focus and consistent marketing and much better customer service.

Obviously it is keen to have a strong leader for this SBU. As we announced we have recruited Jim Mazzo to run this SBU.

Jim has been in ophthalmology industry for more than 35 years. He led AMO as the CEO for many years and is probably one of the best experts of the ophthalmology industry.

We are excited about this change and believe that we will - that it will help us to further grow the ophthalmology business. I would like to mention that as a consequence of the change of our management structure, we need to adapt our reported structure accordingly.

Beginning next fiscal year we will report the results of two SBUs, microsurgery and ophthalmology. In other words, the old SBU OPH and SUR will be combined in one which we call OPT.

Okay, this brings me to the last agenda item of today’s presentation, the outlook. That’s given on slide 18.

The growth drivers for the medical market in general in the microsurgery and ophthalmology markets in particular are intact. Carl Zeiss Meditec will continue to follow the strategy which has been successful for the last year.

We have listed some important elements of this strategy here on our slide. We will further drive recurring revenue generation with both our IOL and refractive laser business, particularly in ophthalmic diagnostic business but also in other fields we will further build on our strategy and data management.

Operationally, we will continue to improve our profitability in ophthalmic diagnostics. And finally, we will continue to lead the neuro/ENT visualization market with application-driven innovations.

For fiscal year 2015/2016 we confirm our guidance for the last - the guidance of our last quarterly report. For the full-year we expect to reach consolidated revenue between €1,080 million and €1,120 million.

And an EBIT margin in the range of 13% to 15%. Our mid-term goals are to grow at least as fast as our markets and to keep the EBIT margin in the range of 13% to 15% which we consider to be an attractive range given the continued high investments in R&D.

Okay, ladies and gentlemen, this concludes our presentation. And now we are happy to answer your questions.

Yes, hi, thanks for taking my question. I've got two.

First one is could you provide an update on the approval process of your refractive laser in the U.S., or maybe provide a more detailed timeline of the approval process? And second is could you maybe provide some sort of indication how much you plan to spend in terms of investment or ramp up of sales force in the U.S., if you would get, indeed, an approval?

And how would you face these kinds of investments, actually? Should we assume a bigger spending early on, or some sort of phasing?

Thanks.

Yes, thank you for your question. The timeline of the approval of our refractive laser VisuMax in the U.S.

is very difficult to predict because it’s simply not in our hands. So, what we have done, as you know, we’ve conducted a clinical trial in the U.S.

we’ve handed in all the documentation through the FDA. And we are now expecting the FDA basically to give us further feedback and they will determine the timeline.

So, the only thing we can do to somehow predict that timeline is to compare our approval process with similar approval processes, there is no other way, and by doing that, we come to the conclusion that it’s probably realistic to expect an approval for our refractive laser in the U.S. in the first half of 2017.

But again, this is uncertain we simply do not know it’s not in our hands. That’s what I’m trying to say.

Regarding your second question on the sales force, we - certainly the build-up of the sales force for the refractive laser depends on when we get the approval. It’s not only the sales force.

We also need to provide certain support functions. So, application support, technical support, so it’s really an organization that needs to be built up and we’ve already started to some extent.

But the most - our significant build up will then happen once we’ve received the approval, we’ll go step-by-step. And of course the moment we get the approval, there will be also some cost impact from that build-up of sales and support.

And could you provide there any indications, what kind of amount should we assume here?

Well, this is I’d say, as we mentioned, it will be a step-wise approach, as soon as the visibility of the approval is clear. But it’s let’s say it will be significant amount let’s say, but not that significant I would guess something between €3 million to €5 million in that range on a running basis, on a yearly basis.

But again, here we should also see of course some return pretty soon. So, for the modeling I would not see this as a major impact here.

All right. Thank you.

Hi, good morning. Three questions from me.

Firstly can you just confirm that, so you talk about incremental costs for the launch of the SMILE of only €3 million to €5 million annualized, did I get that correct? Secondly, considering the change in the distribution setup on the sales side, how do you think about a potential disruption on builds here, and now a new head, you may hire two new heads of sales.

Do you think there's any kind of changes; short-term, there may be a slippage in terms of sales performance? And thirdly, I think you talked about an increase of R&D investment in microsurgery, you talked about some kind of new application; is that something that is on the pipeline already for next year, or should that, take longer?

Thank you.

Yes, I’ll start with your first question here again on the cost for sales. Again, the cost for sales for the refractive business in the U.S.

will build up with the business, right. So we will start initially with a relatively small sales force with relatively small service and that’s why the number of €2 million to €5 million might be right initially.

But then this will build up, right. So, the ratio, the sales cost as a percentage of our revenue will be similar to other businesses.

And it will very much depend on how that will develop. Of course we’ll need to invest first.

And then the sales, follows right. Once the sales, follows we’ll invest further, right.

And we’ll build up successively, step by step. So, I think the number is realistic to get started.

And then we see how things develop and decide about further investments. The personnel change and consequences, again, I believe this is, as I said before in our presentation, this is an important step for our company.

It will allow us to focus on our customers much more than we were able in the past because now everything is in one hand, regarding ophthalmology. So I believe that’s good news.

Of course, change always need some time to become effective. So it will need some time to really see these effects.

I wouldn’t expect major turbulences in the meantime because the organization is intact right. And that actually should not happen.

But to really see the positive effects, we’ll definitely take some time. And Christian, maybe you can comment on R&D costs in microsurgery.

Yes, so we see some increase in R&D cost in microsurgery. But please understand that we cannot let’s say give an indication on when products will be launched.

So still let’s say work in the pipeline that is ongoing and it still takes some time until new products will come there.

Well, that’s just for competitive reasons, I mean, it would weaken our position if we would announce any dates or timeline here.

All right, okay. And a last question from me, on the kind of U.S.

performance, I think you've mentioned U.S. underlying was about flattish.

My impression is that you had before a more ambitious target in mind. Can you just talk about what was actually explained this kind of discrepancy, and what are the key measures to accelerate that?

And is Mr. Mazzo actually to be based in the U.S.?

Thanks.

Yes, it’s right that the U.S. performance remains to be weak.

We see a very strong competitive situation there also particularly in the field of diagnostics. So, that situation has not changed.

But you are correct that the new head of ophthalmology will be based in the U.S. and we of course expect that this will help us to further develop that market and strengthen our position.

So, we hope that we can further accelerate our growth now also in the U.S.

Okay. Thanks.

Thank you very much. Good morning and thank you for taking my questions.

I have two questions, please. First one is just on the SMILE launch in the U.S.

And I was hoping maybe you can talk to us a little bit more about how you're planning to position the product versus LASIK, competitively? What are your thoughts on pricing; and, ultimately, the market opportunity here as we're approaching, hopefully, the launch next year?

It would be great to get some thoughts from you on how to think about that. And then, my second question is just if you have an update on the IOL on R&D works that you’re doing in the U.S.?

Yes, let’s start with SMILE and the positioning. In general I would say that SMILE is the latest and newest product generation in refractive surgery.

There are basically three generations if you like, PRK that was the first one, then came, LASIK and now it’s SMILE. And that will also be the positioning of the product in the U.S.

market because SMILE is the latest development, it has certain advantages, it’s less invasive. And the cuts which need to be done in the cornea is, significantly smaller than it is in invasive.

So, this is how it will be positioned. In the end of course the positioning is up to the ophthalmic surgeons, the refractive surgeons who offer the procedure to patients.

But what we see from the rest of the world and I would expect that it’s the same, is that most refractive surgeons, position the SMILE procedure as a premium procedure. We have other customers that basically just offer that as an up-to-date procedure.

And they don’t leave the decision to the patient which technology to be used they make that decision based on the medical needs of certain patients. So it’s really, it really depends on the preference of the refractive surgeon how it will be positioned to the patients, nevertheless I believe from our perspective it will be positioned as the latest generation of refractive surgery equipment.

In the field of intraocular lenses in the U.S. there is no news yet.

As we stated in the past, we are looking for options to enter that market. Now that we have strengthened our position in the market through the new organization and the new head of ophthalmology and Carl Zeiss Meditec, Jim Mazzo, we believe that actually this process will benefit from that new setup.

And again we will look at options and will try to move forward here as quickly as possible.

Thank you very much, Ludwin. If I just may, just two quick follow-ups on those two questions.

The first one is just on SMILE. I mean, since it is a premium product, is it your intention to price it as a premium product to the - to your customers?

Is that your goal there?

Yes, as I said, it will be positioned as the latest technology, new generation of refractive surgery. And that will most likely result in the positioning as premium procedure to the patients.

But that positioning to the patient is up to the refractive surgeons.

Okay. And then, on the clinical work in the U.S.

for the IOLs, I think when we last met your goal was to begin some work before the end of the year. Are you still on track with that, or might this slip in to 2017 now?

I’m not sure if I understand what you mean, are you talking about IOLs in U.S.?

About, IOLs in the U.S. yes, in terms of starting a clinical trial.

No, we’ve not announced any clinical trial in the U.S. on IOLs and I’m not aware that there was any discussion on this.

No, I meant more, I think when we previously talked about this your goal was to start a clinical trial before the end of 2016, and I'm asking if you're still on track for that. Or might it be, with a change to the organization, that the clinical trial gets delayed in to 2017?

No, we have never announced any time plan on clinical trials in the U.S. so I cannot confirm that.

Okay. Thank you very much.

Okay. Ladies and gentlemen, thank you very much for your interest in Carl Zeiss Meditec and our Q3 results.

We are looking forward to talking to you again after our full-year, after Q4. We will invite you for this conference in due time.

So thank you very much for your participation. And talk to you next time.

Bye-bye.