Sebastian Frericks - Director, IR Ludwin Monz - CEO Christian Muller - CFO

Oliver Reinberg - Kepler Cheuvreux Falko Friedrichs - Deutsche Bank AG Scott Bardo - Berenberg

Good morning also from my side and thank you for joining us today. Welcome to our 9 months 2016/'17 analyst call.

I'm Sebastian Frericks, Director of Investor Relations. And with me, as usual, are our President and CEO, Dr.

Ludwin Monz; and our CFO, Dr. Christian Müller.

I would like to hand over to these gentlemen to give you a short introduction to our quarterly financial statements for 9 months of fiscal year '16/'17. And afterwards, we're open to take your questions.

Ludwin, please go ahead, sir.

Yes, good morning, ladies and gentlemen. My name is Ludwin Monz.

I'm President and CEO of Carl Zeiss Meditec. I would like to welcome you to our 9 months 2016/2017 analyst conference.

Please turn to Slide 3 of this presentation which shows the agenda of today's call. First, I will present an overview about the 9 months results.

After that, Christian Müller will discuss the financials more in detail. And then I will give you some details on a highlight which today is our business in China.

And finally, I will present our guidance for the remainder of the fiscal year and the midterm beyond. Okay, so please turn to Slide 4 which gives you the overview.

I'm glad to report that Carl Zeiss Meditec was able to continue the growth path also in the third quarter, both in terms of sales and profitability. Revenues of the first 9 months reached €865 million which corresponds to 8% growth and top line growth would have been 7% at constant currency.

The major growth contributors have not changed. We continue to see highest growth rates in APAC and there particularly in China.

Christian will discuss the dynamics of the regions and businesses more in depth in just a moment. The EBIT increased by 20% to €133 million which corresponds to an EBIT margin of 15.3%.

As explained in Q1, the EBIT includes an €8 million one-off gain from the disposal of noncore assets. These assets came with the acquisition of Aaren in Ontario in California and were related to discontinued products well in line with our original plan and the acquisition rationale.

If we correct for this extraordinary effect, our EBIT margin would have been 14.7%. Last year, the adjusted EBIT margin was 14.2% at this point in time.

The positive development in EBIT was supported by a favorable product mix and the growth of our recurring revenues. Our net income reached €95 million which corresponds to earnings per share of €1.10.

This compares to €0.83 1 year ago. The increase is primarily based on the EBIT growth but also due to currency hedging gains in business year '16/'17.

That's basically the overview. And I hand over to Christian Müller for more details.

So good morning. Welcome also from my side.

And as usual, I would like to walk you through now through our financials with some more details behind. As Ludwin already mentioned, we were able to continue our growth momentum from the first 2 quarters and finished our 9-months results with an 8.3% growth.

And on an SBU level, both units contributed to that growth. So I would like to start with Ophthalmic Devices now on Page 6.

Revenue for Ophthalmic Devices came in with €640 million after 9 months and this is compared to prior year, their growth reported of 9.2%, 9.2% reported; and on an constant-currency basis, 8.2%. That means 100 -- around about 100 basis points headwind -- tailwind from the currency which we have experienced in the first 9 months.

The Refractive Laser business in that unit continued its strong performance from the past and here, especially our SMILE technology, continues to develop very nicely. In our cataracts, implants and consumables business, we also continued our high growth there.

Again, the IOLs -- the IOL growth with market share gains and good progress with standard IOLs, same picture as in the first 2 quarters. Also, our surgical microscope and workstation business developed nicely, although with a slower growth momentum in a Q3 solo view.

So year-to-date, a wise -- nice development there as well. In our Diagnostics segment, same picture as before.

So the competitive situation remains tough in that segment. So our year-to-date growth in the low single-digit area are growing but soft growth in that segment, as in the previous quarters.

The EBIT margin in the SBU OPT, Ophthalmic Devices, of about 13% includes the one-off gain that Ludwin mentioned before from the sale of the noncore assets at our Ontario plant. So on an adjusted basis, adjusting for that FX, the EBIT margin with 11.7% slightly improved compared to the first 9 months of the previous year which was 11.5%.

So here we were supported by, of course, a favorable product mix and also higher operational leverage overall. Moving on to Slide #7 to Microsurgery.

Microsurgery delivered a solid performance after 9 months, with a respectable revenue of €225 million which represents an increase of 5.6%. Also here, we've seen some currency tailwinds, so on a like-for-like basis, the growth amounts to 4.3%.

And we've seen some acceleration, especially in Q3, here for the Microsurgery business unit. The EBIT margin in Microsurgery above 20%, so remains on a high level, again here supported by positive currency effects and cost discipline in this segment.

As announced in Q2, we've launched some major products in Microsurgery, so in neurosurgery and in dental surgery, the KINEVO 900, our new Robotic Visualization System; and the EXTARO 300, a new surgical microscope for dentistry. Both products have, of course, no significant effect now on our 9-months figures, but they will help us to support our position as market and innovation leader in this segment in the near and also in the midterm future.

Now moving on to Slide #8, to the regional view of our revenues. As in the past, our regional split across the 3 regions is well balanced, but it's obvious that the Asia region -- Asia-Pacific region, has now become our largest region and, of course, also drives -- it's the major driver for our top line growth.

Let me start with the Americas region here. €273 million revenues achieved in this region which represents growth of around about 6%, so around about 4% on a constant-currency basis.

Here, some, let's say, momentum which we've seen in the U.S., growth now of plus 5%. South America, we also achieved good growth due to -- mainly due to Brazil.

Some other countries in Southern Europe, the development was rather flat or slightly decreasing. So all in all, some more positive -- let's say a little bit more positive situation now in the Americas region compared to the previous quarters.

Our area that is relatively, let's say, flat and shows the lowest dynamic is the EMEA region. But here, we also have to state that here we see a very heterogeneous picture in Europe and Middle East.

Overall, we've experienced a slight decrease here on a constant-currency basis of 0.4% and while some countries remain very strong and solid and continue to grow, like Germany or like the, let's say, Benelux and some other countries, Italy, for example. There are other countries who are, let's say, struggling and flat or declining like, for example, U.K.

or some countries in Southern Europe or Middle East. In the Asia-Pacific region, again, strongest growth here.

We've seen an increase of 17% on a constant-currency basis now after 9 months and here, same picture as before. Strong growth momentum in China, so no signs of a slowdown yet in this region to see.

And we see that the health care segment in China continues to provide significant further growth potentials. Southeast Asia -- and Ludwin will, of course, go into more detail on the Chinese market in a minute.

The Southeast Asia region also outperformed very strong, India as well, so the whole Asia-Pacific region is -- provides a very positive picture from a growth momentum point of view. Moving on to Page #9, here an overview about the key P&L line items.

The gross margin at 55.4% which is an increase of roughly 2 percent points, half of that improvement is due to a reclassification. So the effects, we see a shift between OpEx and gross profit.

That means the real gross margin improvement is around about 1 percent point. So some mixed effect as well as cost measure -- management measures had an effect and were the reason for the improvement here on the gross margin.

On the OpEx side, as a consequence of this reclassification, the OpEx ratio was burdened. And on the other hand, at the OpEx, we see the gains from the sale of the noncore assets that we mentioned before of around about €8 million.

So when eliminating these 2 effects, the OpEx ratio would be around about 39.5%. And here also, we've seen some currency effects, so when eliminating that, we're nearly at the same level as last year.

The OpEx -- in the OpEx figures, we see also our investments in sales and marketing in some areas of our business and also some increases in R&D expenses. All in all, an EBIT of €133 million was achieved which is significant above prior year.

So the EBIT margin of 15.3% includes, of course, the one-off gain from the sale of the noncore assets and so quite a positive development. But also, on an, let's say, corrected -- adjusted level which is shown now on Slide #10, you'll see that we've improved our EBIT margin by around about 50 basis points, so we've achieved an EBIT margin of 14.7% on an adjusted level.

And there are, let's say, only mainly acquisition-related effects which are adjusted here. This is, on the one hand, the one-off gain of this around about €8 million effect from the sale of the noncore assets that I mentioned before; and on the other side, depreciations related to the purchase price allocation.

So then as usual, a short look at the cash flow statement and some important key ratios on Slide #11. The operating cash flow, with €22 million after 9 months, is below previous year's cash flow, mainly due to an increase in working capital, trade receivables and inventories.

So product launches as well as some effect in provisions and financial liabilities played a role here. Last year, we've seen a shift between the cash flow from investing and financing activities which was related to the fixed term deposits of €110 million which expires in Q1 2015/'16 and has not been extended.

The cash flow from financing activities was mainly influenced by the development of short term deposits that's held at our group treasury account as well as dividend payments. And if you look at our balance sheet and the financial ratios here, we're very strong there, equity ratio of 70.8 -- 78% and net cash of round about €570 million.

So all in all, again, I think we can say that we again delivered another strong quarter and the performance during the first 9 months remains to be very solid. So having said that, I'm handing back now to Ludwin Monz.

Yes, Christian, thank you very much for the discussion. I now would like to discuss our development in China.

As you could see from Christian's presentation, China has become a very significant market for us. And overall, we can say that the Asia-Pacific region has been a major source of growth for Carl Zeiss Meditec in recent years.

Of course, it is very difficult to predict future economic development of this region, but we believe that a number of factors assessed at the future development should continue to be favorable, for us at least. Now let's have a look at Slide 13.

The Chinese population is aging rapidly. And compared to other rapidly developing economies, already today, 10% of the population of China is above the age of 65 years.

10% in China means 140 million people, so it's really a substantial and very large number. In that age group, above 65 years, age-related eye diseases are a major concern.

These are cataracts, diabetic retinopathy, glaucoma but also AMD. Another interesting fact here, according to WHO, more than 1/4 of visually impaired people worldwide live in China, 25% of all visually impaired people are in China.

This is certainly one of the reasons why our Refractive Laser business in China is so strong and there's a large potential there. The Chinese medtech market overall is expected to become the second-largest medtech market globally by 2020.

And interestingly, already today, it is the second-largest market for Carl Zeiss Meditec. Since we have grown 20% per year now for at least 5 years in a row and we're now at about -- above I should say, above €100 million in revenue.

At least that was the number in '15/'16. While health care in China is mainly provided for free by the public health care system, there is also a booming private segment, private centers which provides premium care.

And we have seen an increasing interest of this segment for our advanced refractive and also cataract surgery products. We expect privatization to continue.

That's a very important strength in China. Both refractive and cataract surgery market segments, as shown in the table on the upper right-hand side of the slide, both segments are expected to grow at healthy double-digit rates.

Carl Zeiss Meditec is positioned really well to benefit from these trends. Our SMILE technology is received very well in the Chinese market and there is already a very substantial installed base of the Visumax.

In cataracts, we're seeing immense future potential. The number of cataract surgeries in China, interestingly, is vastly below the developed countries and even below other RDEs, such as India, as depicted on the lower right-hand side of the slide.

We expect increasing public efforts to improve the care of the cataract patient in the upcoming years. In addition, given the high need for visual correction, our premium IOL portfolio enjoys a very healthy growth prospect also in the midterm.

Yes, I hope that was interesting and helpful for you. So much about China.

And now I would like to move to Slide #14 -- actually 15, on our outlook. The medical care market remains to be attractive as it is driven by megatrends like the aging of major countries.

We just discussed China but also other countries. More megatrends are growing economic strength and growing wealth of rapidly developing economies, urbanization and better access to health cares and other important trends.

At the same time, we see increasing cost pressure in health care and we also see a growing impact of digital technologies. In total, I believe we're in an attractive market with positive future prospectives overall.

Carl Zeiss Meditec will continue to follow the strategy which has proven to be successful over the last years. The strategy is to drive more pressing matters in SEC with innovative products and to provide excellent service and products to our customers.

Innovation and application knowledge is a distinct strength of Carl Zeiss Meditec. On a tactical level, we will continue to drive recurring revenue generation.

We will make best use of the SMILE rollout in the U.S. but also globally by growing our installed base further.

And we will extend our technology leadership in cataract. We will continue to lead the Microsurgery visualization market and will use the latest product introductions which we talked about to generate market and business growth.

Yes, for fiscal year 2016/2017, we expect consolidated revenues between €1.15 billion and €1.2 billion. This corresponds to a growth of 5.7% to 10.3% versus prior year.

We expect an EBIT margin in the range of 13% to 15% based on reported EBIT but without the one-off gain of 8%. As you see, the current business trend is favorable and based on the 9-months performance, we're trending towards the high end of the 13% to 15% range for this fiscal year.

Yes, our midterm goals are unchanged. Most importantly, we want to grow faster than the markets.

Yes, ladies and gentlemen, this concludes our presentation and now we're happy to answer your questions and I hand back to the moderator.

Oliver Reinberg from Kepler Cheuvreux. Three questions, if I may.

Firstly, on regions. If I just look at Q3, the Americas performance was trying to be better, I think, up to 6% roughly constant currency in the third quarter.

But I think the comp was quite undermining, so last year was probably down 7%. So can you just provide a bit more detail in terms of when you expect overall Americas to accelerate in terms of growth and also what was, so far, holding it back in the comps?

Was Visumax getting traction? And how do you feel the kind of competitive pressure in Diagnostics in the U.S.?

Secondly, I was encouraged to see the significant organic growth in Microsurgery in the -- in Q3, probably kind of high single-digit mark here. It's a bit surprising in the upcoming launches, so if you can provide some kind of color what you think what's driving this, it would be helpful.

And finally, in terms of M&A, obviously, you can't say much, but I was just wondering if you can give us a kind of bit of feeling. Do you feel you have made major progress on the activities or have there been any kind of major asset that you looked at that potentially was turned down either by yourself or by a potential seller?

Yes, thank you, Mr. Reinberg, for the question.

Maybe Christian, you start with the first one.

The Americas total, the -- you're right, the Q3 of last year was rather a weak quarter, so therefore, the -- let's say, the growth there has to be seen in context. Overall, we see -- on a year-to-date level, as I said before, we see a positive, let's say, development there.

But the main growth drivers here for our Surgical Ophthalmology business, for example, we're not there in the U.S. And the competitive landscape in the U.S., especially regarding our Diagnostics business, is more or less unchanged, so a very tough situation there.

We've seen some positive effect on the -- let's say, on the launch of the Refractive Laser business, of course. And this is also, let's say, an early stage now but gives us some, let's say, positive signs.

So yes, the market is weak and the growth is below, let's say, the overall growth rate that we see. But we're growing there yet and I would say some signs helps, this growth will continue and might even accelerate in the future.

Yes, so overall, I also believe that's really positive. No change, by the way, in the Diagnostics front.

I mean, that's just a very tough market in the U.S. It's first a reality, if you look at the number of competitors there, this is just immense.

Your second question was on Microsurgery and you might remember that maybe a year ago, we discussed the introduction of the next-generation product which is out now. And we always said that the transition will be challenging because, in the past, we've also seen that when we introduced a new product, that the demand in the transition phase goes down.

So we were very careful to avoid this, this time and obviously, we've succeeded and even see some growth. What might explain that is that the market introduction of that new product goes in phases if you look week by week.

So in particular, the introduction to China will come significantly later because of the approval. The KINEVO has not been approved in China yet.

And the market knows that and accepts that, so customers do not expect the next-generation product very soon. And as a consequence, they keep buying the current generation and that has helped us.

So that might explain a little bit why we actually have seen strong business and do not see the, well, expected transition effect here. We're very glad to have that and hope that it will go on like that.

And as we said before, with these new products, the KINEVO and the EXTARO now out in the market, I believe we have a good position for next year. And maybe we'll also already see some effect here in the fourth quarter.

But it's just building up, so it'll need some time. On the M&A, Reinberg, you gave the answer already yourself.

I can't say much. As we said before and please understand that I also do not want to comment on speculations and rumors which are out here.

It's not helpful to all of us, it's not helpful to the company and I mean, I simply cannot tell you other than we keep working on M&A. M&A is a substantial pillar for growth.

We focus on both organic growth and M&A and sorry to say there is no news here.

Fair enough. Can I just maybe follow up on Americas and the -- I assume you still see a decline in Diagnostics year-to-date in the U.S.

Would you have any kind of indication when you expect that to stabilize?

Well, I believe it has stabilized. That's -- we don't see growth, right, but that does not mean that we're declining.

Three, if I may. The first one and sorry if I've missed it, could you quickly touch on the EBIT decline in OPD in 3Q and what was causing this?

Secondly, could you potentially provide a bit more color on your market share gains in IOLs and especially how much longer you think this can go on? And then thirdly, I know you touched on China, but could you comment on how you see growth progressing in the other Asian countries?

Okay, let me start, perhaps, with the EBIT. I guess you are referring to the solo Q3 EBIT.

Yes, Q3.

Yes. And as usual, please do not overinterpret, let's say, a single quarter here.

Q3 is -- seasonally is a lower quarter, top line-wise traditionally and has also been a lower one this year. It has been, let's say, at the level of Q1 or even slightly below Q1.

So the top line growth -- the top line basis plays one role. And then on the other side, of course, we've invested in certain areas, especially in sales and marketing and have some, let's say, costs there.

And if you look at last year's Q3, solo Q3, we've seen some positive effects on the cost side here, so a relatively low cost ratio on a solo Q3 basis which was, let's say, due to some special effect as well. So nothing very special on this EBIT margin on a Q3 single perspective.

Yes, your second question was on the IOLs and maybe I'll take that one. The question was how long can that growth go on.

Well, I hope it will go on for quite a while. As a matter of fact, our overall market share and if you look at the global average, right, it's still relatively low, so it's a low single-digit percentage number.

There are good reports on this. So that number actually is known well.

What that means is there's potential to grow, right, also in the future. And I believe we will continue to grow for a very simple reason we have the most competitive product portfolio out there.

We have a extremely competitive premium offering, so the trifocal lens, for example, also other products in that segment. We will continue to strengthen our IOL platform also in the premium segment so we will not stay where we're today, so even that will go on.

Furthermore, we now gain also market share in the standard segment and I believe strategically that's very important because it's the high-volume segment. And you might know that some years ago, we introduced the LUCIA IOL and we see very nice growth of this product and, again, it's strategically very important because it's a different segment.

It is the standard segment of the market and here, we continue to grow. So I'm confident that we will be able to continue a growth like that.

It definitely will depend country by country. There are countries, like Germany, where we already have a high market share.

There, of course, it's more difficult to further gain market share and there's a natural slowdown. But there are other markets where still there is a high potential, so I really hope and believe we can continue to grow our market share in IOLs.

Your third question was on Asia and other Asian countries. Yes, China is the most important driver, as we said before, but other countries, if we haven't had China, we would probably talk about India and Southeast Asia because these 2 also grow double digit, very nice.

India, it's good to see that our investments there now really show a very positive effect. Southeast Asia is a more heterogeneous region, includes countries like Thailand, Vietnam, Indonesia and others.

And here, we also see double-digit growth very nicely. The other country I should mention in that region is Japan, right, because Japan is -- used to be the second largest market in the world.

Now it is falling back compared to China. But still, definitely, it's significant.

And in Japan, I mean, that's just the overall economic development. The growth is very slow, we do see low single-digit percentage growth.

So not much dynamics there which shows that the growth in the other countries is even more impressive, right, because, of course, in the regional average, Japan then reduces the overall number. But yes, that's probably the detail you are looking for.

So first question, please, relates to the financial outlook for the full year. I appreciate you have a relatively wide revenue range out there, but given that you're now, if you like, in the middle of your growth path, according to your revenue guidance, can you shed some comments about what is the most likely outcome for revenues for the full year?

Is the upper end out of limits now, would you say or do you still think there's opportunity to shoot for that goal or aspiration? So that's the first question, please.

Second question relates to Microsurgery. Obviously, very encouraging to see a decent bounce back this quarter in that business, perhaps somewhat unexpectedly.

But if I consider then that the 9 months are reasonably healthy, 4.3% underlying growth for Microsurgery, can you comment on -- now that you launched the KINEVO and EXTARO product, is this sort of revenue growth number, in your opinion, one that you should be able to sustainably accelerate from into next year? So I'm just wondering now if -- given that this base is really ahead of any material contribution, you start to see a growth acceleration in Microsurgery.

So perhaps some comments there, please. The last question just relates to the M&A environment or use of proceeds, the capital raise.

I wonder if you could possibly share some qualitative comments with respect to the potential for a transformational deal. Would you view a transformational deal more likely, less likely or about the same as compared to 3 months ago?

Yes, thanks for your questions, Scott. I start with the first one here on the outlook.

Well, the outlook is what it is, right, €1.15 billion to €1.2 billion and it's really tough to narrow it further down because it very much depends now on the fourth quarter and within the fourth quarter, very much depends on September. It is really difficult to make a better prediction here.

And I really apologize. If I could, I would be happy to give you a better number, but that's the range we're looking at and I ask you for your understanding that I cannot narrow this further down.

On Microsurgery, yes, we had good growth here in the -- now in the last quarter overall. This is not due to the new product, as you said and that's important to understand.

I believe that the KINEVO -- and by the way, also the EXTARO, but the KINEVO, of course, also has some potential to drive growth of that business unit in the next year. It will take some time until that effect will show up because the investment cycles are just very long and sometimes, the hospitals have to apply for funds and funds are not readily available and that might take half a year or so until that happens.

But I believe then there is really some good potential to grow the business and that might accelerate a little bit the growth of the business units compared to what we've seen over the last, let's say, 2 years or so. But it's incredibly difficult to quantify, right?

That I cannot do. But I really have some hopes that this will lead to some growth here.

Yes, M&A, again, I mean, there are not so many transformational deals out there, so please understand I cannot comment on individual deals. And when we talk transformational deals, we're talking about 1 or two, so please understand that I cannot comment on this.

And perhaps just one follow-up. I appreciate the additional disclosure on China which seems to be doing very well.

I think you referred to the cataract market there or the intraocular lens market specifically. So just a point of clarification, are your products now CFDA approved in China?

Or is this something that we might expect in the very near term?

Yes, we do have approval already today, at least for the LISA tri. So our full portfolio is available there.

Okay, ladies and gentlemen, so I thank you very much for your interest in Carl Zeiss Meditec and for your questions. Our year-end race has started; just, well, another 2 months ago.

So I'm looking forward to talking to you after the full year and presenting the full year results. Until then, have a good time and talk to you then.

Bye-bye.