Earnings Transcript for CZMWF - Q2 Fiscal Year 2024

Operator: Hello ladies and gentlemen and welcome to the Carl Zeiss Meditec AG Analyst Conference Call for the Six Months Results 2023/2024. At this time, all participants have been placed on a listen-only mode. The floor will be open for questions following the presentation. Let me now turn the floor over to your host Sebastian Frericks, Head of Investor Relations.

Sebastian Frericks: Yes. Good morning. Thank you, everybody, for joining our six months 2023/2024 analyst call. As usual, we will take you to through some prepared remarks and then look forward to your questions after that. I turn the floor over now to our executive management, Dr. Markus Weber and Justus Wehmer. Markus, please go ahead.

Markus Weber: Yes. Thank you so much, Sebastian and also good morning from my side, ladies and gentlemen. Welcome to the six months 2023/2024 Analyst Conference of Carl Zeiss Meditec AG. So, let's have a brief look at our agenda. I will start off with an overview of the results, then Justus will give more insight into the financials following that I'd like to share a brief update on the closing of the D.O.R.C. acquisition. And then finally, Justus will give you an outlook for the remainder of the fiscal year 2023/2024. And Sebastian already pointed out, afterwards, we will be open to your questions. So, let's get started. So revenue in six months 2023, 2024 moved more or less sideways, down minus 2.8% in reported terms of €947 million. Adjusted for currency effect, it was almost stable at €968 million. Currency headwinds mostly came from RMB, U.S. dollar, and Japanese yen. As we have predicted and included in our forecast for the year, ophthalmology has been heavily impacted by destocking of refractive consumables in the Chinese sales channel. I'm very pleased to report that the destocking has been completed in March and we now assess the level of stocks in the sales channel as healthy. Destocking overall impacted our revenue by roughly €40 million in the first half. Adding back to this impact, revenue would be slightly higher year-on-year even in reported terms. Microsurgery delivered a solid performance which benefited from order backlog conversion. With enhanced capacity and improved supply chains over the course of quarter two, order backlog was further reduced to a quite healthy level of €276 million. Order entry was down 9% in the first half, but improved significantly towards the end of the reporting period. Ophthalmology was able to achieve a stable order entry in the second quarter even after accounting for the impact of destocking in China. There remains some backlog in refractive equipment, which we plan to deliver over the next few months and which will also generate additional consumable business later this fiscal year. We continue to see some softness in demand for equipment, particularly in the North America market. The high interest rate environment contributes to some reluctance to invest in equipment that is being leased or financed. We are observing the market very carefully and are noticing that most of our competitors on the equipment side seems to be similarly impacted at the moment. The first half of fiscal year 2022/2023 has still been characterized by supply shortages and long delivery times, leading to a pull forward of orders from distributors and customers who factored into their ordering behavior the knowledge of having to make a substantial time for the equipment to be delivered. We believe there to be no shift of market share neither in ophthalmology nor in microsurgery, and remain optimistic for the trend to turn in the second half of the fiscal year against more normalized comparable months in quarters in the past year. Since delivery times for most products are normalized at only a few weeks' time, having reached pre-pandemic levels again, situation can turn around quickly in the second half of the year. We saw a slight improvement in gross margin in Q2 against Q1. We benefited from better pricing in spite of weaker product mix. The OpEx development was almost flat in first half year. Given persistent inflation and wage increases that provide a constant headwind throughout the year, this takes some heavy lifting, and we needed to pre-reprioritize some of our sales and marketing as well as R&D initiatives. Justus will give you some more details on the P&L later. However, at this point of the fiscal year, as a consequence of relatively weaker product mix and less operating leverage from top line contraction as well as currency headwinds, EBIT fell from €144 million in the prior year to €108 million by around a quarter. The reported EBIT contains a one-off positive result from setting a lawsuit in the U.S. against our diagnostic competitor, Topcon, of around €18 million. EBIT margin dropped to 11.4% from 14.8% in the prior year. The adjusted EBIT margin, which excludes the Topcon settlement and PPA of past acquisitions, EBIT margin was at 10% compared to 15.3% in prior year. Our net income dropped by 26% from €113 million in the prior year to €84 million. Earnings per share was €0.94. Now, I would like to hand over to Justus, who will provide you with more background and we will discuss the figures in some more depth.

Justus Wehmer: Yes. Thank you, Markus and good morning and welcome also from my side. I'm now going to give you a more detailed overview of our financials, starting with the performance of our strategic business unit, Ophthalmology. Revenue of Ophthalmology dropped by 5.7% to €701 million. At constant currency, it dropped by 3.7% to €715 million. Contraction was mainly caused by the completion of refractive consumables destocking in the Chinese sales channel. As mentioned, the diagnostics devices business as well as surgical microscopes struggled to grow during the second quarter, particularly in the U.S. market. We are also noting some delays in IOL orders related to the transition period to national volume-based procurement in China. Clinics are now about to implement the system in May and onwards a bit later than initially expected. On top of this, we are basically receiving the headwind from the already lower prices without yet being able to secure the benefit from higher volumes. The overall estimate for the NVBP impact on our profitability still remains at a negative impact in the neighborhood of €10 million or a bit more, concentrated mostly in the second half. The situation is impacting all players in the market in a similar way. Global IOL sales were above prior year, and delivery of refractive devices remain strong, with considerable backlog of almost 100 devices still in place that we hope to deliver in the next few months. In refractive, the VisuMax installed base has grown by high teens percentage year-over-year to now more than 2,100 devices globally. We are quite happy with the speed of the rollout as it bodes well for future consumables sales. Refractive procedure levels in China in Q2 were growing year-over-year despite the weaker consumer climate, supported by the growth in installed base. Compared to the same period two years ago, which did not have a meaningful COVID impact, procedures are now more than 10% higher in China while installed base is up by almost 25%. We also observed a certain pressure on the end patient price of SMILE among the hospital operators, though not on our own consumable, as well as a slightly higher share of LASIK procedures on our installed base, signaling that consumers favor less expensive options. Looking beyond this fiscal year, we hope to be able to reverse this dynamic with the rollout of our VISUMAX 800 in China in 2025. All in all, we consider the results of the last 6 months in refractive in China is relatively robust compared to our expectations, given the difficult economic climate. In the important summer peak season, with even more laser systems in the field, we now need to see continued good growth in overall procedures. With destocking out of the way, this should help drive a meaningful recovery in product mix. Product mix was weaker year-over-year, mainly impacted by destocking, which also led to a considerable pullback of gross margin. On the cost side, OpEx were almost flat. Nevertheless, due to missing operating leverage, OpEx ratios remained at a high level. We need the top line to turn around to achieve better results in the second half. Ophthalmology EBIT margin declined 5.2 percentage points from 12.3% to 7.1%. MCS delivered an overall robust performance with revenue of €247 million versus €232 million previous year. This represents a revenue increase of around 6.3%, at constant currency at 9.1%, a very strong result helped by accelerated conversion of backlog. As discussed before, we did see some softness in order entry during the period. Sales funnels continue to be well filled, with delivery times now mostly at around one month's time. The situation can, of course, turn around quickly as we continue to intensify our push to accelerate sales. Higher pricing contributed to the improved margin level. EBIT margin improved by 1.1 percentage points year-over-year to 23.7% on good operating leverage and strict cost controls. By regions, EMEA continued strong growth momentum while Americas was under pressure. Americas achieved sales of €217 million, a drop of minus 20%; at constant currency, minus 18%. The decline of top line is partially due to tough comparisons in previous year period. Six months 2022/2023 versus six months 2021/2022 grew by 28% and partially because of weaker diagnostics business, as already mentioned, among which North America, including U.S., experienced a weak period. Latin America, on the contrary, grew slightly year-over-year. We expect Americas performance to improve going forward. based on the VISUMAX 800 launch and the expectation that our top-end OCT model, CIRRUS 6000, is likely to be relaunched with new software very soon. In EMEA, we noted revenues of €289 million, an increase as reported of 17%; at constant currency, 21%. Core markets such as Italy, Spain, and France noted strong performance, and growth was primarily driven by device delivery from backlog, with refractive and IOL business both contributing. In Asia-Pacific, we achieved revenues of €441 million, which moderately dropped by 3.4%; at constant currency, minus 2%. India and Southeast Asia contributed again a very robust performance. China, including Hong Kong, developed slightly down as a consequence of destocking. South Korea also moved sideways while Japan was down year-over-year. Let's now have a look at the P&L lines. Gross margin was 53.3%, was 3.1 percentage points below prior year's level due to less favorable product mix, less operating leverage, additionally, foreign exchange headwinds, mainly from RMB and U.S. dollar. Sales and marketing and G&A expenses were almost flat while R&D increased only modestly despite a rise in headcount and wage inflation. We have been implementing restrictive hiring policies, reducing temporary workers in production, whom we had hired to deal with the equipment backlog. We also reprioritized our growth initiatives and sales and marketing and R&D to keep the most important projects at full speed, but slow down the ones with lesser impact on our competitiveness and financial impact and increased focus. These cost control measures will continue in H2 to keep operating expenses roughly sideways. Due to weaker revenue, OpEx ratios still remain high, but will see some decline when H2 revenues show better growth. The other operating income, €18.2 million, arose from the Topcon settlement. Consequently, reported EBIT of €108 million was below prior year's level, €144 million. EBIT margin was 11.4% versus prior year's 14.8%. Factoring out Topcon payment and acquisition-related special items, our adjusted EBIT was €95 million, with the adjusted EBIT margin at 10% below prior year's level of €149 million and 15.3%. Acquisition-related special items in both periods are at similar scale and primarily include purchase price allocation-related amortization. Clearly, profitability in the first half was weak, as we had expected. We are now entering the second half of the fiscal year, which typically has a better seasonal dynamic, with quite well-contained operating expenses despite some persistent inflationary pressure. Importantly, the destocking in China is now finally out of the way and the good growth of our refractive installed base, even ahead of VISUMAX 800 rollout in the U.S. and hopefully, soon also in China, bodes well for the future. We are therefore confident that we can show a clear uptrend in profitability again from here. Finally, an overview on the cash flow statement. Operating cash flow increased to €60 million, previous year €48 million, mainly owing to more efficient working capital management, and above all else, reduced accounts receivables versus last fiscal year-end. Investing cash flow was reduced from €61 million to €50 million due to continued high investment in property, plant and equipment, and intangible assets. Please note that there has been a technical change in our cash flow statement as the CapEx are now being offset by a drawdown of treasury receivables. The prior year's numbers have been adjusted accordingly. CapEx, including both tangible and intangible, amounted to €80 million and were higher than in the past year's period, which was €52 million, due mainly to the expansion project in our consumables production, for example, at our La Rochelle, Berlin and Guangzhou sites. Change in financing cash flow was mainly caused by the dividend payment and the share buyback. Under the share buyback, we have invested around €20 million. The impact on shares outstanding is still fairly negligible at this point, below 0.25 of a percentage point since the buyback program only began in February. Net liquidity, with €711 million, was below the level of last fiscal year end, mainly owing to share buybacks, dividend payment and CapEx investment. After D.O.R.C. closing and taking the shareholder loan from the parent company as planned, at the beginning of April, we will have a slight net debt position of around €300 million. Thanks for your attention so far. And with that, I hand it back to Markus.

Markus Weber: Yes. Thank you so much, Justus. And now let's move to our key topics, and at this time, the D.O.R.C. acquisition. I'm very happy to report that on April 3rd, we closed the D.O.R.C. acquisition as planned. The merger creates a leading player in the retina surgery area or, as we call it, the surgery posterior segment, so SPS. As we have laid out before, D.O.R.C. is a perfect fit for our strategy by helping us to create a unique retina surgery workflow. Similarly to what we have done in cataract, we will integrate our diagnostic devices with our surgical microscopes and the combined Phaco and Vitrectomy device from D.O.R.C. as well as at our digital solutions, instruments and IOLs to the offering and benefit from the large amount of consumables in the D.O.R.C. offering. This way, we can support customers with improvements in efficiency and quality of their clinical work. D.O.R.C. will also complement us very well in regional terms as we acquire a meaningful installed base in the U.S., significantly expanding our presence in surgical centers beyond the ophthalmic microscopes, while we can help put D.O.R.C. offering into our strong Asian sales channels where it currently does not have a major presence yet. From closing into next few months, we are focused on achieving two main goals

Justus Wehmer: Thank you very much, Markus. So, we are further quantifying our outlook for the fiscal year 2023/2024. Revenue should reach between €2.1 billion and €2.15 billion, excluding D.O.R.C. With D.O.R.C., it will be between €2.2 billion to €2.25 billion. It goes without saying that in order to reach these target revenues, we need some acceleration in order entry in H2. As we have discussed, delivery times are pretty much back to normal so that we have the capacity to move a lot of equipment and consumables between now and fiscal year end. Gross profit and EBIT should significantly recover owing to several factors that benefit the second half over the first half. Delivery of refractive consumables will accelerate with our installed base up by double digits year-over-year and still a meaningful backlog of VisuMax lasers in the order book to be deployed over the next months. Friendly seasonality in the Chinese market post destocking and expectations for overall procedure growth in the Chinese market for Zeiss during the summer peak season; overall positive pricing trend in our equipment business. And lastly, a well-controlled expense base, enabling operating leverage as the top line accelerates. We, therefore, still aim to achieve roughly stable EBIT as in the past year. We clearly acknowledge this target is now more ambitious than it may have seemed at the beginning of the year. While we did factor in the effects of destocking and they played out roughly according to plan, the performance in the equipment business so far has been trailing our expectations, particularly in the North American market. We are seeing some signs of stabilization and recovery in the Q2 that are continuing into the month of April, particularly in our Ophthalmology business. These early signs of a turnaround need to continue and accelerate now. As discussed, the earnings, integration costs as well as amortization from PPA of D.O.R.C. will be excluded from this fiscal year's guidance to keep things comparable to the past year. This also goes for the one-off positive result from the Topcon settlement. Therefore, the adjusted EBIT number will probably be a slightly better indicator of achieving our target of an approximately stable result on a comparable basis. Over the medium term, our EBIT margin target of 20% remains unchanged as a result of rising share of high-margin product mix and innovation driving profitable growth. With that, we have come to the end of our prepared remarks on the financials. Let me pass it then back to the moderator to take your questions.

Operator: Of course. [Operator Instructions] And the first question comes from Oliver Reinberg, Kepler Cheuvreux. Please go ahead.

Oliver Reinberg: Thanks very much for taking my questions. Three, if I may. The first would be on the kind of order situation. I think you mentioned in your prepared remarks the kind of a 9% decline in the first half. Can you just specify, is that reported or constant currencies? And does it basically imply kind of mid-single-digit decline at constant currencies in the second quarter? And can you just talk to the visibility of the kind of acceleration in the second half? And secondly, just on China, again, a clarification. If I have understood you correctly, did you talk about a 10% growth in procedure volumes in China versus installed base up to 25%, just to clarify in that. And can you just talk to the general willingness of Chinese clients to invest into new equipment? And of this 100 order backlog for VisuMax, how many of these are related to China, please? And then third would be just on the kind of Chinese stimulus discussion, there's quite some kind of talk about it. So, it would be just curious to understand your take on it, to what extent this could also impact and support your offering? Thanks so much indeed.

Justus Wehmer: Hi Oliver, it is Justus. So, I go through your questions, order situation, you wanted a confirmation on the second half of Q2. And yes, I can confirm we are talking there in terms of the decline versus the 9% decline earlier, a low mid-single-digit number as assumption for your calculation is correct. I can also confirm that there is the 10% procedure growth year-over-year, as I had in my prepared notes. And yes, you have understood well that this is the growth rate of procedures in the market. So, obviously, that is important to understand, considering our destocking impact on our revenues. Secondly, on the order -- or thirdly, on the order backlog of the roughly 100 VisuMax, roughly 50% of that refers to China. And I want to reiterate again, different from a year ago where we had lead-times for our VisuMax, which we're extending up to a year, we are basically now after capacity investments down to lead-times that are between four and six weeks. So, with that, we are very confident that a good majority of this order backlog will be converted and installed in the market in the months to come. And I'm afraid there was a fourth question, if you may want to repeat that, I think I missed that one.

Oliver Reinberg: Sure. There's generally a discussion in the market on new stimulus in China. So, I was just trying to understand your take on the situation and to what extent it can support your offering?

Justus Wehmer: Yes, you are right. I actually have just also recently read about it that there's apparently a stimulus program on a whole variety of medical equipment. And from the information that I have, it is basically high ASP investment goods across all different disciplines. So, I do not have more details, but I think we will soon get more clarification our Chinese management, but yes, I can confirm that such a program is currently being discussed and soon implemented.

Oliver Reinberg: Do you know if the private market in China was also supported by Chinese stimulus in the past? Or was this just in the public space?

Justus Wehmer: That, I wouldn't know frankly, don't want to make any public statements that I can't substantiate. So, sorry for that. But we try to find out and you follow up with Sebastian, please, yes.

Oliver Reinberg: Thanks everyone. Thanks so much.

Operator: The next question comes from Oliver Metzger, ODDO BHF. Please go ahead.

Oliver Metzger: Yes, good morning. Thanks for taking my questions. The first one is about weakness, as your comments on North America. Potentially, you can provide a more granularity first between also ophthalmic device and microsurgery, but also equipment versus consumables. What do you see also from competitors, how that plays in? Second question is about your cost reduction programs. So, between the numbers, it came through there were some cost reductions. So, potentially, can you remind us between the phasing, what you have seen right now? And what are your expectations towards further cost savings and how this will impact the bottom-line? Thank you.

Markus Weber: Yes. So, maybe I'll take the first question. Second, maybe then, taking Justus. So, good morning Oliver. Maybe to go to the U.S. market, we are well off that the main part of the U.S. market is for us device business. So actually, we are moving in with our VisuMax, as you know. So, we just launched the VISUMAX 800, had a very good feedback also now from customers and the first orders are coming in. So this will push our RTP business. Also, the D.O.R.C. acquisition will push our consumable business very much in U.S., but as it is today, it's mainly devices and here, many diagnostics and operational microscopes. So, overall -- and Oliver, most likely, you had a good better understanding of the competitors and the situation there. But as I stated before, what we see is a significant drop in the last quarters in the device business in U.S., driven by the reasons that Justus and myself explained. So, interest rates is one of the main reasons, but also some PE situation, which is pretty strong in the U.S. Overall, we don't see that the market is changing. Also our market position here, so that means overall, and this is something that we have seen already in April, that the situation is turning and is becoming better. So let's see how this is now continuing, also sustainable, continuing now for the next half year. But overall, we see actually positive signs here.

Justus Wehmer: Yes. And Oliver, on the second part, cost reduction, let me make it short and basically say, as I said in my notes, we expect now continued side-wards movement for our OpEx. We have seen that our G&A and our sales and marketing expenses are almost exactly on prior year's level. The only exception was R&D. And I think that is for good reasons. In the second half of the year, you will, though, see some variable revenue related sales and marketing expenses, obviously proportionately increasing with higher revenues, but that's totally okay. Commissions and stuff like this are included there. But I think what is really notable is if you go back in your spreadsheets, you will see that in prior years, we had -- if you compare the development of OpEx after six months with the first six months of the previous years, we had growth rates of, I think, last year above 20%, and the year before, slightly below 20%. Right now, we are talking about more or less a side-wards 2% increase. And that to be continued means that, obviously, with growth on the top line and a better product mix, we clearly expect then a significant bottom-line impact. So I hope that gives a little bit of color.

Oliver Metzger: Okay. Thank you very much.

Operator: The next question comes from Jack Reynolds-Clark, RBC Capital Markets. Please go ahead.

Jack Reynolds-Clark: Hi there. Thank you for taking the questions. I had two, please. The first one, I was just wondering, in China, could you run through your assumptions around kind of market growth versus market share changes needed in H2 to hit your guidance? And then the second was just on refractive. Obviously, you've talked about strength in placing VisuMax with a strong backlog, that you're making good progress on current company delivery times. Wondering how long you expect -- or how long it is do you expect that installed base to translate into kind of fully ramped consumables revenue? Thank you.

Markus Weber: So, maybe I take the second question and then Justus, take the first. So, in terms of delivery times, actually, we have -- as I've already stated, in one of our last calls, we actually increased our capacity significantly so that we will be able to deliver the VisuMax actually [Indiscernible] and also in the next quarters. And so that the delivery time is really going back to standard times. We see that push in the VISUMAX 800, and as Justus also reported, strong demand from actually around the world, especially also in U.S. We're aware of the VISUMAX 800 is still to be launched in China. So this will be in the next push. So overall, we see actually a good sentiment here, and our operations and capacity is also able to handle that.

Jack Reynolds-Clark: Sorry, can I close the -- it's on that, I was wondering more about kind of how long an installed device takes to kind of ramp through its full kind of capacity, knowing how long it would take the installed base to translate into consumables revenue?

Justus Wehmer: So, Jack, it's Justus. So, what we typically see is there's a ramp-up phase of two to three months because there is some training for the surgeons on the device. And -- but what we also typically see is that the utilization of newly installed devices is typically higher on average than of longer installed devices. That is also something to keep in mind. Now, going to your first question, can you please just clarify when you were referring to China growth, were you referring to our refractive business in China? Or was it a more general question on China?

Jack Reynolds-Clark: Specifically on refractive?

Justus Wehmer: Particularly on refractive, then I'd say, again, with the significantly increased installed base of devices, I would, at this point, at least answer your question on the development of our market share. In China is clearly positive in terms of that we believe that we further extend and grow our market share. The growth rate for the year, of course, is a function of the summer peak and -- I mean at this point in time, and I hope you accept that with all the uncertainties on consumer confidence and so on. The data point that I can only offer right now is if with the low consumer confidence in China that we have seen since a couple of quarters, our corrected growth in China, corrected for the destocking in terms of treatment consumption, RTP consumption is 10% up, then I'd say I would, at this point in time, have no reason to believe why it should be lower than going in the second half -- into the second half of the year. So, the only thing that we observe is there is more price sensitivity in the market. We do a little bit of an uptake of LASIK treatments being conducted on our lasers, but also not to be confused by anybody, that is still revenue and business for us. It's simply a different treatment pack used for LASIK, which has a slightly lower price. So, that could, in the second half of the year, technically mean that even with a high number of procedures, the procedure mix could be such that we may see a little bit of a shift towards LASIK. But again, that remains to be seen. Hopefully, that helps.

Jack Reynolds-Clark: Yes, that’s clear. Thank you.

Operator: The next question comes from Graham Doyle, UBS. Over to you.

Graham Doyle: Morning guys. Thanks for taking my questions. I have three, apologies, but hopefully, they're quick. Just on the order entry, so it sounds like you had good momentum in parts of Feb and then very good, at least relative to recent times, very good momentum in March and April. Do you have any good information or data to show that this really was driven -- in terms of the weakness, was driven by these long lead-times? So it'd be good to get a sense of that. And second question is just related to margins. So obviously, you've kind of slightly recut the revenue guide, but reiterated the adjusted EBIT guide, which basically implies slightly higher margins for this year and a pretty good cost control. Assuming that this is a timing effect in terms of the order entry situation, so we're seeing this improvement which continues, the 20% midterm margin, does that look feasible on a sort of one and a half , two-year view from here? And then one very quick one on the buyback. Is there any sort of time constraint on that? So you've got quite a lot of it left to do. Should we expect that to be done over the coming months? Or is it just going to be opportunistically? Thanks very much guys.

Justus Wehmer: Yes, I'll get going on the last one, Graham. So, we basically have no time constraints to make your -- the answering short here. So we just go ahead opportunistically. And as you can imagine for regulatory reasons, we also keep ourselves pretty distant from taking there any influence on the process itself. So no time constraint. Margin, your question on the 20% and when is it going to be realistically achievable. You were talking about the one to two-year timeframe. I think, as I said in my remarks, our business model is such that delivering end-to-end workflow solutions, and D.O.R.C. is just another strong contributor to that, including an ever-increasing higher share of consumables, which are for a good portion, captive. And even the non-captive ones and the instruments and other consumables going with it also typically command higher-than-average margins, at least higher than our devices. I think it is only a technical function or mathematical function that this 20% is then a consequence of it. So, there is nothing to take away from the target. Giving you now a detailed answer on, is it in a year or is it in two years? I'm a little bit reluctant here, but I just leave the statement as I've made it. Our strategy is clearly consequently on continuing that path to make this 20% happen. So, on your first question was a little bit more detail, I think, on the order entry momentum and the question on the lead-time implication. I think, again, we can't interview every single customer that we have and ask him for his motivation to place his orders a year ago or one and a half years ago. But I think it is a reasonable assumption, and I actually see that confirmed speaking with other companies in medical equipment that -- which all suffered from broken supply chains to a bigger or a smaller extent. But I think we can clearly, clearly categorize a good portion of the order entry that we have seen in the last 12 to 18 months prior to now is basically motivated by the concern that, as I mentioned before, imagine lead-times for VisuMax were at a year, that people simply said, I want to have a guarantee that I will get my devices. And that this has somewhat inflated order entry in the quarters of -- in the early quarters of last year and the last quarters of the year before. So, I think that is a safe assumption. And maybe the other data point, if we go back to pre-corona times, we never had a deep order move entering into the second half of the year. And we always have seen the pattern of distinctively higher revenues in Q3 and Q4. And I would think that we are seeing here in the numbers that we discussed some return to, we can call it the new normal or the old normal or whatever you want to call it, but I'd say that this is clearly something that needs to be factored into the interpretation of the current order entry data.

Graham Doyle: Okay, great. Just a quick clarification on that last point. So the -- you feel like the order momentum is returning to where we were sort of pre-COVID, and assuming everything else holds you should have that step up like we saw pre-COVID the second half?

Justus Wehmer: I think the -- however you want to call it, the angst or fear of not getting supplies at all, I think that has totally disappeared. And now, I mean we have the -- some sort of expectation of lower interest rates that makes some people potentially waiting a little bit or trying to hedge. And that certainly also has some implications because what's really important to understand is, and I expect this question actually still, us confirming today our guidance, and that means us believing in a significantly stronger second half, where do we take this confidence from? And that is clearly also because we have funnel, a project funnel across the board of our products which is at record levels. So the sales organization clearly has done its job. It now needs to focus on converting this funnel into the orders. And believe me that we -- not only with the new products that are coming now to market, but also with all conventional sales and financing practices, we want to make it attractive now to actually then convert these projects into orders. And I think with March and April giving us already an indication of an uptake and very strong funnel fills, I think at this point in time, it is reasonable to believe that we have the ingredients and we have done our homework to be ready for them quickly ramping up our sales.

Graham Doyle: That’s really, really helpful. Thanks a lot guys. Appreciate it.

Operator: The next question comes from Falko Friedrichs, Deutsche Bank. Please go ahead.

Falko Friedrichs: Thank you. Good morning. I have two questions, please. The first one is on your statement that you're seeing a bit of a stabilization in April, especially on the Ophthalmology side. Can you potentially add a little bit more flavor to this statement, just so we understand a bit better how the trends on the ground are also in the different product categories? And how does it look in April in the Microsurgery business? Have there also been slight improvements, or rather, not? And then my second question is on order intake. Is it realistic to assume that it can grow positively again in Q3? Or is it still rather going to be negative again and then maybe positive in Q4? Thank you.

Markus Weber: Yes. So, thank you so much, Falko. I'll try to answer your questions. So, first of all, the statement of how the split looks in April and how Microsurgery is currently performing. So, maybe an overall statement, and that's, I think, quite important here, I think this also relates to Graham, so overall, the market is intact. So that really means the demand is there and there is no change in the market dynamics. So that's just really important for all of us. At least we believe very strongly in this momentum. Secondly, our investments in innovation and R&D is creating our output. And you have seen that. So we have actually launched now the ARTEVO, the new operation microscope for Ophthalmology which has been very well received also in the U.S. MCS will come with significant innovations over the year or beginning of next year. We have rolled out now the cataract digital workflow and ELANA is ramping up, so that means our multifocal hydroscopic IOL in Europe. The VisuMax comes to U.S.; China and Japan to come. So, there's a lot of activities ongoing. And in combination with D.O.R.C., we have now actually a nearly fully-fledged portfolio to offer ophthalmology and also microsurgery to our customers. So that means the order entry. So, this is maybe very important to understand why we are also confident for the next quarters, whenever the market is going up again, that we will at least grow as the market or even outgrow the market. Then the other thing is how the order entry has been split. So we are actually quite happy to see that, especially in the diagnostics, which has been very weak in the U.S. market in the first two quarters, that this is now starting to pick up. This will be supported especially also by the CIRRUS 6000, which has been re-registered then, hopefully, in the next coming weeks or months latest so that we can enter also with this important product in the U.S. market again and can be here again in the market. So, this is quite an insignificant part. The other thing you asked about Microsurgery -- so what we see is also in microsurgery, and we have to be aware of that Microsurgery has really a pretty significant market share here and it's actually driving the market. So that means in the moment when the market is coming up again, Microsurgery will be also there, and we see also momentum. Justus said that the sales funnel is on record level. So it's all about now to convert the funnel into orders, and this is something to come now in the next months. Overall, order entry, I think this is maybe then also answering your second question. So it's always hard to predict the future. What we have seen in March and April are really good signs that there might be a turnaround in order entries, especially for the next quarter, but it's a [indiscernible] world, to make that also clear. And I think you know that and we know it also, there's always changes coming in. I think we are flexible to adapt on that. But for instance, now in China, for sure, we have to be -- actually now we are looking very forward to see the summer peak in refractive and that people are coming and getting the treatments there. We see also that presbyopia treatment, so our PRESBYOND offering will become, hopefully, more momentum then over the next coming months. And as you know, there is a big customer group and patient group, actually, which we can address with this. So, overall, that's the reason that we are quite confident for the next two quarters and then especially also for the next upcoming year.

Justus Wehmer: And Falko, it's Justus once more. If I may, although it's only anecdotal, but anyways for whatever it helps you, to give a bit more color to our observations in the U.S., I was in April at ASCRS in Chicago -- in Boston, sorry. And the order entry at the booth at the show was the highest that they ever had in a show. So, can take it for whatever it's worth, but it's at least a data point on indicator that I think gives you a little bit of flavor why we believe that the situation in the U.S. seems to be now improving. Thanks.

Falko Friedrichs: Okay. Thank you.

Operator: And the next question comes from Sezgi Oezener, HSBC. Please go ahead.

Sezgi Oezener: Hi thanks for taking my questions. Two, please, from me. One on China. You mentioned the destocking is coming almost to an end, but you also mentioned that there could be some market share losses to LASIK. So should we expect a return to pre-destocking post-pandemic order growth for this business? Or should we rather think about pre-pandemic or even lower? And do you feel any price pressure here? How does exactly the business with the distribution work on this front? And my second question is on the U.S. entry on IOLs. Have you -- I mean can you give us some color on how you are competing, whether you can work with a bundling structure and whether there are any price differences between you and competition? Thank you.

Markus Weber: Yes, maybe I'll take the second question first, and then Justus will answering the first question. So, good morning, first of all. So, U.S. entry, yes, so as you know, so we have currently with the LUCIA hydrophobic monofocal lens in U.S., which is quite important, especially for D.O.R.C., because in the retina surgery, the normal procedure is to use then also the monofocal lenses and especially the monofocal lenses because to preserve a maximum contrast. So, that means this is a perfect fit, and definitely, we will bundle this. In terms of pricing, well, that's something which comes from the market, and we will definitely position ourselves so that we are competitive.

Justus Wehmer: Yes. And on the China, first of all, I want to clarify, the destocking is ended and not approximate or close or whatever. It is ended, and that to me is important that there is no misconception here. The price pressure, as I said, the price pressure is not on the ASP for our SMILE procedures, but it's more the mix effect between the number of LASIK procedures and the number of SMILE procedures. Other than that, I think we do not notice any other pressure. And I think there is a high motivation in the market to maintain the SMILE positioning as a superior solution when it comes to laser vision correction.

Markus Weber: And I would even turn it around saying that the SMILE procedure is becoming more and more recourse than a procedure. We see this also in U.S. and in China now so that actually even other companies are now moving into the SMILE-like procedures, but what is also clear that we are keeping the distance also bit based on our innovation power.

Justus Wehmer: And in terms of growth rates, no, it's a question difficult to answer because you have seen our growth rates in the ramp-up phases prior and partially during the corona times, which were nothing where I'd say that is sustainable on that level. But we do not see a, how should I say, signals, as I said right now, that we feel would make growth getting much slower than what we have seen in the first six months. Thanks.

Operator: And the next question comes from Ed Hall, Stifel. Over to you.

Ed Hall: Hi, Markus, hi Justus. Thanks for taking my questions. Just the first one, again on China. I know this has been touched on, but I just want to just clarify something. So you mentioned -- I just wondered the situation on the ground in China, you mentioned that VBP is going to take effect in May. And just if we take destocking out for a sec, is it fair to say that APAC was up around about 5%? And then just some thoughts on China on a procedure level year-on-year, especially as VBP takes effect and what sort of volume change you expect? And then maybe secondly, on D.O.R.C., the complementary of the business is quite clear here. But I just wanted to understand any sort of internal projects that you may impair, any additional cost savings that may go under? And then if there's a sort of a clear number you have in mind now that the deal has closed? Thanks.

Justus Wehmer: I'll try to start with your first question. China on the ground, I think your calculation, if you correct for the destocking, I think you said 5% would then be the year-over-year growth that -- I haven't done the calculation, but I think that sounds reasonable to me. So, I would confirm on that. But again, repeating that procedure-wise, we actually see this 10% increase compared to prior years, which is important and simply a function of the significantly increased installed base and also, although still lower than in the record times during corona, but improved utilization per device, which we also noticed over the last couple of months now. On IOL, I think you were asking about the NVBP, and again, just confirming, we understand that now in the first three provinces, the rollout will start now in end of May. And then in other provinces, June -- in June, that should start. And then, of course, it's a bit of -- even for us, given the volumes implied, it's a little bit hard to predict how fast we will then potentially benefit from the volumes being then requested. So therefore, I think important to understand is that we have baked in our guidance, as I said earlier, a net impact of roughly €10 million. Whether that is going to be sufficient or whether it is going to be somewhat slightly higher impact is ultimately a functional of the speed of this rollout, and that is really hard to predict for us. But I think that that's all we can share with you at this point in time.

Markus Weber: And concerning D.O.R.C., maybe I take the D.O.R.C. question. Actually, we have two synergy effects we are currently considering. So the first one is on top line. It's especially in sales. So we see, as I said, we see really a very good complementary fit of the sales activities. So, for instance, destock in China, it's currently not existent but it's fully certified, especially with the EVA and also some of the liquids and consumables so that actually our sales team can directly start. And we expect in the next couple of months here, then, a start of synergies which will then be fully materialized over the next years. So this is the one thing. On the other side, we see also that D.O.R.C. is very well established in the U.S. and especially with consumable business logistics, the entire value chain, and we can also benefit out of this. The other thing is, as I said, is then the combination of the products we are aware of. So we are really -- we have a super high installed base and market share in operational microscopes and especially in ophthalmic microscopes, and we can combine that now with our digital solutions with HDP and CIRRUS data platform. And this is an activity which is currently massively ongoing now between D.O.R.C. and the team here in Zeiss. So that means there will be very soon a solution available which is creating additional value then to the customer. Also very important to know is that we have now the D.O.R.C. and EVA NEXUS. In EVA, we have now a very competitive and leading combo unit. So that really means that we can do the vitrectomy and cataract treatments, which is something where the market is moving in. And we see here significant benefits also now with the installed base so that we can combine our knowledge of cataract and the cataract workflow and the consumable there, instruments here. Be aware of we just acquired Kogent and Katalyst together with FCI, which is also have instruments here that we can really provide a full offering. And this is now really creating a very competitive actually portfolio where we can amend and shape the market here. On the cost side, yes, we see opportunities, which is not so easy to number because we are just in the beginning of getting that out. So this will be more clear over the next few months, but we see that in the value chain. We see this in operations, so to actually streamline operational footprint here. So there is definitely also cost benefits, which will be then also derived over, as I said, over the next months and years. Overall, our case is set up actually for synergies over the next five to 10 years, also taking into account that approval times and regulatory times are pretty long, but this is overall. So we are currently quite confident that in terms of the synergies that we can even fulfill the case.

Ed Hall: Perfect, very clear. Thanks a lot guys.

Operator: Next question comes from Alexander Galitsa. Please go ahead.

Alexander Galitsa: Yes. thank you for taking the question. I have two left. The first one is just if you could clarify or provide some color on the quarterly volatility we have seen in the EBIT margin in MCS segment. I think on sequentially flat sales, your EBIT margin dropped by 4.5%. Just wondering, how much of that is really due to lower gross profit margin? And why that has been the case? And then the second question is on the VisuMax, if you are able to share the sort of normalized split as to how much LASIK versus SMILE procedures are being done. And how is it -- what the shift has been now that the consumers are trading down, how far away is it from the norm? Thank you.

Justus Wehmer: Hi Alex, I'll try to give you a little bit of a flavor on your question. So, the first one was on MCS, the quarterly volatility. I think there is -- even in the MCS portfolio, there is some sort of, you can argue, a higher margin and lower margin products. It's the top line flat products like KINEVO with a lot of accessories, they typically have higher margins than the mid or entry-class [Indiscernible] and so on. So, therefore, there can clearly be, and we had -- due to the delays of some of the products, we had some shifts in mix that will explain the vast majority of the -- we have observed here. Let's also remind that we have the order book that we had to work through and basically not much further influence on the mix composition, so to speak. So, on the VisuMax question referring to the split between LASIK and SMILE, I don't have the data right now here in front of me, but I think what we have typically is a ratio of probably 90% SMILE versus 10% LASIK. That is from my memories right now what we would typically see. And we right now see maybe an accentuation where LASIK may increase temporarily to levels that are closer to 20% or so, but nothing beyond that, that we have observed, yes. So, I hope that answers the question.

Alexander Galitsa: Thank you so much.

Operator: The next question comes from Anchal Verma, JPMorgan. Please go ahead.

Anchal Verma: Hi, good morning. Thanks for taking my questions. I have two left, please. The first one is just following up on the America weakness. You outlined that much of the weakness is driven by the diagnostics business. Could you just talk to the wider surgical market demand in the U.S., so essentially cataract and refractive market demand there, in terms of volume? And then the second one, a follow-up on Chinese VBP. I know it's still early, but have you started to see any spillover impact into the private markets so that the private markets are adopting similar pricing to the public VBP?

Markus Weber: So, maybe I'll take the first question. So, if I understood it right, you're asking how the cataract surgeries are developing. It's hard for us, I think, to say that as you do because I think you have exactly the same data as we have, so based on that, what we see is that overall, the cataract market is stable in the U.S. and is slightly growing. As I said, it's a little bit -- or as we said and stated, it's a little bit of different dynamic because one thing is consumables and IOLs has a different market dynamic currently as the device business. And this is what we see. Partially, for instance, now during the pandemic, it was accepted the other way around. There was a huge demand on the devices, and based also on the lockdowns, softer demand on consumables, so this has been now shifted for a while. We see now that the momentum comes back, but more to come. So, I hope this is answering. Gives you a little bit of big answer, but this is exactly the information that you have and I think the same for us.

Anchal Verma: And what about refractive in the U.S.?

Markus Weber: The refractive is -- overall is also currently quite, let's say, soft in that way. So what we see especially, as you know, the main market in U.S. is LASIK. And so we see that the market is softer in terms of that, also driven by the consumer behavior. Overall, we see a strong demand on SMILE procedures. So that is a little bit of a different thing, so because we are in a way, a kind of new entrant with this procedure now coming in, and there's a high demand on that. As you know, the SMILE was already treated in the past, but now with VisuMax, there are so many benefits coming in and that we see a strong demand and a higher adoption of this special procedure as we have seen that in Asia.

Justus Wehmer: And on your China VBP question on spillover, honestly, too early to tell from -- on observations. So as I said, it's just in the process of being rolled in. And therefore, I do not have already really evidence or data to answer your question whether we already see that in the private market, we have price spillovers. So maybe something to follow up in the next earnings call.

Anchal Verma: Perfect. That’s clear. Thank you.

Operator: The next question comes from Richard Felton. Please go ahead.

Richard Felton: Thank you. Good morning. Thanks for taking my question. Just one follow-up from me on China refractive, please. So I appreciate you sharing the 10% procedure growth number with us. It's really helpful to understand the underlying momentum for that business, especially in context of destocking. But I think that number was H1 overall. I was wondering if you're able to share any color on the variation on that 10% between Q1 versus Q2 or maybe an exit rate from Q2. Any color on that would be very helpful. Thank you.

Justus Wehmer: Richard, the only color that I can give you is that the pattern that we have is typically there is the Chinese New Year vacation peak and there's the summer peak. And that actually means that it doesn't really make a lot of sense to compare Q1 with Q2 growth rates, yes. So, I think there's nothing you can read out for it that predicts then the rest of the year. So, therefore, this is what I think is the meaningful number to keep in mind. Thanks.

Richard Felton: Fair enough. Very clear.

Operator: So, at the moment, there seem to be no further questions. [Operator Instructions] And there is one question coming in from Samuel England, Berenberg. Please go ahead.

Samuel England: Okay. Thanks for taking the questions. The first one was just around the U.S. I was just wondering if there's any levers you think you have to improve the weaker sales conversion that you called out, or whether you're just really waiting for the market to pick up in the second half? And then also did you see any order cancellations in the first half in the U.S., given what you've said around the market. And then secondly, you called out some small gross margin improvement in the first half from pricing and in Q2 versus Q1. Should we expect a similar positive impact on gross margins from price at the same sort of order of magnitude in the second half of the year? Thanks.

Markus Weber: Yes. So, maybe I'll take the first question. So, first of all, initiatives, yes, indeed, so we have initiatives running, for instance now for the VisuMax actually, to support the market entry of the new VISUMAX 800 to the U.S. market. There will be also when the CIRRUS is available again and we are allowed to, there will be then also definitely activities ongoing there. Overall, as I said before, we have also the operational capacity to react very fast on it and actually to move fast as soon as we have seen or as soon as the customer requires a new tool. In terms of cancellation, so as far as I know, we don't see a special high rate of cancellation. So, it's more kind of, as Justus already stated, it's a delay of the conversion. So, the sales funnel is pretty high, but the conversion rate is a little bit more delayed to what we normally expect.

Justus Wehmer: On your second question, the pricing improvements and expectations for the second half of the year, yes, indeed, we do have a couple of price measures that we would think will only play out then in the second half of the year. Also depends all on mix and so on, but I would think on similar levels than what we have seen in H1.

Operator: Okay. So the next question comes from Julien Ouaddour, Bank of America. Over to you.

Julien Ouaddour: Hi, good morning everyone. Thanks for squeezing me at the end. Quick follow-up. Thanks for giving us some sort of SMILE and LASIK market share like in China. And so we see the -- like the shift from like 10% to 20% for LASIK. Have you seen this trend, let's say, worsening or improving in the recent weeks? And my other question about that is just how confident are you for the VISUMAX 800 launch in China in 2025 with the recent trend of shift back, let's say, like to LASIK and especially given the ASP for equipment and probably consumables would be -- it would be higher, while consumers are like trading down? And the second question is I think you mentioned sort of like competition for SMILE procedure. Could you update us on like what you're seeing from like competitors, timing and probably also implication for the company? Thanks.

Justus Wehmer: Yes, I can try to answer these questions. So, no, I do not have any data from recent weeks. In terms of whether the proportion between SMILE and LASIK is moving significantly into the one or the other direction, simply have no data for that. On the VISUMAX 800 launch in China, we clearly do not have any expectation that there's some trading down because of the SMILE and LASIK shift. I think in terms of the unique differentiation that the VisuMax, the new VisuMax generation is offering to our customers, we rather get the feedback from the market that they are eagerly waiting for the product to be approved by NMPA and then ultimately be shipped. And also keep in mind that there's a huge installed base of lasers in China, and some of them clearly also at a point in time where they want replacement. And the SMILE brand is so well established that I clearly do not see any market dynamics that would bring the trading down, as we described it, to make that very realistic as a scenario. In competition-wise, I think you can be assured that we very, very carefully scrutinize the market in terms of what our competitors are doing. And we have not seen any of them, and some of them are in the process for many years, none of them to this point in time has actually been able to develop a significant footprint in China yet. And we're not talking in detail about specific companies. But just believe me that I think we are not seeing yet anybody making inroads. So -- and with the new VisuMax, then next year entering the market, I would think that this would rather solidify our position. Thanks.

Julien Ouaddour: Perfect. Thank you very much.

Operator: Okay. Again, at this point, as there are no further questions, I'd like to hand it back to the speakers at this point.

Markus Weber: Thanks everybody for joining our call and look forward to ongoing conversations with you in the next few months. We'll speak to you next time of our quarterly results in August. Thank you very much. Have a good day everyone.

Justus Wehmer: Yes. Thank you. Bye.