Materialise N.V. (MTLS) Q3 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q3 2018 Materialise Financial Results Conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Harriet Fried of LHA. Please go ahead.

Thank you 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 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 third quarter of 2018. To access the slide, please go to the Investor Relations section of the company's website at www.materialise.com. The earnings press release issued earlier this morning can also be found on that page. Before we begin, 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 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 and expectation. 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 fiscal year 2017, Form 20-F. 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. And now, 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'll find an agenda for our call on Slide 3. I will begin with a brief recap of our results for the quarter which was a very positive one for us with good performance in all three segments and much activity underway throughout the organization to innovate and advance the digital manufacturing process. After my review, Fried, will come on and discuss some of our activities of the last quarter in more detail. After that, as usual, Johan will take us through our third quarter numbers in more detail. And finally, I will come back with a few concluding remarks on our guidance for the rest of the year. When we've completed our prepared remarks, we will be happy to respond to any questions that you may have. Now, turning to Slide 4, you will see the highlights of our third quarter results. Total revenue rose by 45%, excluding ACTech, total revenue rose by 10%. Our Materialise Medical and Materialise Software segments performed particularly well. Including the impact of ACTech which contributed EBITDA of €2.4 million in the quarter, our adjusted EBITDA rose 116%, and our net results swung from a loss of €1.4 million to a profit of €2.3 million. Excluding ACTech, our adjusted EBITDA rose 44% and we posted a net profit of €1.4 million. For the period, all three of our segments delivered double-digit EBITDA margins and our medical segment actually set a new record at 19.3%. Against this background, I will turn the call over to Fried. Fried?

Good morning. Good afternoon everyone. Thank you for joining us today. During our last call which came shortly after the announcement of our cooperation with BASF, and the closing of our capital increase, we explained that we very much looked forward to spending more time on our daily operations. That is what we have done and this focus on operational excellence have definitely contributed to the strong performance that every segment has posted in the third quarter of this year. What makes me particularly proud and confident in the future is that in every segment, the focus on a continuous improvement of our operational excellence has not refrained our teams from simultaneously strengthening our strategic product and positioning. Over the past quarter, several projects have been started and several actions have been implemented to execute on the strategic collaboration with BASF. While the first results of these efforts will only enter the market during next year, we are seeing once again that the unique interaction between our manufacturing and software activities can lead to fast useful developments that no other company can offer. At Formnext, we'll deliver another proof of this fruitful interaction between our manufacturing and software segments with a full release of the metal simulation module in Magics. This simulation module which was announced almost a year ago in collaboration with Simufact is the result of extensive internal experimentation. A thorough validation on the big amount of historical tracking data in our own Metal 3D Printing Competence Center in Bremen demonstrates that with the use of the new simulation module, we would have been able to predict and prevent 100% of the flaws and errors in historical problematic both. This validation was externally complemented with an extensive better program on a wide variety of metal product geometries in multiple alloys on multiple metal printer brands. As a result, we are now able to very reliably demonstrate to our customers the tangible savings that they can make by simulating before printing. Importantly, we have integrated our simulation module into a user friendly workflow that enables Magics users to benefit from the tool without needing to be high level mathematical simulation experts. The simulation module which further reinforce e-Stage for metal which won the 2018 TCT Software Award in September. e-Stage for Metal has been proven to not only save time in work preparation and part finishing but to also offer savings in material consumption and to improve quality along the way. For multiple customers e-Stage for Metal literally bridges the gap from producing at a loss to producing at a profit. While our Manufacturing segment delivers valuable feedback to our researchers who develop products and software, the Manufacturing segment itself is the first to benefit from the use of our new tools as shown in this segment's increasing margin and our ability to do innovative projects. This was demonstrated a few weeks ago when we won not one but two Silmo d'Or Awards in Paris. Recognizing originality and quality in the optics and eyewear industry, the Silmo d'Or Awards are widely regarded as The Oscars of the eyewear innovation. With category champions viewed as best practice benchmark projects not to mention trend indicators for the eyewear market as a whole. Our customer L'Amy won the Frame Technological Innovation Award with the McLaren Ultimate Vision range printed in titanium by Materialise. And another Materialise printed Polyamide Frame won the Silmo d'Or in the category best sunglasses. These awards demonstrate the leading position we have developed since we entered the market for 3D printed eyewear five years ago. From this position, we support a variety of eyewear brands with multiple solution in customized and standard eyewear frames. The Materialise segment have best demonstrated operational excellence in Q2 with our Medical segment. Introducing innovative and meaningful medical applications of 3D printing such as our CMF personalized implant is one big challenge that very few companies older than Materialise are up to. Subsequently wrapping up custom implant design and manufacturing to the latest guides and implants at high speeds while at all times maintaining quality and certification requirements is another even bigger challenge. Our medical teams are proving on a daily basis that they can handle both challenges very successfully. In addition, all our software products and internal software systems has been made to operate in a new GDPR compliant environment. This has required additional efforts but we nevertheless kept improving overall efficiency. Later this year, at RSNA, we will be able to demonstrate more surgical planning options than ever before in our Mimics Innovation Suite. This has been made possible, thanks to the continued expansion of the scripting options in the Mimics Innovation Suite. And this allow our internal application engineers as well as our customers to create and validate new medical image based surgical planning application. Based on the general state of performance, we can confidently conclude that the backbone systems at Materialise has been developing for additive manufacturing are well-positioned to power the growth of additive manufacturing for our customers in many application fields. At this point, Johan will come to give you more details on our third quarter financial results.

Thank you, Fried. I will begin with a brief review of consolidated revenue on Slide 6. Before getting started, I'd like to remind you as I do each quarter that when we refer to sales in our presentation, we mean revenues plus deferred revenues. 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 results of ACTech for the third quarter of 2018 in our Manufacturing business. As you know, this will not affect for financial reporting purposes, the results of our software and medical segments. When we provide information on a cross-segment basis, we will present the ACTech numbers separately. Now, as Peter mentioned in his opening remarks, in this year's third quarter including ACTech's €11 million we generated a 45% increase in revenue. Organically our revenue grew to €35.5 million or almost 10% compared to last year's period. Both our Medical and our Software segment had particularly solid revenue increases. As a result of the ACTech acquisition, our revenue is again distributed somewhat differently this quarter than in last year's period including ACTech’s 24% share. Materialise Manufacturing grew to 51% of our revenue this quarter, while Materialise Software accounted for 21%, and Materialise Medical for 28%. The cross-segment distribution of our revenues also looks different in great part due to ACTech's acquisition. Although total revenue from software products increased in absolute numbers by €2 million, it's decreased relatively as compared to the other cross-segment product groups by seven percentage points to 30.6%. Moving to Slide 7, you will see a consolidated adjusted EBITDA numbers for the third quarter. As Peter mentioned earlier, consolidated adjusted EBITDA increased by 116% rising from €3 million to €7 million. This result includes a tax contribution of €2.4 million. Our adjusted EBITDA margin rose 500 basis points from 10% to 15%. All three segments achieved EBITDA increases organically. Excluding ACTech, our adjusted EBITDA increased €1.4 million to €4.7 million or an EBITDA margin of 13.2%. Slide 8 summarizes the results of our Materialise Software segment. Here revenue increased 17.2% or €1.5 million. Revenue growth from recurring sales was 33%, OEM sales rose 1%, and direct sales grew 20%. The segments EBITDA went crescendo from Q1 over Q2 to Q3 from 28% to 31% and now 34.3% versus a 39.9% in Q3 of 2017. Moving now to Slide 9, you will see that Materialise Medical had another outstanding quarter. Total revenue in this segment grew 23% to €12.8 million. Revenue from Medical Device Solutions rose 27%, boosted by partner sales growth of 41%. Revenue from Medical Software rose 17%. Medical's EBITDA set another record by increasing €1.3 million to €2.5 million. The EBITDA margin was 19.3% as compared to 11.2% in the prior year's quarter. This was a result of a combination of higher revenues and improved operational excellence, while SG&A and research and development only increased moderately. This demonstrates once again the way that the successful investments in and development of a vertical can yield an impressive outcome, in particular, when scaling ethics can be achieved. Now let's turn to Slide 10 for an overview of the Q3 performance of our Materialise Manufacturing segment. Their revenue was up 78% reflecting ACTech's strong €11 million revenue contribution. But organically the segment reported the highest revenue over the past four quarter. It still remained flat below the strong third quarter last year. As we discussed last quarter, the automotive industry in Europe has tempered the growth of our top-line in the past year. Based on a current more positive outlook for the near future, we do expect to report a positive organic growth again in Q4 2018. Despite the quarterly negative growth, the improved operational excellence resulted in a more than doubled organic EBITDA which moved from €0.5 million last year to over €1 million this year. ACTech contributed €2.4 million to the segment's EBITDA. This quarter added only one printer which brings the total number of industrial printers that we have in production in our Manufacturing and Medical segments to 186. This total amount includes the nine printers operated at ACTech. Slide 11 provides the highlights of our income statement for the third quarter. Gross profits rose 48% compared to last year's period. Excluding ACTech, gross profit increased 25% and gross margin increased to 63% as compared to 55% last year. The fixed costs of sales related to the decreased manufacturing revenues weighed on the gross margin which were more than offset by optimized third-party subcontracting, materials, and transportation expenditure in both our Manufacturing and our Medical segment. In total R&D sales and marketing and G&A spending rose by 26% over the prior year period. Excluding ACTech, these operating expenses increased 15%. R&D rose 20% with increases in all three segments, but in particular, in Manufacturing and Software. Excluding ACTech, sales and marketing rose 19% primarily as a result of increases in our Software and Medical segment. Excluding ACTech, G&A rose 7% 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. ACTech's other operating expenses of almost €700,000 primarily explains the decrease of the net operating income line. The Group's operating profit amounted to €2.3 million as compared to an operating loss of something more than €200,000 last year. Excluding ACTech, we posted an operating profit of €1.1 million compared to the same loss of €222,000, reflecting improvements in operational excellence, while we continued to invest in R&D and SG&A. Net financial result was €269,000 compared to negative €600,000 for last year's period primarily reflecting variances in the currency exchange rates. Income tax remains limited to €230,000 compared to €433,000 for the third quarter of 2017. Net profit for the third quarter of 2018 was €2,316,000 or €0.04 per diluted share compared to a net loss of €1.4 million or a loss of €0.03. ACTech contributed €890,000 positively to the net results. Now please turn to Slide 12 for a recap of balance sheet and cash flow highlights for 30 September. Our gross debt increased €9.5 million to €107.7 million as compared to 30th of June 2018 and this as a result of €10 million drawing from European investment bank credit facility. On the other side and because of net proceeds of the €55.8 million from BASF and follow-on public capital increases in July, our cash position grew to almost €115 million. As a result, the net debt position of almost €50 million in June swung into a net cash position of €7 million and total equity increased to almost €135 million from €76.6 million in Q2 2018. Capital expenditures for the quarter grew to €5.6 million and €9.6 million in last year's period. Cash flow from operating activities for the quarter amounted to €7.2 million compared to negative €2.7 million for the same period in 2017. Year-to-date cash flow from operating activities now exceeded €18 million. Total deferred revenue amounted to €27.5 million as compared to €22.6 million as of end last year. Of the €27.5 million, €20 million were related to annual software sales and maintenance contracts compared to €18.7 million also at the end of last year. You should bear in mind to this cumulative amount of €20 million on our balance sheet also reflects to a very large extent deferred operating profit. With that overview, I will turn the call back to Peter.

Thank you, Johan. As you may remember in our previous 2018 earnings announcements, we stated that we expect to report consolidated revenue between €180 million and €185 million, adjusted EBITDA between €22 million and €25 million, and an increase of deferred revenue generated from annual licenses and maintenance of an amount between €2 million and €4 million as compared to year-end 2017. Based on our performance in the first nine months of 2018, and our outlook for the rest of the year, we expect all three of the guidance indicators to be somewhere within the higher end of these ranges. Practically, this means that while we expect to continue to perform well on all three fronts, we expect to report a particularly strong growth of our deferred revenues from annual licenses and maintenance in the fourth quarter. This concludes our prepared remarks. Operator, we are now ready to open the call to questions.

Thank you. [Operator Instructions]. And our first question comes from Troy Jensen with Piper Jaffray. Your line is now open.

Hey gentlemen, congrats on a great third quarter results.

Thank you, Troy.

Good morning.

Hey, so good morning everyone. A quick update on the Medical section really good growth there was a lot of that from CMF contribution or was it just more broad-based strength in Medical?

Well, definitely our fastest growing line in this moment is CMF, so you're right.

Is it a meaningful number growth rate or it's kind of really driving some revenue growth for the company?

Definitely, it's driving revenue growth and sorry I didn't fully grasp the question, Troy.

Yes, I guess, I was just wondering the size of it. I mean percentage growth can be high off a little base but I was just wondering if the dollar size, sort of Euro size [indiscernible] I think that was an update on -- how about if you could just give us an update on what you think the EBITDA margins can read for the Medical segment?

Well, we are aiming for EBITDA margin above 20% but at the same time, we want to say that we have also a lot of important projects in the pipeline that are demanding high R&D efforts and that will, yes, if they grow in importance, they will probably be also grow in requirements as you know in the Medical sector, once a product could become ready for the market, there is a huge effort to be done on the, yes, quality side and on the certification side which is often a multiple of the original development cost. And so we have still very interesting projects in the pipeline that will weight on the EBITDA margin.

Okay, understood. Hey jumping into the Software segment, I think you showed on the Slide OEMs were up 1% but direct sales were up 20%. I'm just curious why there's such a spread between the OEM channel and the direct channel and does it make more sense for you guys to commit more to direct sales here that's a better return?

Troy, this is Peter. It's important to look at trends here, and not just look at the numbers that we post for one particular quarter. It is -- what sometimes happens is in a particular quarter, OEMs sell machines to existing Magic users who will just add that particular machine to their suite which will imply that we will sell less through the OEMs for that particular quarter. But then our direct sales force will come in and as these customers grow their machine basis, they are more likely to be prone to upselling efforts from our direct sales force. So that explains to some extent the situation here where we have 20% growth in direct sales and a very moderate 1% growth in OEM sales.

Over the year it was 10% year-to-date, so this is, as Peter says, just this quarter.

So 10% for OEMs?

Yes, year-to-date.

Okay, perfect. Hey then last question for me, just on the BASF partnership, can you just talk about some optimistic outcomes from this partnership and maybe your sense of timing for revenue contributions?

Well the aim is that we are together really capable of bringing some high performance materials to the market that really and large the application scope of 3D printing. Especially on the plastics side, I think we have seen a slower evolution than on the metal side and partially this is also the case because we are not that fast as a sector to introduce more material options to us, the customers and that they can really step into new application and we are aiming at multiple developments in multiple fields. One of them we mentioned earlier eyewear, where for instance 30% of the eyewear frames are currently manufactured in SeeMe transparent materials and there are no materials that mimic that behavior for 3D printing at this moment sufficiently stable and sufficiently easy to process to address that part of the market. That’s one example of multiple that Materialise is addressing together with BASF.

Understood. All right, gentlemen. Keep up the good work.

Thank you, Troy.

Thank you. [Operator Instructions]. And our next question comes from Weston Twigg with KeyBanc. Your line is now open.

Hi, thanks. I was just wondering maybe if you could talk a little bit more about the broader manufacturing trends and other concerns about the slowdown in autos may be persisting the slowdown in China maybe impacting broader manufacturing demand overall. And so given that the organic growth was down a little last quarter but you see a strong rebound in Q4, just wondering if you could help walk us through your confidence in the rebound and maybe some of the more significant trends you're seeing over the next couple of quarters?

Thank you. Weston, as you know, our manufacturing activity is really an activity that is based in Europe and only mainly concentrates on serving European customers. So some of the trends that you're referring to like slowdown of the industrial activities in China would have little impact at least on our manufacturing business in Europe. That being said, yes, we have been referring for a couple of quarters now to the slowdown in the European automotive business in particular slowdown in coming up with new models which has affected our manufacturing activity. And as we said during -- in the prepared remarks, actually we've already I think answered that during previous calls, we do see some light at the end of the tunnel possibly already in Q4 definitely in the first quarters of 2019. So, yes, based on the renewed activity that we see there, we do expect that our European focused manufacturing activity will again touch base with positive organic growth as early as in the fourth quarter. That is to a large extent due to the rebound that we see in European automotive manufacturers bringing new models to the market.

Okay. So you're not seeing any of the broader macro concerns leaking into your manufacturing activity over the next two or three quarters at this point?

Over the next two to three quarters frankly, yes, our outlook does not suggest that macroeconomic situations that not affect European markets, would affect our European focused manufacturing activity.

Okay. I also wanted to ask about eyewear, the awards were really interesting, I know that the ramp was supposed to start to pick up in the second half of this year, I’m just wondering if you could give us a progress update in terms of that ramp and when we might start seeing some meaningful revenue in the eyewear segment?

Well we have to confirm. What we also already indicated in our previous call that the ramp-up of the customized eyewear is going slower than we anticipated. However, Materialise is also printing quite some serious both 3D printed eyewear that are not customized and there we see a nice continued growth, yes, actually if we compare to last year, it's a growth of approximately 65%.

All right, that’s helpful. That's all I have. Thanks.

Thank you, Weston.

Thank you. And this does conclude the question-and-answer session. But now let me turn the call back to Peter Leys for any further remarks.

Thank you. And thank you all again for joining us today. As always, we look forward to continuing our dialogue in our year-end call. Both Fried and Johan will be attending Formnext in a couple of weeks in Germany. I myself expect to be in the U.S. during the second week of next year where I will attend the Needham Conference. So we very much look forward to meeting some or all of you at either one of these events. Thank you again and goodbye for now. Bye.

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