Materialise NV (MTLS) 2017 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 2017 Materialise Financial Results Conference Call. (Operator Instructions) As a reminder, this conference call may be recorded.

I would now like to introduce your host for today's conference, Harriet Fried of LHA. Please go ahead.

Thank you, everyone, for joining us today for Materialise's third quarter earnings conference call. With us on the call are Wilfried Vancraen, Founder and Chief Executive Officer of Materialise; Peter Leys, Executive Chairman; and Johan Albrecht, Chief Financial Officer.

Today's call and webcast are being accompanied by a slide presentation that summarizes Materialise's strategic, financial and operational performance for the third quarter of 2017. To access the slides, if you've not already done so, please go to the Investor Relations section of the company's website at www.materialise.com. The earnings press release, issued earlier this morning, can be found on that page as well.

Before we begin, I'd like to remind you that management may make forward-looking statements regarding the company's plans, expectations and growth prospects, among other things. These forward-looking statements are subject to known and unknown uncertainties and risks that could cause actual results to differ materially from the expectations expressed including competitive dynamics and industry change.

Any forward-looking statements including those related to the company's future results and activities represent management's estimates as of today and should not be relied upon as representing their estimates as of any subsequent day.

Management disclaims any duty to update or revise any forward-looking statements to reflect future events or changes in expectations.

A more detailed description of the risks and uncertainties and other factors that may impact the company's future business or financial results can be found in the 20-F for the fiscal year ended December 31, 2016, filed with the SEC on May 1, 2017.

Finally, management will discuss certain non-IFRS measures on today's call. A reconciliation table is contained in the earnings release and also at the end of the slide presentation.

With that introduction, I'd like to turn the call over to Peter Leys. Peter?

Thank you, Harriet, and thank you, everyone, for joining us today.

The agenda for today's call is on Slide 3. I'll begin with a brief overview of the quarter, which was a very significant one for us, not the least because of the acquisition of ACTech. After my brief introduction, Fried will come on and give you some insights into the strategic rationale and expected benefits of our acquisition. After Fried's comments, Johan will come on, and as always, will go through our Q3 numbers in more detail. And finally, I will come back to update you on some of our accomplishments in the third quarter as well as our new guidance. When we've completed our prepared remarks, we will be happy to respond to questions.

So turning to Slide 4, you will see the highlights of our third quarter financial results, which were good, especially considering the numerous activities we were simultaneously implementing. For the quarter, our revenue grew 12.4% to EUR 32.3 million. Each of our 3 business segments had revenue increases ranging from over 9% for Medical to more than 10% for Software and to more than 16% for Manufacturing. And all segments generated positive EBITDA. Our consolidated adjusted EBITDA was up 15% compared to the third quarter of last year.

But the most interesting news of the quarter were the many steps we took to continue building our growth platform including the completion of our new production and office facilities, our acquisition of ACTech and the expansion of our roster of partnerships as well as preparations for new ones we plan to unveil at formnext or at RSNA later this year.

At this point, I would like to turn the call over to Fried to give you more insight into the strategy behind our acquisition of ACTech.

Thank you, Peter. Good morning or good afternoon, everyone.

Please turn to Slide 5. Q3 2017 has been an extremely busy period at Materialise. We have quite literally been building the foundations for our next stage of growth at full speed. The rapid growth in our manufacturing during Q1 and Q2 make the expansion in production space an absolute necessity. However, the most important contribution to our future does not come from bricks, but from people, in particular, from the 368 highly skilled people that joined Materialise as a result of our acquisition of ACTech.

ACTech augments our strategy for metal applications of 3D printing. Through this acquisition, Materialise manufacturing has mapped out a path of success in metal applications that is similar to the one we pioneered for plastic applications.

While there are similarities between the metal and plastic segments of additive manufacturing, there are also very clear differences. The post processing steps for metal 3D printed components are different, more complex and they add more value in the value chain than for the plastic 3D printed parts. Metal parts are, in general, also subject to higher functional loads and tolerances so that quality controls become even more crucial.

While Materialise has historically built up all the knowledge to deliver fully functional and aesthetic solutions with plastic AM parts, we did not have this solution approach on the metal side. By joining forces with ACTech, we now have all the knowledge and capability in-house to finish and quality inspect the most demanding unique metal parts in the shortest period of time.

But apart from enhancing our technical capabilities, this acquisition also delineates the way we intend to prosecute our strategy in the wide universe of metal 3D printing opportunities. We want to concentrate on providing unique or very small series of complex and fully functional metal parts in a wide variety of alloys. We also want to maintain a competitive edge and high-value position by delivering those in the shortest possible lead time. And ACTech has an established sales channel for customers that meet exactly these kinds of components in the automotive, industrial goods and aerospace sectors. When these unique components are functional prototypes for test rigs that need to go into serial production in very specific alloys and casting processes, they can be produced by 3D printing-enabled casting metals to exactly those specifications that a customer wants at ACTech.

ACTech has been a global pioneer in the development of different 3D printing-enabled casting methodologies for both sand casting and investment casting since the 1990s. This also opens avenues for us to provide more software in the segment of the additive manufacturing industry.

With this choice, our goal is to distinguish our manufacturing operations from the large existing supply companies in industries such as automotive and aerospace that build a large series production that, in the future, will also contain significant contributions from additive manufacturing systems. The Materialise long-term focus remains to support those companies with our software backbone. The wide variety of products we will see passing through our metal manufacturing and that have been -- to be delivered fast and right from the get-go will serve as an ideal test bed for our software tools, so that we can maintain a premium position there.

With that overview, I would like to turn the call over to Johan.

Thank you, Fried. I'll start with a brief review of our consolidated revenue on Slide 6. As you know, when we refer to sales in our presentation, we mean revenues plus net deferred revenues.

Also please note, that unless otherwise stated, all comparisons in this call are against our results for third quarter of 2016.

As Peter mentioned already in his opening remarks, we realized an increase of more than 12% in revenue in this year's quarter with all 3 of our segments, especially Materialise Manufacturing producing good growth. For the quarter, Materialise Software accounts for 26% of our total revenue, Materialise Medical for 32% and Materialise Manufacturing for 42%. In this year's third quarter, across all 3 of our segments, revenue from Software sales and end parts contributed 77% of total revenue. The remaining 23% was generated through the production of prototypes.

With the acquisition of ACTech, which, as Fried just described, specializes in producing limited rounds of complex metal parts, the configuration of our revenue will change in future quarters.

Moving to Slide 7, you will see our consolidated adjusted EBITDA numbers for the third quarter. As Peter mentioned earlier, consolidated adjusted EBITDA increased by 15%, rising from EUR 2.8 million to EUR 3.3 million. Our adjusted EBITDA margin grew by 20 basis points to 10.1%. Adjusted EBITDA excludes EUR 266,000 in expenses related to the ACTech acquisition. These improvements reflect the combination of continued 12.4% revenue growth and a lower increase in operational expenses as compared to the third quarter last year.

Slide 8 summarizes the results of our Materialise Software segment, for which revenue grew 10.4% over last year's period. Revenue from recurring sales grew almost 13% compared to last year's quarter. Direct sales grew 19% while OEM sales were flat. The 10% revenue growth combined with the smaller aggregate increase of operational expenses and net other income resulted in a segment EBITDA of almost 40%, an increase of 300 basis points.

Turning to Slide 9, you will see that total revenue in our Materialise Medical segment grew more than 9% for the quarter. Revenue from medical software sales increased 25%. Software revenues represented 36% of total Medical segment. Revenues from medical device solutions rose 2%. EBITDA for the Medical segment was EUR 1.2 million as compared to EUR 754,000 in the prior year's period. EBITDA margin was up 330 basis points as a result of the higher revenues with favorable sales mix and only 0.1% growth of operational expenses.

Now let's turn to Slide 10 for an overview of the third quarter performance of the Materialise Manufacturing segment. There, as we mentioned, revenue was up more than 16%. This growth was driven by the increase in revenue of 27% from end part manufacturing. The revenue growth in the Manufacturing segment reflects a combination of strong growth in our core business, combined with sales of metal and of scanner sales from the HOYA agreement. End parts accounted for 46% of the segment's quarter revenue. EBITDA was EUR 499,000 as compared to EUR 1.7 million in the prior year period. The margin decreased to 3.7% this quarter from 14.9%. Where last year's EBITDA included EUR 460,000 related to the updated accounting valuation of resin materials stock, in the 2017 period it was affected negatively by higher cost of sales and start-up costs from the sales of eyewear scanners. As an aside, in our second quarter earnings call, we mentioned that the process of moving parts of our production to our new facilities in Belgium and Poland would further impact margins negatively during the year. More recently, however, we have seen that production inefficiencies have been limited and are already partly being offset against efficiency gains in other production techniques. At quarter end, the total number of printers Materialise has in production rose to 167, up 17 over the number at the end of the last year. This included 7 Multi Jet Fusion printers.

Slide 11 provides the highlights of our income statement for the third quarter. Gross profit rose 5.5% compared to last year's period. Our gross margin was 55.3% as compared to 58.9%. Again, this primarily reflects costs in the Manufacturing segment associated with the initial sales of eyewear scanners while the prior year's quarter included a positive effect of EUR 460,000 with respect to the updated accounting valuation of resin material stock.

In total, research and development, sales and marketing and G&A spending rose by 8.5% over the prior year period. R&D and sales and marketing each rose moderately, while G&A accounted for a larger proportion of the increase. G&A included the EUR 266,000 in expenses related to the ACTech acquisition.

We posted an operating loss of EUR 222,000 compared to a profit of EUR 332,000 for the third quarter 2016. This decrease was a result of combination of an increase in gross profit of 5.5% and a higher increase of 8.5% in R&D, sales and marketing and G&A. The operating result was negatively affected by the depreciation costs that increased to EUR 2.9 million from EUR 2.1 million for the third quarter of 2016.

For the fourth quarter, we expect the costs related to the ACTech acquisition to be an additional EUR 700,000. This amount will include the EUR 400,000 related to German change of control real estate tax with respect to ACTech's premises that have a book value of approximately EUR 11 million.

Net financial result was negative EUR 593,000 compared to a negative EUR 124,000 for last year's period, reflecting variances in the currency exchange rate, primarily on the portion of the company's IPO proceeds held in US dollar.

Income tax amounted EUR 433,000, this compared to an income tax of EUR 191,000 for last year's period.

As a result of the above, net loss for the third quarter of 2017 was EUR 1.4 million compared to a EUR 50,000 -- EUR 52,000 loss for last year's period.

Now please turn to Slide 12 for a recap of balance sheet and cash flow highlights. Our balance sheet remained solid with debt accounting for 30% of total liabilities and equity at quarter end.

Over the past 12 months, the amount of loans and borrowings did double to EUR 53.6 million. The increase in the loans includes the financing of our new premises in Belgium and Poland for EUR 16.5 million. The financial cost increase remained limited, however, due to the current favorable market circumstances and our strong banking partnerships.

It is also important to note that the short-term debt increased only marginally to EUR 7.0 million at end of the third quarter 2017 from EUR 5.7 million at the end of the third quarter last year.

As a result of the ACTech acquisition, the debt position increased again in October by EUR 28 million, carrying average interest rate of 1.1%. The acquisition financing is structured through a EUR 10 million bullet loan of 7 years and a 6-year investment loan.

Capital expenditures amounted to EUR 9.6 million compared to EUR 2.3 million in last year's period and mainly includes EUR 3 million related to the completion of our new premises in Poland and Belgium, EUR 3.2 million related to new equipment and EUR 2.5 million related to new software. Almost all capital expenditures have been financed externally.

We ended the quarter with cash and cash equivalents of EUR 48.1 million compared to EUR 55.9 million at the end of last year. Cash flow from operating activities in the first 9 months of 2017 was EUR 2.5 million compared to EUR 4.3 million for the same period in 2016. The operating activities generated EUR 8.7 million, offset by an increase of working capital of EUR 6.2 million.

Total deferred revenues from annual software sales and maintenance contracts amounted to EUR 16.6 million at September 30, 2017, versus EUR 16.8 million at the end of last year.

With that overview, I turn the call back to Peter.

Thank you, Johan. Please turn to Slide 13 for an overview of some of our strategic achievements of the quarter. Fried already pointed out that, over the last few months, we had invested significantly in new buildings in Belgium and Poland and in new competencies in Germany. We are obviously very excited about those major steps, but during Q3 there has also been some other interesting activity that we would like to share with you.

First, and most importantly, during the quarter, we were the first to receive the green light to bring a 3D-printed maxillofacial implant to the U.S. market. This will enable our [implant] operator, DePuy Synthes, to start selling our maxillofacial implants in the United States.

In addition, Ørgreen, the high-end Danish eyewear brand joined the Yuniku platform with 12 models specifically designed for 3D printing.

And finally, together with winter sports gear and footwear specialist Tailored Fits, we launched the world's first end-to-end digital supply chain for custom fit ski boots.

Other meanings partnerships initiatives are underway and we hope to be able to announce some of them either as early as next week at formnext in Frankfurt or later this month at the RSNA conference in Chicago.

Let's turn to Slide 14. As you know, at the beginning of 2017, we said we expected to report consolidated revenue between EUR 128 million and EUR 134 million, adjusted EBITDA between EUR 10.5 million and EUR 13.5 million, and an increase of deferred revenue from annual licenses and maintenance by an amount between EUR 4 million and EUR 5 million as compared to 2016. When we reported our second quarter results, we added that we expected to be closer to the high end of the revenue and adjusted EBITDA ranges.

We are now adjusting our revenue and adjusted EBITDA guidance for 2017 to reflect the acquisition of ACTech, which we will be consolidating for the full fourth quarter.

For fiscal 2017, we currently expect to report consolidated revenue between EUR 140 million and EUR 143 million and adjusted EBITDA between EUR 13 million and EUR 14 million. Separately, based on year-to-date software sales, we are revising our outlook for deferred revenue from annual licenses and maintenance in 2017. We now expect a decrease between EUR 2 million and EUR 3 million as compared to 2016.

This concludes our prepared remarks. So operator, we are now ready to open the call to questions.

(Operator Instructions) Our first question comes from the line of Troy Jensen from Piper Jaffray.

So just a couple of questions from my end. Just first of all, sequentially, gentlemen, it looks like you guys were down 4% historically. We haven't seen that in the September quarter. I understand you're up nicely on a year-over-year basis, but can you explain why you think sales declined on a sequential basis?

Yes, the third quarter is always the holiday quarter where, yes, some of the major customers are, for approximately a month, unavailable in Europe and that explains why the third quarter is always a difficult quarter, yes? And also this year, we have seen this effect.

Yes, and let me add, Troy. As you know, we had exceptionally good first and second quarter results so if you haven't -- and better than expected as we explained during the last call, second quarter. And then you move into the third quarter, which is a more holiday-inspired quarter, then you have that effect of having a sequential less good quarter, if you want.

Yes, okay, understood. And then just to touch base, to follow down the income statement here, you're at gross margins, so down for a bit sequentially here. I guess it sounds like Software grew as a percentage of revenues and manufacturing declined as a percentage of revenues. So I thought that, that mix change would have boosted the gross margins. So can you explain the big drop in gross margins?

Well, effectively, we have seen this decrease in gross margin for 2 major reasons, as I already explained. Last year, we had a onetime accounting adjustment that we applied to the resin valuation, which had a positive effect at that moment of EUR 462,000. And this quarter, we see effectively that from the sale of our scanners from the HOYA deal, that the margins that we realized on those scanners is significantly lower than we realized on our production and besides that we also have the start-up costs that we have to assume in the first year. That is the double effect that we noticed here in the third quarter.

Okay. I guess, sequentially, Johan, not as much year-over-year so it's just the scanner sales?

This is an effect we won't see anymore. So the fourth quarter we will already be more comparable to last year. But we will see, again, the effect of the HOYA in the fourth quarter. Thereafter, this should improve. We won't have the start-up costs anymore going forward -- going further because everything will have been assumed in 2017.

Okay. And then maybe 1 or 2 more for me. So the deferred rev, taking that down by couple of million here. To me, is Software sales below expectations? Or is it primarily Medical?

No, it's not Medical. It's the OEM portion in the Software business is flat, yes. So we're still having Software growth of our direct sales, but OEM sales have been flat and we think that's reflecting a little bit what is also happening to some of the OEMs that are publicly reporting their results.

Yes, okay. Understood. So within that component, though, are you seeing HP ramp? I'm assuming it's not ramping enough to offset the weakness with the other OEMs.

Yes, it's still in the initial phase.

Clearly, we -- as we report, we have 7 printers, that's a high number. But compared to all the plastic printers that are in the market, I mean that's a very low number, Troy.

Yes, yes. Understood. And the last question then I'll cede the floor. Just in the industrial or the Manufacturing business. EBITDA, your EBITDA is down year-over-year, but it's been down like 4 or 5 quarters sequentially and I'm just kind of wondering what's going on there. Is it really just this move to the end part carries lower profit margins?

There's a number of things here, Troy. As you -- definitely the items that Johan already referred to on the margin side, but also as you note, we, quarter after quarter, concentrate on trying to sell the manufactured end parts rather than prototypes. And I mean that just requires, as we explained during earlier calls, it does require a particular certified manufacturing. It requires a pretty intensive first collaboration with the customer and ramp-up costs, which can only be offset and lead to better EBITDA once we have more volumes of those manufactured end parts. And in line with where the market is, we are engaging in many early stage projects with quite a few customers, which has an impact on -- has had an impact for a number of quarters now on our EBITDA.

We see also a combination. We had the move of the printers that we first noted in the second quarter. We have the HOYA effect, we have the start-up of -- or the cost of new introduced technologies and this is a higher effect on cost of sales that should go on -- that should improve in the future.

Another element I can bring here to the table is that in the first 2 quarters, we really had a very, very big growth, which resulted in serious efforts to keep up and also in some situations that we had to subcontract some of the work. And yes, very big growth in combination with our preparation of the move and so on have led to inefficiencies and this is not something new, I think. We spoke about this also at the occasion of the release of our second quarter results that we anticipated that this would have an impact also on the third quarter.

(Operator Instructions) And it looks like we have a question from the line of Weston Twigg from KeyBanc Capital Markets.

I have a couple. First, just wondered if you could help us understand the ACTech financial implication for Q4 guidance or for 2017 guidance, how much revenue and associated costs are in the model or in the projection?

Okay. Well, let me give you some, indeed, further insight in that. Weston, from the press release regarding the ACTech acquisition, 2016 sales or revenue of ACTech were EUR 34.3 million and they reported a full year EBITDA of EUR 8.2 million. Quarter-over-quarter over the year, I mean, both revenues and EBITDA rather evenly spread. And as we also explained earlier, this is not a business that will show the same growth profile as the Materialise business. So if you then look at the new guidance that we've given, we are still confident that we will fall in the top -- in the higher parts of the initial guidance that we had given both on revenue and on adjusted EBITDA on a stand-alone basis. That basically means between EUR 131 million and EUR 134 million on revenue side and between EUR 12 million and EUR 13.5 million on the adjusted EBITDA side for Materialise as a stand-alone. And then we basically added the, I mean, 1/4 of the revenue on the one side and of the EBITDA on the other side that we expect ACTech to be realizing for the full year 2017. And if you add that, then you kind of come to the new ranges that we've provided.

That's very helpful, okay. And then just on the eyewear traction, it sounds like you're getting a lot of scanners out into the marketplace. Just wondered if you'd give us an update in terms of the traction of this product segment and your expectations maybe in 2018 for growth?

It's a good question, Wes, and it also kind of dives into a question that Troy asked earlier about the EBITDA margin of our Manufacturing business. Obviously, we are also here with the sale of the scanners, which have lower margins. We are in an investment mode in a very particular application with our Manufacturing business just like we are in "investment mode" with a number of other certified manufacturing projects. And so I mean, that has an impact on our EBITDA. And obviously, we expect to see volume coming from our certified manufacturing projects in general. And on the HOYA project, in particular, we expect, eventually, this project will be a success if then subsequently the sale of the scanners can be converted into the sale of the, actually of the eyewear itself where we have, I mean, a royalty income stream associated with it. Currently, it's difficult for us to get a very strong visibility on the conversion rate. Obviously, we are printing ourselves the eyewear that is being ordered through the systems that have been installed. But as many of the [efficients] are either in the process of installing are in the process of actually being educated by the marketing teams and then in the process of actually educating the market, we think it's a bit early to actually make any learned judgment on the success of the conversion rate of those scanners into actual sales of eyewear. We hope to be able to give the market a better flavor on the timing and education of our full year call in February of next year.

At this time, I'm not showing any further questions. I would like to turn the call back over to Peter Leys for any closing comments.

Thank you, operator, and thank you all for joining the call. We look forward to meeting many of you in the course of next week at formnext where we hope to be able to share the details of some of our new partnerships and definitely of some of the new products that we intend to launch. Thank you, again, and we look forward to seeing you soon. Goodbye.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.