Materialise NV (MTLS) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Q1 2018 Materialise conference call. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to turn the conference over to Ms. Harriet Fried of LHA. Ma'am, you may proceed.

Thank you for joining us today for Materialise's quarterly conference call. With us on the call are Fried Vancraen, Founder and 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 reviews Materialise's strategic financial and operational performance for the first quarter of 2018. To access the slide 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 that will be issued earlier this morning can also be found on that page.

Before we get started, I would 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 date. 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 fiscal year ended December 31, 2017, filed with the SEC on April 30, 2018.

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

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

Hi, Harriet. Thank you, and thank you, everyone, for joining us today. You'll find an agenda for our call on Slide 3. As always, I will begin with a brief recap of our results for the quarter, after which, Fried will come on to discuss the outstanding performance of our medical segment and the strategy that we followed to arrive at that point. We felt it was particularly germane, because it illustrates the way that insightful and astute investment in and development of a vertical can yield an impressive outcome. After that, Johan will go through our first quarter numbers in more detail, and finally, I will come back on with a few concluding remarks.

When we've completed our prepared remarks, we'll be happy to respond to any questions that you may have.

So turning to Slide 4. You will see the highlights of our first quarter results. Continuing along the path of our diversified business model, Materialise delivered another set of good results. This quarter, the strongest performance came from of our medical segment and from the ACTech business that we added to our manufacturing segment last October.

Including the impact of ACTech, which contributed revenue of EUR 11.2 million and EBITDA of EUR 2.8 million in the first quarter, our total revenue rose by 37.5% to EUR 43.9 million, our adjusted EBITDA rose 86% to EUR 5.2 million and our net result improved by more than EUR 600,000.

For the period, all 3 of our segments turned in double-digit EBITDA margins, with medical reaching a record high of 17%.

With this summary, I would like -- now like to turn the call over to Fried.

Good morning, and good afternoon to everyone. Thank you for joining us today. We are very pleased that the quarterly results we released today clearly demonstrate the benefit of our focus on certain vertical markets over the past years. And we believe this will continue in the years to come. Medical could be considered by far our oldest and biggest vertical market. As Peter already mentioned in his introduction and Johan will explain more in more financial detail in a minute, our medical segment performed particularly well in Q1.

Medical applications in the field of orthopedic and CMF surgery were the first in which Materialise built a patent portfolio that was not solely related to 3D printing technology and the software side of 3D printing as such. In these medical fields, we have been working on a pattern portfolio that influences the entire value chain to the benefit of patients that need certain types of specialized care.

We combine here all of Materialise's core competencies, the deep knowledge of what 3D printing can offer in design and engineering opportunities for medical instruments and implants: our software that can automate the medical image process, the design and the production planning, and, finally, our certified manufacturing capabilities with AM technologies. This combination allows us to bring medical products to the market where our offering reflects the entire value offering and is not just subject to competitive and a cyclical AM subcontracting pricing.

One example that I want to give here is the TRUMATCH titanium 3D printed implants, distributed by Johnson & Johnson. Those are part of a personalized total solution for orthognathic surgery, also known as corrective jaw surgery, as well as for facial reconstruction. From virtual surgical planning to the 3D-printed implants used in combination with 3D-printed surgical guides, the systems help to achieve better aesthetic results and minimize surgery time for patients.

It has achieved positive results in the European and Australian markets since its introduction in 2016. We received FDA clearance in September 2017. A first approved 3D printed maxillofacial implant in U.S., as was this [case.]And now, the rollout in the American market is really starting as of Q1.

The development for this solution started as early as in 2009. It is covered by multiple patents, and we clearly demonstrated clinical and economic benefits by both reducing surgery time and improving the surgeon's experience. The system is supported by dedicated software tools and clinical engineers that optimize the solution for each patient in interaction with the surgeon. Accurate transfer or the surgical plant is enabled by minimally invasive guides printed in titanium. The patient's specific implants are also 3D printed in titanium.

They undergo multiple post-processing steps in the production line, including heat treatment, amortization and cleaning. The end result is fully in line with what the market normally expects from titanium implants, generated by other technologies, but with the additional benefits in patient-specific functionality. It is obvious from this example that such vertical solutions require multiple years of development. This development effort is not only the latest related to the technological product development and additive manufacturing process development, but also to the logistical software development and, even more importantly, the market development for those disruptive solutions.

We are currently executing this development not only for multiple products in our medical segment, but also for several vertical markets in our manufacturing segment, eyewear frames, insoles and [automotive]quality pictures are all examples of the verticals we are currently investing in. Each time we succeed, thanks to the inherent benefits of additive manufacturing in creating new product categories in those verticals, we can offer unprecedented value, and we thereby contribute to a better and healthier roles according to our mission statement. While these developments may weigh on our results in the short-term, we are confident that they will deliver better margin contributions in the longer term, as is demonstrated by the current strong results of our medical segment.

At this point, Johan will come on to issue you more details on our first quarter financial results.

Thank you, Fried. I'd begin with a brief review of our consolidated revenue on Slide 6. As we get started, I would like to remind you that when we refer to sales in our presentation, we mean revenues plus deferred revenue. Also please note that unless otherwise stated, all comparisons in this call are against our results for the same period in 2017. Finally, we have consolidated the results of ACTech for the first quarter of 2018 in our manufacturing business. They do not affect for financial reporting purposes the results of our software and medical segments. When we provide certain numbers on a cross-segment basis, it will present the ACTech numbers separately.

As Peter mentioned in his opening remarks, in this year's first quarter, including ACTech's EUR 11.2 million, we generated a 38% increase in revenue. Organically, our revenue grew to EUR 32.7 million or 2.4% compared to last year's period. Excluding the effects of changes in U.S. dollar-euro exchange rate, organic growth would have been 5.8%, although these currency exchange differences which have had far less impact on our EBITDA.

Not only our medical but also our software segment had solid sales increases, particularly if you take into account our deferred revenue from annual software sales and maintenance contracts, which rose by EUR 2.1 million. As a result of the ACTech acquisition, our revenue is distributed differently this quarter than in last year's period. Including ACTech's 26% share, Materialise Manufacturing to 54% of our revenue this quarter, while Materialise Software accounted for 19% and Materialise Medical for 27%. The cross segment distribution of our revenues also looks differently, in great part due to the ACTech acquisition. Although total revenue from software products increased in absolute numbers, by almost EUR 400,000, it decreased relatively as compared to the other cross segment product groups by 10 percentage points to 28%. The relative share of our cross segment and parts activities, which grew in absolute numbers by approximately EUR 0.8 million, decreased by 8 percentage point to 29%. Finally, our traditionally 3D printing prototyping business accounted for 17% of total revenues.

Moving to Slide 7, you will see a consolidated adjusted EBITDA numbers for the first quarter. As Peter mentioned earlier, consolidated adjusted EBITDA increased by 86%, rising from EUR 2.8 million to EUR 5,224,000. This result includes ACTech's contribution of EUR 2.8 million, and our EBITDA margin rose 310 basis points from 8.8% to 11.9%.

The significant increase in our medical segment's EBITDA was success factor described by Fried, was offset to some degree by lower EBITDA in our software and our organic manufacturing segments, which I will discuss in a minute.

Organically, our adjusted EBITDA decreased EUR 430,000 to EUR 2.4 million, mainly as a result of a continued growth in R&D and our sales and marketing expenses compared to decreased revenue in our manufacturing and software segments. The organic adjusted EBITDA margin for the quarter was 7.3%.

Slide 8 summarizes the results of our Materialise Software segment. Here revenue decreased 3% or EUR 249,000, but that excludes $1.8 million recurring sales that could not be recognized in the quarter compared to EUR 0.8 million in last year's period.

Recurring sales as well as OEM sales were up 6%, while direct sales grew 10%. Due to the combination of higher deferred revenue and continued investments in R&D and sales and marketing, the segment's EBITDA was 28% in 2018 versus 35%.

Moving now to Slide 9, you will see that total revenue in our Materialise Medical segment grew 20% for the quarter to almost EUR 12 million. This number does not include deferred income of approximately EUR 1.4 million from new or renewed partner contract project fees. Revenue from our medical software grew 18%, representing 35% of the total segment's revenue. Revenue from Medical Device Solutions rose 22%. EBITDA for the medical segment increased almost EUR1.8 million to EUR 2,060,000. The EBITDA margin was 17.2% as compared to 3.2% in the prior year's quarter, as a result of higher revenues, improved gross margin and an only 2.3% increase in operational expenses.

Now let's turn to Slide 10 for an overview of the Q1 performance of our Materialise Manufacturing segment. There, as we mentioned, revenue was up 76%, including ACTech's EUR 11 million revenue contribution. Organically, however, the segment's revenue fell 7% from what was a record quarter last year. The decrease in one industrial project impacted revenue by 5%, while the market dynamics in Europe and in particular in the automotive industry, also had negative impact on our top line. End part manufacturing was up 11%, while prototyping decreased 5%. ACTech's EUR 2.8 million contribution and $3.1 million segment EBITDA compensated for this quarter's organic EBITDA of EUR 292,000, as compared to EUR 1.3 million in the prior-year period.

This EBITDA was a result of the negative organic revenue growth combined with increased research and development expenses with respect to our wearable and metal 3D printing product lines, and increased G&A expenses. At quarter end, we had a total of 182 printers in production, up 27 over the number at the end of last year's quarter, although down 3 from year-end's due to disinvestment in powder binding equipment. The total includes 9 printers operated at ACTech.

Slide 11 provides the highlights of our income statement for the first quarter. Gross profit rose 30% compared to last year's period. Excluding ACTech, gross profit increased 8%, while gross margin was 61% as compared to 58%. The fixed cost of sales related to the decreased manufacturing revenues weighed on the gross margin, which were more than offset by optimized subcontracting, materials and transportation expenditure in both our manufacturing and our medical segments. On the other hand, the quality of the current generation of 3D printers boosted by our software add-ons have led to considerably longer production lifetime. As a result, we updated our quality depreciation rules and extended the lifetime for most of our machines as from the fourth quarter 2017, which led also in this period to an improvement of our cost of sales by EUR 0.3 million. In total, R&D sales and marketing and G&A spending rose by 90% over the prior-year period. Excluding ACTech, these operating expenses increased 9.6%.

R&D rose 22%, while certain of our development costs related to eyewear and integrated software were activated in the first quarter 2017. we continued and reinforced those efforts, also increasing medical R&D compared to last year's period. Excluding ACTech, G&A rose 12% over the prior-year period, reflecting increased efforts in further improving our internal processes and controls as well as expenses related to financial and other projects.

Net other operating income decreased to EUR 549,000 compared to EUR 1,018,000. Excluding the impact of ACTech, net other operating income decreased by EUR 172,000. This slide also includes the depreciation of intangible assets from business combinations amounting to EUR 571,000, of which EUR 373,000 is related to ACTech.

The group's operating profit amounted to EUR 1,130,000. This operating result was negatively affected by depreciation cost, which increased from EUR 2.6 million to EUR 4 million or to EUR 3 million, excluding the impact of ACTech.

Excluding ACTech, we posted an operating loss of EUR 672,000, compared to a loss of EUR 84,000, reflecting an improved gross profit, but offset by higher R&D, G&A and depreciation expenses in this year's quarter.

Net financial result was negative EUR 730,000 compared to a negative EUR 142,000 for last year's period. This mostly reflected variances in the currency exchange rate and increased financial expenses, of which EUR 167,000 relates to ACTech.

Income tax amounted to EUR 0.5 million, of which EUR 416,000 was related to ACTech compared to EUR 201,000 in the first quarter of 2017. Net loss for the first quarter of 2018 was EUR 183,000 or EUR 0.00 per diluted share, compared to a net loss of EUR 816,000 or a loss of EUR 0.02. ACTech contributed EUR 1,219,000 positively in the net result.

Now please turn to Slide 12 for a recap of balance sheet and cash flow highlights. Our balance sheet remains solid, with cash of EUR 44.7 million compared to EUR 43.2 million as of end last year. Total debt only rose EUR 200,000 from year-end 2017 to EUR 94.8 million. Capital expenditures amounted to EUR 4.7 million, of which EUR 0.6 million was related to expenditures made by ACTech, compared to EUR 9.2 million in last year's period. Again, most of the capital expenditures have been financed externally.

Cash flow from operating activities for the quarter amounted to EUR 6.2 million compared to EUR 1.6 million for the same period in 2017.

Total deferred revenue amounted to EUR 29.1 million as compared to EUR 23.8 million as of end December 2017. Of the EUR 29 million, EUR 20.8 million was related to annual software sales and maintenance contracts versus EUR 18.7 million as of end December last year. Finally, and as also mentioned in our previous earnings call, this balance sheet has not yet been affected by the EUR 35 million credit facility agreement with the European investment bank that was signed in December last year.

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

Thank you, Johan. In the less than 2 months that have passed since we announced our the fourth quarter and full year 2017 results, we've been working hard on the operational priorities that we outlined in our previous call. Recently, as many of you know, we were present at the AMUG and RAPID trade shows in the U.S. But as many of you may not know, we were also present at the Hanover Messe trade show.

As illustrated on Slide 13, at the booth of SAP in Hanover, Materialise and SAP jointly demonstrated a proof-of-concept, illustrating how a combination of the currently existing platforms of both companies can drive the digital supply chain of tomorrow, already today.

A seamless combination of the currently existing Materialise 3D print suite, with the currently existing SAP distributed manufacturing platform, provides customers with easy access to 3D print factory services via the cloud through standardized procurement processes. From the initial purchase order to the receipt of the final printed product and related invoice, the customer is automatically informed of the status of his project, including via printability checks and status updates -- and all this in his familiar system, while the required parts are in fact being remotely manufactured. Importantly, during the entire process, the customers design IP remains closely protected.

These kinds of relatively straightforward combinations of existing products of different players in the ecosystem, in the case at hand between products of Materialise, SAP and LEO Lane, show that the digital supply chain is much more a reality than many people think, provided of course, that smarter players in the ecosystem find each other and are willing to collaborate.

We intend to further underscore our unique position in the market and our openness and willingness to collaborate at the Materialise Experience conference that we are holding in Detroit on June 7 and 8 of this year.

And finally, based on of our performance in the first quarter and our outlook for the rest of the year, we believe that we remain on track to meet the full year guidance that we have provided earlier in March of this year. This concludes our prepared remarks. So operator, we are now ready to open the call to questions.

(Operator Instructions) And our first question comes from the line of Troy Jensen from Piper.

Can we just spend some time on the software business. So it's like it was down about 3% year-over-year. Just curious what's going on between OEMs and kind of the direct Magics Streamics business?

Sure. While Johan is looking at the numbers, Troy, let me maybe repeat what we already outlined in the prepared remarks. We had an exceptional growth in the fourth quarter of last year as you may remember, up close to 30%, which as we explained was partially due to the fact that we had relatively little deferred revenues and that we could actually recognize more revenues than we had anticipated. I mean, somewhat of a reverse movement happened in this quarter. I think we had still good sales but we had to defer much more revenue in this first quarter, than we had anticipated, showing --I mean, actually slightly negative growth if you look at the recognized revenues only. But if you compare those 2 quarters and if you add up revenues that we have to defer and revenues that we can recognize, then we had a solid growth in Q4, but not as spectacular as it maybe then seemed. And I think we still have, if you look at the overall market circumstances, a good growth in Q1 and probably better than what the solely recognized revenues show. And with that, I'll turn the floor to Johan to respond to your question more precisely.

And if we translate that in numbers, we see effectively that OEM sales -- sales and not revenue -- have increased by 6%. You specifically ask with reference to Magics, well that growth is not far away from the 6% neither. So we see that sales increased and as explained in our remarks, we also referred to the fact that we have a dollar that is a little weaker compared to the euro and this also had an impact of approximately 5% on the top line, being it, as you know and as we already explained before, that we also have costs expressed in US dollars and that we pay in US dollars, so that they have only a little or a far lesser effect on our EBITDA.

Troy, if I may add, it's of course -- it's also always dangerous to draw conclusions from one quarter. But if you look at the growth of OEM sales, that is kind of in line with the overall growth, slower growth of the markets, I'd say. And our upselling, is typically more annual sales, as you know. So there was also upselling this quarter, but those resulted in quite significant deferred revenues, which we could not show in our revenues in this quarter.

In software, to be concrete in number, we have higher deferred revenue from software sales of EUR 1 million in this quarter compared to last year.

Alright, now shifting gear into the medical business. 20% growth was pretty impressive this year. Can you just talk about kind of it's -- the drivers on that business and I'd be curious to know how big Biomet Zimmer is within the medical business now?

Well, first of all, while software in the medical side is also growing double digits, the biggest driver is the implant business I was referring to and then especially in the CMF field. In the meantime, yes, Zimmer Biomet has dropped to less than, well, 35% of the overall business. At the time of our IPO, you will remember that it was still 80%, but this has significantly dropped.

Also, an important driver here, Troy, as you will definitely remember, we were switching -- particularly in our medical software -- from selling perpetuals to annuals. And we are clearly also seeing now the results of that switch, gradually already we saw in the last quarters of last year, we continue to see it now. And Johan can correct me if I'm wrong, but I think our recurring sales, in particular, our renewals of annuals in medical, I think, grew by something like 50%. So that is really -- that strategy that we announced and deployed a couple of years ago is now clearly showing its results.

Ok. All right, last question from me, too, just on the manufacturing side now. The EBITDA margins looked pretty impressive here. And I know a lot of that is coming from the ACT acquisition, but organically are you guys seeing better EBITDA margins, excluding ACT?

Well, ACTech has historically always been able to present good margins, and they have maintained that in this particular, very, very good quarter, as in the line of expectations, but even a stronger performance. So they are concentrated, they have good market access and they effectively deliver.

Now on our own business, we must say that the gross margin has improved compared to last year, but at the same time, given that the turnover was weakened or the revenue was weakened, we see a higher impact of the fixed cost, which has decreased the EBITDA of that side of the business.

We have the fixed costs of our personnel. We have the fixed costs of the equipment and facilities. On the other hand, we have won in subcontracting transportation costs and raw materials. Productivity on that increased.

And our next question comes from the line of Weston Twigg from KeyBanc.

First, just sticking with the manufacturing segment. I was wondering if you could can help me understand a little bit more specifically where the weakness is coming from? And then tied into that, what was driving the ACTech strength? And do you expect that business to actually grow this year, because I think when you acquired it you said it was sort of flattish? Or you expected it to be sort of flattish growth.

Well, a double-sided question, let me start. The strength of ACTech is that, ACTech is primarily focused on engine development and the powertrain part of vehicles. And this is a sector where there is, of course, as you know, a lot of movement, both because fuel-based engines have to become more efficient and have to emit less toxic gases. And at the same time, because the weight increased in hybrid vehicles and electric vehicles. So a lot of the development is going out in the automotive sector on the powertrain side. At the same time, this is also a bit of an explanation for the weakness of our traditional business, because currently, a lot of new models are in the pipeline, but not in a prototyping phase yet. And there is in -- at least in the European market -- there is currently a clear, let's say, dip in the cycle, where there is much less demand in the market for automotive prototypes, automotive fixtures and all things with which 3D printing is used a lot, which causes, of course, high pressure on pricing and capacity utilization. And that is -- that is a dip we currently experience, but that we expect -- according to the market information -- to either reverse into a real flood of new models in the second half of this year or early next year.

Okay. And then on -- just on -- following up on that ACTech side. So does that imply you that you would actually get some recently good growth from ACTech this year?

Yes. ACTech has been growing also in double-digit.

Okay. And, I guess, following on that a little bit, GM just announced a deal with Autodesk, I think, on Thursday to develop parts using 3D printing. First, I was wondering if that represents any risk to your business? Or if you think that is more of a design-related effort and something that a company like Materialise might still be involved in, at least, either on the manufacturing or software side? They also said, within 5 years, they hope to produce thousands or tens of thousands of parts of scale, which I think would tie in nicely with your plans. And so I was just wondering if you have any update on thoughts of scaling up your automotive business a bit more over the next few years?

Well, actually our team in the U.S. has a very good relation with the people from GM. They will be one of the speakers at the events, the Materialise Experience event that Peter announced at the end of the call. So we believe this is truly an opportunity for us and for the entire sector.

(Operator Instructions) And our next question comes from the line of Chip Skinner from Royce Funds.

I guess, there are 2 components of software, one in the manufacturing and 1 in the medical. You sort of touched on this in the -- I believe it's the manufacturing segment. But it seems to me, maybe I am wrong, correct me if I am wrong, that you're selling software on a perpetual and, increasingly, on a subscription basis? Can you confirm that in both of those 2 segments? And is there a way to sort of measure that since it looks like it could be depressing the software revenue growth?

Chip, let me -- I think we have to make a distinction here, as we already did, between the software that we sell within the software segment on the one hand and then the medical software, that our medical segment sells. The medical software that we sell from of our medical segment -- there, the short answer to your question is, yes. The switch from selling perpetuals to selling annuals was fairly dramatic, and was an effort that we started in 2014. It was not 100%. It was like a research institutes and universities still work on annual budgets and still buy perpetuals, but in short, you can say yes, that was a dramatic change. Actually, that switch had a depressing effect on our revenues of medical software, shortly after that switch in 2015, 2016. And as I explained earlier on the call, now we are seeing the benefits of that as people continue to renew the annual subscription contracts, that helps the growth of our medical software business.

Second part -- second answer to your question, the picture in the software segment of our business is a more mixed bag. There, we have so far not been able to make the same dramatic switch from selling perpetuals to annuals, as we have been able to do so in the medical market. As you may know, partially because customers do view at least a part of our software suite, really as almost inherent to the machine, and therefore, do expect that when they buy a machine, at least the base modules, they buy them together with the machine on a "perpetual" basis. So the switch is less dramatic there, but it is correct, that also with software, we tried to move more and more towards annual contracts and definitely the new modules that we are introducing,we introduce them as much as possible on an annual subscription basis, rather than on a perpetual basis. So to some extent, but a far less extent than what we experienced a couple of years ago in the medical software numbers,that does have on the short term, a negative impact on of our numbers, but should help us in generating more sustainable growth going forward.

Great, thanks. And I guess, the second question, the strength in the medical business, the revenue growth and the margins in the quarter -- is that likely sustainable in future quarters? Or was there something sort of one-off in the quarter that might not be occurring in the future?

Well, it's definitely not one-off in a sense that we even deferred quite some revenues sales that we definitely made. But at the same time, I want to make it clear that we have plans to increase our investments at some level, because we have a few focused investments that can further increase our position in some of the verticals that we are really addressing.

I guess that -- I guess I've heard you say that the FDA process with medical devices is long and expensive. Does that tie with what you were thinking before? Or has there been a change?

Yes, there are still some several projects we have in the pipeline that will cost us money and that will be financed, of course, from the good results we achieved on the successful lines.

Recent lines that we've added like CMF, we see now nice profitabilities and these will effectively be sustainable and may further increase, but, again, offset for a certain part, the new investments that we will invest into.

And I am currently seeing no further questions. I would like to turn the call back to Peter Leys for any closing remarks.

Thank you, operator, and thank you, again, all, for joining us today. So we'll be back in the U.S. for a financial conference in Boston in June, and we'll issue an advisory announcement with the details of that in a couple of weeks. And also we will be hosting, as I explained earlier, the Materialise Experience in the beginning of June. So we look forward to seeing some of you either at the financial conference or at our Materialise Experience conference. Thank you, again, and talk to you soon. Bye.

Ladies and gentlemen, thank you for your participation in today's conference call. This concludes the program, and you may all disconnect. Everyone, have a great day.