Materialise Q2 2023 Earnings Call Transcript

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Provided by Quartr
July 26, 2023

There are 6 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Q2 2023 Materialise Financial Results Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer advising that your hand is raised. Please be advised that today's conference is being recorded.

Operator

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

Speaker 1

Thank you, everyone, for joining us today for Materialise's quarterly conference call. With us on the call are Fried Van Krum, Founder and Chief Executive Officer of Materialise Peter Leys, Executive Chairman and Koen Braughes, 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 Q2 of 2023. To access the slides, if you have 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 was issued earlier this morning can also be found on that page.

Speaker 1

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 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 company's most recent annual report on Form 20 F filed with the SEC.

Speaker 1

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

Speaker 2

Thank you, Harriet, and thank you everyone for joining us today. You can find the agenda for our call on Slide As the first item on the agenda, I will summarize the highlights of our financial results for the Q2 of this year. Then I will pass the floor to Fried, who will discuss our investments in a new facility for medical mask customization production in the U. S. After that, Koen will walk you through our 2nd quarter numbers in more detail.

Speaker 2

As you may recall, 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 Q2 was very much in line with our very solid performance in the previous quarter.

Speaker 2

In the Q2 of 2023, we recorded €64,800,000 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 A 12% growth compared to last year's period. In the absence of this one time adverse event, Our current EBITDA margin of 7.3 percent would have been 15.3%. As a result of this unexpected event, our net results turned negative to €500,000 negative or minus €0.01 per share for the period. And with that, I would like to pass the floor to Fried.

Speaker 2

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 2023 at the EBITDA level. 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 the level of revenue and operational profitability even stronger If we want to ensure profitable growth in the longer term, we need to invest wisely in our medical activities.

Speaker 2

In the important U. S. Market, our personalized implants are the major growth driver. Until now, Materialise manufactured titanium CMS implants solely at our 3 d printing facility in Belgium. This will change when our new production line in Plymouth will become operational this summer.

Speaker 2

The new facility will not only provide capacity for growth, it will also improve Our service offerings strategically in the United States. With the opening of this 3 d printing line, Materialise will accelerate the delivery of patient specific medical implants to patients in the United States. Surgeons Are increasingly embracing 3 d 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 3 d printing of personalized titanium are used for facial reconstructive surgery, facial asymmetry resolution, bite corrections as well as Gender Affirmation Surgery. With a dedicated 3 d printing facility in the U.

Speaker 2

S, We can respond to certain needs with greater reliability, while significantly reducing the delivery time of fully personalized implants to less than a week for U. S. Patients. This expansion of capabilities complements existing production of 3 d printed surgical guides and models that existed already in the United States. It also expands our collaboration with the 3 Synthes division of Johnson and Johnson for the delivery of patient specific instruments and CMS Implants.

Speaker 2

Currently, Materialise produces 200 80,000 personalized 3 d printed tubes ending tons per year, of which under 60,000 The advance of technologies such as 3 d printing and advanced visualization techniques has transformed personalized patient care. Patient specific 3 d printed medical solutions Include surgical guides to enhance the accuracy and the efficiency, anatomical models for diagnostic purposes, and finally, the reconstructive implant themselves. These solutions are designed to bolster surgeon's comfort before and during surgery, leading to more predictable and accurate surgical outcomes. As a result, surgeons increasingly adopt 3 d printing as part of their medical practices to bring personalized care closer to the patients while reducing overall costs for the healthcare system. Materialise has more than 3 decades of experience in developing FDA to use medical solutions.

Speaker 2

We offer a comprehensive range of medical visualization and surgical planning software solutions, 3 d printer's guides and implants are additional components to our solution that empower researchers, engineers and Congratulations to revolutionize Innovation Patient Care. 30 years ago, surgical solutions We are highly standardized. Patient specific solutions were very rare for unfortunate patients That really has 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 has pioneered numerous groundbreaking medical 3 d planning and printing applications, And we continue to do so with our ever increasing research and development efforts.

Speaker 2

We have built a leading position Overcoming the limits of current standard treatments. For instance, In 2021, Materialise Innovative 3 d Planning and Plinkin Tools played a pivotal role In the world's first simultaneous double hand and face transplant that was successfully performed And NYU Langone Health in New York City. But today, 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 healthcare systems. In 2017, we introduced 1 of the first personalized CMF implant portfolios in the United States.

Speaker 2

This is an opportunity for the healthcare industry and for Materialise in particular. With the opening of our new 3 d printing facility in the U. S, we bring personalized care closer to U. S. Patients.

Speaker 2

And at the same time, thanks to our software offering, we bring the concept and building blocks of mass customization also closer to the U. S. Healthcare industry. The Prelimitt facility acts as the regional headquarters for our medical and industrial software solutions in U. S.

Speaker 2

Thanks to the expanded facility, we are now able to demonstrate even better than before how all of our tools operate In a patient specific context, for real AI product development and for real three d printing production lines And on top of that, in a certified environment. Let me now pass the call to Koen.

Speaker 3

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 Q2 of 2022. Revenue increased by almost 12% to €64,800,000 The growth took place in all three of our business segments. Our software segment grew by 3.6%, Our Medical segment by 19.6 percent and Manufacturing revenue increased by 8.5%.

Speaker 3

The amount of deferred revenues from software, license and maintenance fees on our balance sheet amounted to €41,700,000 at the end of June 23, compared to €42,800,000 at the end of last year. Over the Q2 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 €4,800,000 compared to €4,300,000 for the same period last year, which is an increase of more than 12%. This represents an adjusted EBITDA margin of 7.3%.

Speaker 3

The increase in adjusted EBITDA follows our top line growth, While we continued investing in R and D, which is key to materialize this further development. Importantly, as Peter already mentioned, our adjusted EBITDA includes a negative impact resulting from the unexpected adverse resolution of an arbitration proceeding for €5,200,000 in May of this year. Excluding this one time 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 percent to €11,000,000,000 driven by an increase of 7% of our recurring revenue from maintenance contracts and reviewed licenses, including our Coriant subscription fees.

Speaker 3

Revenue from nonrecurring sales, on the other hand, decreased by 2.8%, reflecting our gradual transition to a recurring business model. Adjusted EBITDA for the 2nd quarter increased from €800,000 last year to almost €2,000,000 this year, representing an improved adjusted EBITDA margin of 17.9%. Moving now to Slide 9, You will see that our medical business continues 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 an arbitration proceeding related to our customized joint business For amount of €5,200,000 this quarter, the adjusted EBITDA of our Medical segment decreased to €2,700,000 from €4,500,000 This is also reflected in the adjusted EBITDA margin, which dropped to 10.8%.

Speaker 3

Nevertheless, excluding the negative impact of this one time event, Medical's adjusted EBITDA margin would have grown to 31.6% this quarter. Now let us turn to Slide 10 for an overview of the Q2 performance of our Materialize Manufacturing segment. Manufacturing revenue grew 8.5 percent to €28,800,000 boosted by our core manufacturing business lines And Agtech, adjusted EBITDA for the quarter ended at €2,700,000 compared to €1,600,000 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 await the start up of the new Actec production facility planned for 2024. Slide 9 provides the highlights of our income statement for the Q2.

Speaker 3

Gross profit margin grew to 57.2% compared to 55.2 percent in Q2 of last year. Despite continued inflationary pressure, Kite's cost control helped us in bringing our operating expenses down by 1.3% compared to the prior year period to an aggregate of €33,200,000 While sales and marketing and general and administrative expenses decreased, respectively, by 5% 2%, we increased our R and D expenditures by 6%. Net operating income amounted to negatively minus €4,500,000 and includes the negative impact of the earlier mentioned unexpected adverse resolution of an arbitration proceeding for €5,200,000 As a result of these elements, the group's operating results was negative by €597,000 compared to a negative operating results of €1,084,000 last year. The net financial income for Q2 was €635,000 and included growing interest income from our cash deposits of around €1,100,000 Net loss for the quarter was €494,000 or €0.01 per share compared to a net profit of €896,000 last year. Now please turn to Slide 12 for a recap of balance sheet and cash flow highlights.

Speaker 3

At the end of the Q2 of 2023, our balance sheet remained Cash amounted to €136,300,000 while our borrowing position further decreased to €72,400,000 resulting in a mid net cash position at the end of the second quarter of 63 €900,000 Cash flow from operating activities for the Q2 was €775,000 Our operating cash flow consisted of income statement components of €5,000,000 while our working capital increased by €4,200,000 Capital expenditures for the quarter amounted to €2,100,000 and were not externally financed. And with that, I'd like to hand the call back to Peter. Thank you, folks.

Speaker 2

At the beginning of 2023, we said we expected our full year revenues to be between €255,000,000 €260,000,000 After our solid results in the first half of this year, we believe we are well on track to post full year revenues When we reported roughly 3 months ago our Q1 results in April, We increased the expected range of our year end EBITDA by 10% to an amount between €28,000,000 €33,000,000 Today, our strong operational results in the first half of the year allow us to maintain our EBITDA guidance And this despite the €5,200,000 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

Thank you. And our first question comes from Troy Jensen of Lake Street Capital Markets. Please proceed.

Speaker 4

Hey, gentlemen. Congrats on the nice Q2 results here.

Speaker 2

Thank you, Troy.

Speaker 4

Hey, so first, I guess I wanted to focus on just some of the profit margin stuff here. I mean, 15.3 percent adjusted EBITDA, is that near is that record recent record levels for profitability for you guys?

Speaker 2

Yes, yes. It's definitely on the high end. We had Previous quarters that were a little bit better like the Q1, but it's definitely among the better performances.

Speaker 4

Yes, yes. And obviously, a lot of us strengthened gross margins. So I guess, question would be on the lines of 2nd 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?

Speaker 2

Well, typically, we have some seasonality. And the 3rd quarter has been proven consistently a little bit worse in previous years. But yes, then you also know that the 4th 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 two quarters.

Speaker 4

Great, great. Well, and congrats guys on this profitability level. I mean, excluding that $0.09 hit, you guys did 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? And just your thoughts about peak versus titanium in CMF

Speaker 2

Well, indeed, titanium Implants are the major growth driver. Although we still have a very considerable part of the Cases we support that are done with just the guides and models as well. So it's not always that the surgeons opt for patient 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 peak implants as well. In our experience, it's still a minority.

Speaker 2

And we believe that titanium is very competitive.

Speaker 4

And even if peak grows, you guys can obviously make peak based CMF parts?

Speaker 2

At this moment, We totally believe in the added value of titanium.

Speaker 4

I see. Okay. All right. That's interesting. I'll switch gears here.

Speaker 4

I know I'm asking a lot, but just the 3 d software business, it seems like you guys are kicking butt here in medical and manufacturing. Yes, 3 d was down sequentially. I think deferred growth dropped a little bit sequentially. So can you just talk about what's going on competitively and Linked integration or Linked 3 d integration and just when you think we're going to start to get better growth out of that software business?

Speaker 2

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 this very moment. But that doesn't mean that we don't have also some Internal transitions that are taking place from our previous model where we saw perpetual license To annual licenses and subscription models, which is a transition that for our Medical software has been ongoing already for 5 years and that we more recently Intensified for the industrial software business.

Speaker 2

So that is also impacting our revenue growth because Yes, it's yourself. But materializes, you see immediately an immediate revenue recognition, while animals Let's say, less recognized in the revenue. And But on the other hand, as a more long term recurring revenue And then finally, yes, we have that transition from engineering tools With metrics to the growth that is also coming from OEM, which is more company wide or at least AM facility wide investments that is much more strategic and that We warned, but we also experienced that those investments are not made lightly, 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 weighed on the growth

Speaker 4

Got it. All right. You guys, well, once again, keep up the good work, and good luck in the second half.

Speaker 2

Thank you, Troy.

Operator

Thank you. One moment for our next question. And our next question comes from Alex Kramersch of Kepler Cheuvreux. Please go ahead.

Speaker 5

Hi, good morning. Also from my side, congratulations on the nice set of results. And maybe a first question to the new CFO, Koen. Just wondering how you're settling in your position and what are your main priorities at the moment? I'll start with that.

Speaker 3

Thank you, Alex. It's been a very interesting journey so far for me. I've had the 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 strengths and weaknesses that can be found there. For me, I think It was very interesting to learn all of these. For me, the key priority is to continue Delivering really financially a good process of financial results.

Speaker 3

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.

Speaker 5

Thank you. 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 it, please?

Speaker 3

It's indeed correct, Alexander, 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 sold So quite some multi annual licenses in the 2nd quarter and of course the difference is 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

Speaker 5

Thank you for that. And then on the manufacturing, very Interesting to see the ACTech finally coming up. Just two 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 a subcontracting In house manufacturing for the AC Tech Factory, because you mentioned that in your reports specifically.

Speaker 5

I I was just wondering how much the difference is, so we can maybe put an analysis forward.

Speaker 2

Yes. Particularly in relation to Architec, we currently face true capacity issues. So the amount is really higher than what we can deliver. And Aztec is active in a market where fast delivery times are also really important To the kind of heavy duty industries and automotive industries they are supplying. So that is Why we believe that we have, yes, serious growth potential on the one hand And secondly, why it is expensive to subcontract?

Speaker 2

Because we have to I asked our system contractors also to deliver very complex and big Confirm us on very short notice and of course, we also ask some premium prices for this. Ken, I cannot give you a very clear indication of how much that difference exactly is simply count. But we are confident that we can increase our EBITDA margins further with

Speaker 5

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

Speaker 2

Like I said, it's really difficult to give this an accurate estimate. So I prefer not to give you a clear indication at this moment because that's a quick call.

Speaker 5

Okay. Thank you. And maybe as a final question, I mean, now that we're going in the second half, we were already almost 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 5,000,000 impact.

Speaker 2

Well, yes, but luckily, I think it was sufficiently conservative to completely compensate for that For us, it was a big adverse effect that we experienced with the mitigation outcome. Now there is a difference, I must admit. When you asked me the same question last quarter, I could say that while there were in the market Quite some room not just rumors, 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 Yes. Quotation levels and in the way the market was Demand in service is not much. I must say at this moment that we see a decline In quotation requests, the effect on our output is still limited, But we must admit that the economic climate for us in particular is a bit more negative.

Speaker 2

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.

Speaker 5

Okay. Thank you very much. Again, congratulations on the nice set of results and talk to you soon.

Speaker 2

Thank you. Thank

Speaker 4

you.

Operator

Thank you. And I see no further questions. So I would now like to turn the conference back to Peter Leys for closing remarks.

Speaker 2

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 1 on 1 virtual meetings or calls. So please reach out to us should you

Operator

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

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Materialise Q2 2023
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