Materialise NV (MTLS) 2023 Q2 法說會逐字稿

Good day and thank you for standing by. Welcome to the Q2 2023 Materialise Financial Results Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Harriet Fried of LHA. Please go ahead.

Thank you everyone for joining us today for Materialise's quarterly conference call. With us on the call are Fried Vancraen, Founder and Chief Executive Officer of Materialise; Peter Leys, Executive Chairman; and Koen Berges, 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 second quarter of 2023. To access the slides, if you haven't already done so, please go to the Investor Relations section of the company's website at www.materialise.com. Our earnings press release that was issued earlier this morning can also be found on that page.

Before we get started, 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 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 company's most recent annual report on Form 20-F filed with the SEC. Finally, management will discuss certain non-IFRS measures on today's call. A reconciliation table is contained in the earnings release and at the end of the slide presentation.

With that, I'd like to turn the call over to Peter Leys. Go ahead please, Peter.

Thank you, Harriet, and thank you everyone for joining us today. You can find the agenda for our call on Slide 3. As a first item on our agenda, I will summarize the highlights of our financial results for the second quarter of this year, then I will pass the floor to Fried, who will discuss our investments in a new facility for medical mass customization production in the U.S. After that, Koen will walk you through our second quarter numbers in more detail.

As you may recall, Koen assumed the position of our Chief Financial Officer in May of this year. And we've already experienced that he does bring a lot of valuable experience to the role. And as you will notice, he has gotten off to a very quick start. Finally, I will come back to give you some observations about what we currently believe the rest of the year may bring. And as always, when we have completed our prepared remarks, we will be happy to respond to any questions that you may have.

So let's turn to Slide 4, which summarizes the highlights of our financial results. Our operational performance during the second quarter was very much in line with our very solid performance in the previous quarter. In the second quarter of 2023, we recorded EUR 64.8 million in revenues, representing a growth of almost 12% compared to last year's period.

Our adjusted EBITDA for the quarter, which was impacted negatively by the unexpected adverse resolution of an arbitration proceeding for a total amount of EUR 5.2 million, amounted to EUR 4.8 million, which is still a 12% growth compared to last year's period. In the absence of this onetime adverse event, our current EBITDA margin of 7.3% would have been 15.3%. As a result of this unexpected event, our net results turned negative to EUR 0.5 million negative or minus EUR 0.01 per share for the period. And with that, I would like to pass the floor to Fried.

Thank you, Peter. Good morning or good afternoon to all of you listening to this call. After the tailwinds that we discussed a quarter ago in our Medical business, we faced a serious headwind in Q2 '23 at the $80 growth. But fundamentally, we confirmed the robustness of our profitable growth in Medical Devices and software during this quarter. In essence, the Medical segment performed at a level of revenue and operational profitability even stronger in Q2 than in Q1, where we talked about the tailwinds.

If we want to ensure profitable growth in the longer term, we need to invest wisely in our medical activities. In the important U.S. market, our personalized implants are the major growth driver. Until now, Materialise manufactured titanium CMF implants solely at our 3D printing facility in Belgium. This will change when our new production line in limit will become operational this summer. The new facility will not only provide capacity for further growth, it will also improve our service offering strategically in the United States. With the opening of this 3D printing line, Materialise will accelerate the delivery of patient-specific medical implants to patients in the United States.

Surgeons are increasingly embracing 3D printing solutions as they recognize the added value these solutions bring to personalized patient care, including a more predictable and accurate surgical outcome and time savings during the surgery.

At the new production line in our Plymouth facility, Materialise specializes in the 3D printing of personalized titanium craniomaxillofacial implants for the reconstruction of bone segment. CMF implants are used for facial reconstructive surgery, facial asymmetry resolution, bite corrections as well as gender affirmation surgery.

With a dedicated 3D printing facility in the U.S., we can respond to surgeons' needs with greater reliability while significantly reducing delivery time or fully personalized implants to less than a week for the U.S. patients. This expansion of capabilities complements Materialise's existing production of 3D printed surgical guides and models that existed already in the United States. It also expands our collaboration with the recent division of Johnson & Johnson for the delivery of patient-specific instruments and CMF implants.

Currently, Materialise produced 280,000 personalized 3D printed tubes and implants per year, of which 160,000 are for the U.S. market. The advance of technologies such as 3D printing and advanced visualization techniques has transformed personalized patient care. Patient-specific 3D printing medical solutions include surgical guide, to enhance the accuracy and the efficiency, anatomical models for diagnostic purposes and finally, the reconstructive implants themselves.

These solutions are designed to both the surgeons comfort before and during surgery, leading to more predictable and accurate surgical outcomes. As a result, surgeons increasingly adopt 3D printing as part of their medical practices to bring personalized care process to patients while we're using overall costs for the healthcare system.

Materialise has more than 3 decades of experience in developing FDA clearance medical solutions. We offer a comprehensive range of medical digitalization and surgical planning software solutions. 3D printed guides and implants are additional components to our solutions that empower researchers, engineers and clinicians to revolutionize implant in patient care.

30 years ago, surgical solutions were highly standardized. Patient-specific solutions were very rare for unfortunate patients that really have no alternatives. For the medical device industry, it was highly unprofitable to deliver personalized implant solutions. And as a consequence, it was only done in a compassionate care context. Materialise pioneered numerous groundbreaking medical 3D planning and printing applications, and we continue to do so with our ever-increasing research and development efforts. We have built a leading position by changing the mindsets. Now patient-specific surgical solutions can be delivered in a cost-effective and economically viable way by the health care industry.

Custom surgical solutions are still very valuable for the unfortunate patients in rare complex situations, offered overcoming the limits of current standard treatments. For instance, in 2021, Materialise innovated 3D planning and printing tools played a pivotal role in the world's first simultaneous double hand and face transplant that was successfully performed at NYU Langone Health in New York City.

But to date, personalized implant solutions are also important for more patients that suffer from more frequent diseases or accidents. Thanks to mass customization, more people can benefit from the first time right approach and better quality solutions in a cost-effective way that enhances the quality of our health care systems.

In 2017, we introduced one of the first personalized CMF implant portfolios in the United States. This is an opportunity for the health care industry and for Materialise in particular. With the opening of our new 3D printing facility in the U.S., we bring personalized care closer to U.S. patients. And at the same time, thanks to our software offering, we bring the concept and building blocks of mass customization also close to the U.S. health care industry.

The Plymouth facility acts as the regional headquarters for our medical and industrial software solutions in the U.S. Thanks to the expanded facility, we are now able to demonstrate even better than before how all opportunities operate in a patient-specific context for real AI product development and for real 3D printing production lines and on top of that, in a certified environment.

Let me now pass the call to Koen.

Thank you, Fried, and good afternoon or good morning to you all. I'll begin with a brief review of our consolidated revenue on Slide 6. Please note that unless stated otherwise, all comparisons in this call are against our results for the second quarter of 2022. Revenue increased by almost 12% to EUR 64.8 million. The growth took place in all 3 of our business segments. Our Software segment grew by 3.6% and Medical segment by 19.6%, and manufacturing revenue increased by 8.5%.

The amount of deferred revenues from software license and maintenance fees on our balance sheet amounted to EUR 41.7 million at the end of June 23 compared to EUR 42.8 million at the end of last year. Over the second quarter of 2023, Materialise software accounted for 17% of our total revenue. Materialise medical for 38% and Materialise manufacturing for 45%. Cross-segment revenue from software products represented 29% of our total revenue.

Moving on to Slide 7. You will see that our consolidated adjusted EBITDA grew to EUR 4.8 million compared to EUR 4.3 million for the same period last year, which is an increase of more than 12%. This represents an adjusted EBITDA margin of 7.3%. The increase in adjusted EBITDA follows our top line growth, while we continued investing in R&D, which is key to Materialise's further developments.

Importantly, as Peter already mentioned, our adjusted EBITDA includes a negative impact resulting from the unexpected adverse resolution of an arbitration proceeding for EUR 5.2 million in May of this year. Excluding this onetime event, the adjusted EBITDA margin for Q2 would have been 15.3%.

Slide 8 summarizes the results of our Materialise software segment. Software revenue increased by 3.6% to EUR 11 million, driven by an increase of 7% of our recurring revenue from maintenance contracts and renewed licenses, including our CO-AM subscription fees. Revenue from nonrecurring sales, on the other hand, decreased by 2.8%, reflecting our gradual transition to our current business model. Adjusted EBITDA for the second quarter increased from EUR 0.8 million last year to almost EUR 2 million this year, representing an improved adjusted EBITDA margin of 17.9%.

Moving now to Slide 9. We will see that our medical business continued growing at a solid double-digit pace of around 20%, both from software and medical devices solutions. Software revenue grew by 26%, while our medical devices business expanded across most of its business lines by an aggregate of 17%. Because of the unexpected adverse resolution of the arbitration proceeding related to our customized joint business for amount of EUR 5.2 million. This quarter, the adjusted EBITDA of our Medical segment decreased to EUR 2.7 million from EUR 4.5 million. This is also reflected in the adjusted EBITDA margin, which dropped to 10.8%. Nevertheless, excluding the negative impact of this onetime event, Medical's adjusted EBITDA margin would have grown to 31.6% this quarter.

Now let's turn to Slide 10 for an overview of the Q2 performance of our Materialise manufacturing segment. Manufacturing revenue grew 8.5% to EUR 28.8 million, boosted by our core manufacturing business lines and ACTech. Adjusted EBITDA for the quarter ended up EUR 2.7 million compared to EUR 1.6 million for the same period last year, representing an improved adjusted EBITDA margin of 9.4%. This result includes continued investments in our Motion and Eyewear business lines and temporary higher subcontracting expenses while we wait the start-up of the new ACTech production facility planned for 2024.

Slide 9 provides the highlights of our income statement for the second quarter. Gross profit margin grew to 57.2% compared to 55.2% in Q2 of last year. Despite continued inflationary pressure, tight cost control helped us in bringing our operating expenses down by 1.3% compared to the prior year period to an aggregate of EUR 33.2 million. While sales and marketing and general and administrative expenses decreased, respectively, by 5% and 2%, we increased our R&D expenditures by 6%. Net operating income amounted to negatively minus EUR 4.5 million and includes the negative impact of the earlier mentioned unexpected adverse resolution of an arbitration proceeding for EUR 5.2 million.

As a result of these elements, the group's operating result was negative by EUR 597,000 compared to a negative operating results of EUR 1.084 billion last year. The net financial income for Q2 was EUR 635,000 and included growing interest income from our cash deposits of around EUR 1.1 million. Net loss for the quarter was up EUR 494,000 or EUR 0.01 per share compared to a net profit of EUR 896,000 last year.

Now please turn to Slide 12 for a recap of balance sheet and cash flow highlights. At the end of the second quarter of 2023, our balance sheet remained strong. Cash amounted to EUR 136.3 million, while our borrowing position further decreased to EUR 72.4 million, resulting in a net cash position at the end of the second quarter of EUR 63.9 million.

Cash flow from operating activities for the second quarter was EUR 775,000. Our operating cash flow consistent of income statement components of EUR 5 million, while our working capital increased by EUR 4.2 million. Capital expenditures for the quarter amounted to EUR 2.1 million and were not externally financed.

And with that, I'd like to hand the call back to Peter.

Thank you, Koen. At the beginning of 2023, we said we expected our full year revenues to be between EUR 255 million and EUR 260 million. After our solid results in the first half of this year, we believe we are well on track to post full year revenues close to the high end of that range. When we reported roughly 3 months ago, our first quarter results in April, we increased the expected range of our year-end EBITDA by 10% to an amount between EUR 28 million and EUR 33 million.

Today, our strong operational results for the first half of the year allow us to maintain our EBITDA guidance, and this despite the EUR 5.2 million adverse arbitration award that we did not expect at the time of our previous call. And with this outlook, I would like to conclude our prepared remarks.

So operator, please go ahead and open the call to any questions.

(Operator Instructions) And our first question comes from Troy Jensen of Lake Street Capital Markets.

So first, I guess I wanted to focus on just some of the profit margin stuff here, 15.3% adjusted EBITDA, is that recent record levels for profitability for you guys?

Yes, definitely on the high end, we had previous quarters that were a little bit better like the first quarter, but it's definitely among the better performances.

And obviously, a lot of strength in gross margins. So I guess, question would be on the lines of second half expectations for gross margins. Can we stay above this 57% level? And then also on EBITDA, adjusted EBITDA? Do you guys think you can run at 15% plus here in the second half?

Well, typically, we have some seasonality, and the third quarter has been improving consistently a little bit worse in previous years. But yes, then you also know that the fourth quarter is normally our best quarter. So over the second half of the year, it will be approximately consistent, but with the differentiation between the 2 quarters.

And congrats guys on this profitability level. Excluding that $0.09 hit, you guys had really good here in Q2. But other questions I want to hit, I guess, on the medical side for you, Fried, CMF, is most of your business titanium you see your thoughts about peak versus titanium and CMF applications.

Well, the titanium implants are the major growth drivers. Although we still have a very considerable part of the cases we support that are done with just the guide and models as well. So it's not always that the surgeons opt for patent-specific implants and patient-specific guides and patient-specific planning also contribute to still a majority of surgeries where no patient-specific implants are used. Some of those can indeed be with big implants as well. In our experience, it's still a minority. And we believe the titanium is very competitive.

And EBITDA peak grows, you guys can obviously make peak-based GMF parts?

At this moment, we only believe in the added value of titanium.

That's interesting. I'll switch gears here, and I'm asking a lot, but just the 3D software business. It seems like you guys are kicking out here and medical and manufacturing, 3D was down sequentially. I think deferred growth dropped a little bit sequentially. So can you just talk about what's going on competitively and link integration or link through the integration and just when do you think we're going to start to get better growth out of the software business.

Yes. We face for our software, a challenging investment climate at the moment and as far as we can judge, this is not only for us the case. It's even beyond the pure additive manufacturing-related software industry software in general, it's facing a difficult investment climate at its very moment.

But that doesn't -- yes, it doesn't mean that we don't have also some internal transitions that are taking place from our previous model where we sold partial licenses to annual licenses and subscription models, which it is transition that for our medical software has been ongoing already for 5 years and that we more recently intensified for the industrial software business.

So that is also impacting our revenue growth because, yes with perpetual licenses is -- immediate revenue recognition, while annual are, let's say, less recognized in the revenue. But on the other hand, as a more long-term recurring revenue impact.

And then finally, we have the transition from engineering tools with metrics to the growth that is also coming from CO-AM, which is a more company-wide or at least a facility-wide investments that is much more strategic and that we want, but we also experienced that those investments are not made likely, especially at this moment in the current investment climate and that is challenging.

Of course, we also have to deliver those softwares, and that is also taking longer than delivering an engineering product. So the combination of all of these factors currently seriously wait on the growth of the software business.

Our next question comes from Alex Craeymeersch of Kepler Chevreaux.

Congratulations on a nice set of results. And maybe a first question to the new CFO, Koen. I'm just wondering how you're settling in your position? And what are your main priorities at the moment? I'll start with that.

It's been a very interesting journey so far for me. I've had a chance in the last 2 months to meet a lot of people in the business, both in finance and also outside finance trying to understand the business that we're in and then all the strength and weaknesses that can be found there.

For me, I think it was very interesting to learn all of these. I mean the key priority is to continue delivering really financially a good process of financial results. And that is a process I think that works quite well. I think the challenge for us is like Fried already indicated to continue that journey towards even more recurring revenues, especially in our software business, and we are taking further steps also to help support that from a finance point of view.

And maybe if I can just elaborate on that recurring revenue side. I saw that the order book or deferred revenue has actually decreased versus Q1. Maybe this is normal, but I'm just wondering what was the exact reason for that, if you could explain that.

It's indeed correct, the number that we saw a temporary decrease of our deferred revenue that we carry on the balance sheet. That is also partly due to timing effects. We noticed that, for instance, especially also last year, we saw still quite some multi-annual licenses in the second quarter. And of course, the differently from annual licenses and then they don't come up for renewal 1 year later. So that is a trend we of course, we are watching, but that impacts our deferred revenue in the second quarter indeed.

And then on the manufacturing, very interesting to see the ACTech finally coming up. Just 2 questions on that. So one, what would now be the obstacles for you and your clients to get the manufacturing side more attractive and that your capacity is actually more filled.

So also the margins can get a bit higher. And yes, and then also on that part, I was just wondering if you could just maybe elaborate on the difference in costs versus the subcontracting and in-house manufacturing for the ACTech factory because you mentioned that in your reports, specifically, I was just wondering how much the difference is so we can maybe put an analysis forward.

Yes. Particularly in relation to ACTech, we currently face 2 capacity issues. So now it's really higher than what we can deliver. ACTech is active in a market where both delivery times are also really important to the heavy-duty industries and logic industries they are supplying.

So that is why we believe that we have serious growth potential on the one hand. And secondly, why it is expensive to subcontracts? Because we have to have ask our ACTech contractors also to deliver very complex and big components on very short notice. And of course, we also asked some premium prices for that. I cannot give you a very clear indication of how much that difference exactly is, I simply can't. But we are confident that we can increase our EBITDA margin further with a few percentage points if we can produce in-house.

But maybe to ask what's the goal there in terms of percentage points or at least EBITDA margins for the future?

Like I said, it's really difficult to give the accurate estimates. So I prefer not to give you a clear indication at this moment because I simply can't.

And maybe as a final question. Now that we're going in the second half, we were already almost at the end of July. What's your visibility typically at the midpoint of the year towards the second half? And how does that visibility lead you to project your guidance at the moment? Considering that the last guidance was actually a little bit conservative given the EUR 5 million impact.

Well, yes, luckily it was sufficiently conservative to completely compensate for that effect that we experienced with the litigation outcome. Now there is a difference. I must admit, when you asked me the same question last quarter, I could say that while they were in the market, quite some room -- not just room, but companies that announced they experienced some downturn on the economic environment that we were very positive, and we didn't see anything of it in our quotation levels and in the way the market was demanding services from us.

I must say at this moment that we see a decline in quotations and requests. The effect on our output is still limited, but we must admit that the economic climate for all in particular is a bit more negative, I won't exaggerate it, but it's a bit more negative than it was a quarter ago. So maybe it has to do with the summer holiday period. But anyhow, it is worse than a quarter ago.

(Operator Instructions) I see no further questions. I would now like to turn the conference back to Peter Leys for closing remarks.

Thank you, operator, and thanks again to all of you for joining us for our Q2 call today. We, of course, look forward to continuing our dialogue with you through investor conferences, including the Lake Street Conference that we intend to attend in mid-September or in one-on-one virtual meetings or calls. So please reach out to us should you need any further information. Thanks again, and goodbye for now.

This concludes today's conference call. Thank you for participating, and you may now disconnect.