Materialise N.V. (MTLS) Q3 2017 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for your patience, and please remain on the line. Your conference call will begin momentarily. Once again, thank you for your patience, and please remain on the line. Your conference call will begin momentarily. Good day ladies and gentlemen, and welcome to the Q3 2017 Materialise Financial Results Conference Call. At this time all participants are in a listen-only mode. Later we'll conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions] As a reminder, this conference 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 Fried 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 have not already done so, please go to the Investor Relations section of the company's Web site at www.materialise.com. The earnings press release issued this earlier 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 three. I will 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'll come back to update 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 four, you'll 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 €32.3 million. Each of our three 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 EBITDA was up 15% compared to the third quarter of last year. But the most interesting news of the quarter were the main 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 [indiscernible] later this year. At this point, I would like to turn the call over to Fried to give you more insights into the strategy behind our acquisition of ACTech.

Thank you, Peter. Good morning or good afternoon everyone. Please turn to slide five. 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 made 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 to 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 change than for plastic 3D printed parts. Metal parts are in general also subject to higher functional loads and [indiscernible] so that quality controls become even more crucial. While Materialise have historically built up all the knowledge to deliver fairly [ph] functional and esthetic 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 capabilities 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 [technical difficulty] or very small series of complex and fully functional 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 need 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 methods 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 [indiscernible] casting and investment casting since the 1990s. This also opens avenues for us to provide more software in this 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 the large series production that in the future will also contain significant contributions from additive manufacturing systems. And Materialise's long-term focus remains to support those companies with our software background. 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 six. 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 the 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 three of our segments, especially Materialise Manufacturing, producing good growth. For the quarter, Materialise Software accounted for 26% 26% over total revenue Materialise medical for 32%, Materialise manufacturing for 42%. In this year's third quarter, gross all three of our segments revenue from software sales of metal parts contributed 77% of total revenue, the remaining 23% was generated through the production of prototypes. With the acquisition of ACTech which Fried just described specializes and producing limited rounds of complex metal parts, the contribution of revenue will change in future quarters. Moving to slide seven, you will see our consolidated adjusted EBITDA numbers for the third quarter. As Peter mentioned earlier, consolidated adjusted EBITDA increased by 15% rising from €2.8 million to €3.3 million. Our adjusted EBITDA margins grew by 20 basis points to 10.1%, adjusted EBITDA excludes €266,000 and expenses related to the ACTech acquisition. These improvements reflect the combination of continued 12.4% revenue growth and increase in operational expenses as compared to the third quarter last year. Slide eight 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 grew, 10% revenue growth combined to this small aggregate increase of operational expenses and net audio income resulted in a segment EBITDA of almost 40% and increase of 300 basis points. Turning to slide nine, you will see the 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 grows 2%. EBITDA for the medical segment was €1.2 million as compared to 754,000 to the prior year's period. EBITDA margins was of 330 basis points as a result of the higher revenues with favorable sales mix and 0.1% growth of operational expenses. Now let's turn to slide 10 for an overview of the third quarter performance for 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 part manufacturing, revenue growth in the manufacturing segments reflects a combination of store growth in our core business combined to sales of metal and of scanner sales from the HOYA agreement. End parts accounted for 46% of the segment's quarter revenue. EBITDA was €499,000 as compared to €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 €460,000 related to the updated accounting valuation of resin materials to stock into 2017 period it was affected negatively by higher cost of sales and start-up costs from the sales of Highway Scanners. As aside in our second quarter earnings call, we mentioned that the process of moving parts of our production to a new facilities in Belgium and Poland could further impact margins negatively during the year. More recently however we have seen that the production inefficiencies have been limited and are already partially being offset against efficiency gains in other production techniques. At quarter end, the total number of printers Materialise in production rose to 167 up 17 over the number at the end of last year. This included seven 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, that gross margin was 55.3% as compared to 58.9% again just primarily reflects cost into manufacturing segment associated with the initial sales of Highway Scanners while the prior year's cost included a positive effect of €460,000 with respect to the updated accounting valuation of resin materials stock. In total, research and development, sales and marketing and G&A spending grows by 8.5% over the prior year period. R&D and sales and marketing each grow moderately while G&A accounted for a larger proportion of the increase, G&A included to €266,000 in expenses related to the ACTech acquisition. We posted the operating loss of €222,000 compared to a profit of €332,000 for the third quarter 2016. This decrease was a result of the 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 but the depreciation costs have increased €2.9 million from €2.1 million for the third quarter of 2016. For the fourth quarter, we expect the cost related to the ACTech acquisition to be an additional €700,000. These amounts will include 400,000 related to journal change of consumer real estate tax with respect to each text premises that have a book value of approximately €11 million. Net financial result was negative €593,000 compared to the negative €174,000 for last year's period, reflecting variances in the currency exchange rate primarily on the portion of the company's IPO proceeds in U.S. dollars. Income tax amount of €433,000 this compare to a complex of 191,000 for last year's period. As a result of the above net loss for the third quarter of 2017 was €1.4 million compared to 52,000 lose per last year's period. Now please turn to slide 12 for a recap of balance sheet and cash flow highlights. Our balance sheet remains solid with debt accounting for 30% of total my abilities and equity at quarter end. Over the past 12 months the amount of loans and borrowings that double to €53.6 million. The increase in the loans includes the financing of new premises in Belgium and Poland for €16.5 million. The financial cost increase remains limited however due to the current favorable market circumstances and I'll show banking partnerships. It is also important to note that the short term debt increase only marginally to €7.0 million end of the third quarter 217 from €5.7 million end of the third quarter last year. As a result of SC tech acquisition, the debt position increased again in October by €28 million carrying average interest rates of 1.1%. The acquisition financing is structured to€10 million bullet loans of seven years and a six year investment loan. Capital expenditures amounted to €9.6 million compared to €2.3 million in last year's period and mainly includes the €3 million related to the completion of our new premises in Poland and Belgium, €3.2 million related to new equipment and €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 €48.1 million compared to €55.9 million at the end of last year. Cash flow from operating activities in the first nine months of 2017 was €2.5 million compared to €4.3 million for the same period in 2016. The operating activities generated €8.7 million offset by an increase of working capital of €6.2 million. Total deferred revenues from annual software sales and maintenance contracts amounted to €16.6 million at September 30, 2017 versus €16.8 million of last year. With that overview I'll turn the call back to Peter.

Thank you, Johan. Please turn to slide 13. Our overview of some of our strategic achievements of the quarter Fried already pointed out that's over the last few months we have 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 Printer maxillofacial implant to the U.S. market. This will enable our [technical difficulty] to start selling our maxillofacial implant in the United States. In addition or green high end Danish Ivor brand joined unique platform with 12 models specifically designed for 3D printing. And finally together with winter sports gear and footwear specialist we launched the world's first M2 end digital supply chain for custom fit ski boots. Other meaningful partnerships, initiatives are underway and we hope to be able to announce some of them either as early as next week at for next in Frankfurt or later this month at the [indiscernible] Conference in Chicago. Let's turn to slide 14. As at the beginning of 2017 we start we expected to reports consolidated revenue between €128 and €134 million. Adjusted EBITDA between €10.5 million and €13.5 million and increase of deferred revenue from annual licenses and maintenance by an amount between €4 million and €5 million as compared to 2016, when we reported our second quarter results we added that we'd expected to be closer to the higher 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 decelerating for the full for fourth quarter. For fiscal 2017, we currently expect to report consolidated revenue between €140 million and €143 million, and adjusted EBITDA between €13 million and €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 an increase between €2 million and €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. Your line is now open.

Hi, yes, good morning or good afternoon gentlemen.

Hello, Troy.

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

Hi. 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. And also, this year we have seen this affect.

And let me add, Troy, as you know, we had exceptionally good first and second quarter results. So if you -- and better than expected as we explained during the last call second quarter, and then you move into the third quarter which is more of a 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 [indiscernible] gross margins, so down a fair bit sequentially here. And I guess it sounds like software grew as a percentage of revenues, and manufacturing declined as a percentage of revenues. So I would've thought that that mix change would've boosted the gross margin? So can you explain the big drop in gross margins?

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

Okay. [Indiscernible] sequentially, Johan, not as much year-over-year, so it's mainly just the scanner sales?

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

Okay. And then maybe one or two more for me, so the deferred revs, taking that down by a couple of million a year, is that -- to me it's -- is software sales below expectations, is it primarily medical?

No, it's not medical. It's the OEM portion in the software business is flat. So we're still having software growth of our direct sales, but OEM sales has 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.

Okay, understood. So within that component though, are you seeing HP ramp, but 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 -- I mean, as we reported, we have seven 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, understood. And the last question, and then I'll leave the floor, but just in the industrial or the manufacturing business, in EBITDA, your EBITDA is down year-over-year, but it's been down like four or five 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 over profit margins?

There's a number of things here, Tory. As you mentioned, definitely the items that Johan already referred to on the margin side, but also I mean, as you note, we quarter-after-quarter concentrate on trying to manufacture end parts rather than prototypes. And I mean, that just requires, as we explained to you in earlier calls, it does require -- in particular certified manufacturing, it requires a pretty intensive first collaboration with the customer and ramp up costs, which can only 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 had an impact for a number of quarters now on our EBITDA.

Just the -- also combination we had the move of the printers that we firstly noted in the second quarter. We have the HOYA affect, and we have the startup of or the cost of new introduced technologies and this is a higher effect on cost of sales that should improve in future.

Another element I can bring here to the table is that in the first two 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, this very big growth in combination with our preparations of the move and so on have led to inefficiencies, and that is not something new I think we spoke about is 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.

Okay, understood. Good luck for the remainder of the year, gentlemen.

Thank you.

Thank you. [Operator Instructions] And it looks like we have a question from the line of Weston Twigg from KeyBanc Capital Markets. Your line is now open.

Hi, yes, thanks for taking my questions. I have a couple. First, just wondered if you could help us understand the ACTech financial implication for Q4 guidance for 2017 guidance, how much revenue and associated cost in the model or in the projection?

Okay, well, let me give you some deep further insight in that, Weston, you know, from the press release regarding the ACTech acquisition, 2016 sales revenue of ACTech was 34.4 million and reported full-year EBITDA of 8.2. Quarter-over-quarter over 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 now look at the new guidance that we have given, we are still confident that we will fall in the top and the higher parts of the initial guidance that we had given both on revenue and on adjusted EBITDA on the standalone basis, that basically means between 131 and 134 on revenue side and between 12 and 13.5 on the adjusted EBITDA side for Materialise as a standalone. And then, we basically added the -- I mean one fourth 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 range that we have provided.

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

It's a good question, West. And it also kind of ties into the 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, yes, we expect eventually this project will be a success if subsequently the sale of the scanners can be converted into the sale of the actually of the eyewear itself where we 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 opticians are either in the process of installing or in the process actually being educated by the marketing team 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 at the occasion of our full year call in February of next year.

Understood, okay. Thank you for the color.

Sure.

Thank you. At this time, I am not showing any further questions. I'd like to turn the call over to Peter Leys for any closing remarks.

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 new partnerships and definitely 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.