Materialise N.V. (MTLS) Q4 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Fourth Quarter 2019 Materialise' Financial Results Conference Call. At this time, all participants' lines are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker today, Harriet Fried. Thank you, please go ahead ma'am.

Thank you everyone for joining us today for Materialise’s quarterly earnings 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 accompanied by a slide presentation that reviews Materialise’s strategic, financial and operational performance for the fourth quarter and full year of 2019. To access the slides if you’ve not already done so, please go to the Investor Relations section of the Company’s website. The 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 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 could impact the Company’s future business or financial results can be found in its most recent Annual Report on Form 20-F filed with the SEC. Finally, management will discuss certain non-IFRS measures on today’s conference call. A reconciliation table is contained in the earnings release and also at the end of the slide presentation. With that, I'd like to turn the call over to Peter Leys. Peter?

Thank you, Harriet, and thank you, all for joining us today. You will find an agenda for our call on Slide 3. As always I will begin with a brief recap of our results for both the last quarter of last year and the full year, after which Fried will come on to give you some insights in what we believe will be the long-term trends in additive manufacturing as the technology enters its fourth decade. Fried will also discuss the way the COVID-19 virus could impact our sector in the short term. After that, Johan will go through our fourth quarter and full year numbers in more detail and then I'll come back on with our financial guidance for 2020. When we have completed our prepared remarks we will be happy to respond to any questions. Now, turning to Slide 4, you will see the highlights of our fourth quarter and full year results. In the last quarter of 2019 total revenue increased 3.5% to €50.7 million, while adjusted EBITDA rose 28% to €7.7 million. In the fourth quarter our Software segment did particularly well with a revenue growth of 21% and an EBITDA margin of 41%. Year-over-year our revenue grew by 6.5% and our adjusted EBITDA increased at a rate that was more than twice as past by 13.3%. In 2019 our Software and Medical segments both posted double-digits revenue growth numbers of 11% and 16% respectively, while the revenues of our Manufacturing segment decreased slightly by less than 1%. At the end of the financial year, it is worthwhile to highlight a few other key financial indicators that underscore our financial strength. In 2019 our cash flow from operations amounted to €28.4 million. Our capital expenditures were €15.7 million, and we had cash and cash equivalents on our balance sheet for a total amount of almost €129 million. While the short-term macroeconomic outlook is not crystal clear, we believe that the consistent good performance of our Software and medical Segments and our strong balance sheet positioned us well to continue to realize our growth ambitions both organically and non-organically. And with that, I would like to turn the call over to Fried. Fried?

Good morning and good afternoon to everyone. Thank you for joining us today. After almost 30 years of consistent growth, Materialise will celebrate its 30th anniversary in 2020. Not only Materialise, but the entire additive manufacturing industry is entering its fourth decade. In the first decade of 3D printing the key challenge was to make the technology simply work. Materialise played an important role in this journey, enabling printer to work better by connecting CAT [ph] systems and CT scanners seamlessly with 3D printers, and this we did through our flagship products Magics and Mimics. Pioneers worldwide started to use our products almost exclusives for prototyping purpose. During the second decade of 3D printing, the additive manufacturing industry as a whole and Materialise in particular, started focusing on making the technology meaningful, by introducing 3D printed end parts in applications such as customized hearing aids, oral implantology [ph] guides and knee guides. In 2010, with the start of the third decade of 3D printing, yet another dimension was added to the equation. We concentrated on making the technology worthwhile by introducing tools and solutions that increased the efficiency and productivity of the technology with the launch of our Build Processors and the [indiscernible] as perfect examples. This year marks the beginning of the fourth decade of the AM industry. What is going to be the core theme of this fourth decade? We strongly believe it will be sustainability. Our planet is in jeopardy. The younger generations challenge us to take action. Now is the time to show that technology and innovation in general, and 3D printing in particular, are part of the solution. The role that additive manufacturing can play in our joint quest to make the world more sustainable will be the main theme over the fourth decade of 3D printing. The manufacturing industry at last has no other option but to cut as much weight as possible. We must not only reduce the amount of raw materials we use in production, but also recycle them as often as we can. We have to make sure we produce the first time right, minimizing transportation by setting up manufacturing units closer to the endpoints of sale. We much manage our inventories more carefully by producing more to order and less to stock. In all these instances, additive manufacturing can significantly enhance the choice for sustainability. Massive increased use of additive manufacturing will require a quantum leap in process optimization and control. Materialise is developing the appropriate software tools to enable this leap. But the sustainable world is not only about the planet. It is also about people. People look for solutions that address their needs more accurately. This is in particular the case in the medical field. Here again, 3D printing can come to the rescue. Additive manufacturing enables the production of personalized products at virtually no extra cost provided the design automation tools and digital backbones that support the person's life supply chains are available. Materialise is a pioneer in developing these indispensible software solutions. These and other related topics were to be discussed at Materialise World Summit that we had planned for May 14 and 15 in Brussels. The summit has been postponed however to November 5 and 6, because of the worldwide both mandatory and voluntary restrictions on mobility in response to the COVID-19 virus. That brings us from the great opportunities of tomorrow to the harsh situation today. The global impact of the coronavirus that is also impacting Materialise. The region that is affected the most aided by the virus itself or by the drastic measures that aim at containing its spread is Asia. The region is a growth market for both the additive manufacturing in general and for Materialise. Both our Software and Medical segments sell software in Asia. China, South Korea, Japan are countries that are most impacted by the crisis. In 2019 approximately 10% of our sales were from those Asian countries. We see that our activities in the region are affected in the short term. Our sales teams are less mobile. Fewer new machines will likely be deployed in the region. And overall, companies that struggle with their daily operations may temporarily slowdown their investments in innovation. And economic slowdown in those countries will impact us. But this will most likely be limited and temporary, particularly since delayed software sales of which a portion is recurring will be recoverable at a later stage. The second region at this being impacted by the virus is Europe, the key region for our Manufacturing segment. The European manufacturing services market in general has been difficult lately. The delays of imported supplies from Asia and the slowdown of export to that region, both will not help in the short term. As a result, we expect that the difficult situation of the manufacturing market in Europe will last longer than we had expected before the outbreak of the corona crisis. Unlike software sales, business that our manufacturing unit may lose in the first half of 2020 may not be easily recoverable in the second half of the year as our production capacity is limited. To conclude, 20/20 presents itself as a challenging year. While we will deal with the short-term impact of the continued difficult macroeconomic situation, we are determined to continue to invest in meaningful and sustainable applications of 3D printing, including the orthopedic, CMF, and cardiovascular initiatives within our Medical segment and the wearables initiatives of our Manufacturing segment. And now I'll pass the word to Johan.

Thank you, Fried. I'll begin with a brief review of our consolidated revenue on Slide 6. As a reminder, when I 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 last quarter of 2018. As Peter mentioned in his opening in this year’s fourth quarter, we generated a 3.5% increase in revenue. Materialise Software turned into an especially strong performance with a 21% increase in revenue and Materialise Medical realized 14% growth. These excellent performances were offset by a revenue decrease of 11% of Materialise Manufacturing, which continued to face significant macroeconomic headwinds in this quarter. Deferred revenue from license and maintenance fees increased €3.7 million during the quarter and €5.1 million over the entire year because of the strong recurrent sales in both, Materialise Software and Materialise Medical. For the quarter Materialise Software accounted for 24% of our total revenue, Materialise Medical for 34%, and Materialise Manufacturing for 42%. Cross-segment revenue from software products accounted for 34% of our revenue. Moving to Slide 7, you will see our consolidated adjusted EBITDA numbers for the fourth quarter. Consolidated adjusted EBITDA increased €1, 697,000, 28% from €6,52,000 to €7,749,000. Our EBITDA margin increased from 12.3% to 15.3%. Unlike the previous period, the 2019 Q4 EBITDA included a positive effect of €641,000, resulting from the new IFRS Accounting Standard that requires us to capitalize certain lease expenses as of 2019. This new accounting standard has little impact on our operating profit as depreciation expenses increased by roughly the same amount. Slide 8 summarizes the results of our Materialise Software segment. Here, revenue grew by 21% or €2.1 million. As we expected, the rebound we realized in Q3 from the softer first half of the year accelerated significantly in Q4. Recurring revenue was up 23.3%, but also non-recurring revenue grew 18.8%, boosted by direct sales. The segment’s EBITDA increased to €5,26,000 from €2,969,000 in last year's quarter. The EBITDA margin increased to a record of 21.5%, that is compared to 29.6% in Q4 2018. And that is despite the continued expansion of our software sales and marketing capacity. Moving now to Slide 9, you will see the total revenue in our Materialise Medical segment grew 14% for the quarter to €17.2 million. Revenue from Medical Device solutions rose 16.9%, accounting for 70% of the total segment’s revenue. This includes the results of the Engimplan acquisition that we consolidated since August 01, 2019. As Engimplan manufactures and sells orthopedic and cranio-maxillofacial implants and instruments, its revenues are reported under Medical Device solutions. Engimplan’s revenues amounted in the aggregate to €1.4 million. Medical Software sales which were not impacted by Engimplan's acquisition grew 25.4%. This quarter's deferred revenue from license and maintenance fees of $1.3 million tampered the revenue growth to 8%. Revenue from our Medical Software accounted for 30% of the segment revenue. EBITDA for the medical segment was €3.5 million compared to €3.6 million. EBITDA margin was 20% as compared to 24%. Now let's turn to Slide 10 for an overview of the Q4 performance of our Materialise Manufacturing segment. Their revenue was down by 11% or €2.6 million, reflecting a decrease in both, our traditional manufacturing and ACTech businesses. Particularly were affected by the softer macroeconomic environments in Q4. EBITDA decreased €222,000 to €1.8 million while the EBITDA margin remained flat at 8.3%. Gross profit was affected negatively because of the fixed cost of capacity, but partly offset by slightly decreased operating expenses and increased net operating income. Slide 11 provides the highlights of our income statement for the fourth quarter. Revenue rose 3.5% and gross profit rose 4.8% compared to last year’s period. The €1.3 million gross profit improvement was realized by our Software and Medical segment partly offset by Manufacturing's cost of capacity. In total, sales and marketing, G&A and R&D spending rose by less than 1% over the prior year period. Sales and marketing rose by 13%, mainly by continued capacity expansion in our Software and Medical segments. G&A decreased 22% and R&D costs rose 11%. This R&D cost increase excludes expenditures in Q4 2019 of €306,000 that were capitalized as intangible assets from our tracheal splint initiative. In total the intangible assets related to the development initiatives amounted to €1,759,000 on our balance sheet at the end of the fourth quarter 2019. Net other operating income increased by €700,000 to €1.5 million compared to €800,000, mainly as a result of higher grant income and an improvement of our net debt position. As a result of these three elements, improved gross profit, as well in amount as a margin, the low increase of operating expenses and higher net operating income, the groups operating profits increased by €1.8 million or 232% to €2,589,000 compared to €781,000. Net financial result was negative €558,000 in line with a negative result of €420,000 in last year's period. Income tax expense amounted to €558,000 compared to an income tax income of €348,000 in the fourth quarter of 2018 that at that moment reflected positive deferred tax results. Net profit for the fourth quarter was €1,327,000, compared to €525,000 for the same period in 2018. Now please turn to slide 12 for the recap of balance sheet and cash flow highlights. Our balance sheet remains strong with cash of €128.9 million, compared to €115.5 million as of end 2018. The increase of cash reflects the strong EBITDA performance. We're focused on reducing accounts receivable and the drawing of the second tranche of €25 million from our credit facility with the European Investment Bank, partly offset by the Engimplan acquisition and other capital expenditures and the payment of €2.5 million convertible loan that we extended in Q1 to Fluidda and that we referred to in previous earnings calls. Total debt rose €21.9 million from year end 2018 to €127.9 million besides the new €25 million tranche drawn by the European Investment Bank this debt includes €5 million of total lease liabilities from the new accounting standard IFRS 16 and €1.3 million debt from the Engimplan acquisition. Capital expenditures for the quarter amounted to €3.8 million of which less than 10% was financed. The €3.8 million includes the €306,000 capitalized development costs for the tracheal splint project explained earlier. Cash flow from operating activities for the quarter was €5.7 million and amounted to €28.4 million for the full-year as compared to €28.3 million last year. Total deferred revenue amounted to €32.7 million, as compared to €27.8 million as of end 2018. Of the €32.7 million, €27.6 were related to annual software sales and maintenance contracts versus €22.6 million as of end 2018. With that overview, I turn the call back to Peter.

Thank you, Johan. Before we conclude our prepared remarks this morning, I would like to go over our financial guidance for this year. For fiscal 2020, we expect to report consolidated revenue between €202 million and €215 million with the growth like in 2019 coming primarily from our Software and Medical segments. We expect our adjusted EBITDA to come in between €27.5 million and €30 million, and our deferred revenue from software licenses and maintenance to grow by an additional €3 to €5 million as compared to December 31, 2019. The financial year has started with some unexpected headwinds in connection with the COVID-19 virus. As Fried already explained, our Software and Medical segments are active in Asia, which is currently most impacted by the event, and our Manufacturing segment is exclusively active in Europe, where the impact of the crisis on the economy may be higher than initially anticipated. As a result of this unfortunate event, we have built in some extra prudence into our guidance by widening the ranges we are providing. We also believe that the business impact that we will likely feel in the first half of the year may to some extent be compensated by a stronger second half of the year. And with this, I would like to conclude our prepared remarks. So operator, we are now ready to open the call to questions.

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

Hey gentlemen, congrats on good results here in a tough environment.

Thank you, Troy.

Thank you.

Hey, so for me guys, the Software segment was pretty impressive. You know, so Johan had mentioned we saw acceleration here in the fourth quarter. Just curious to know what you think is driving that? Is it traction with metals? Is it just more end part production applications, any more insight would be helpful?

Well, I think there are two elements. On one hand we saw a stronger performance of the OEMs by the end of the year, but on the other hand, we do believe that some of the newer system types like the HP printers are getting more and more adopted in end parts applications in manufacturing applications and this together with the continuous growth of metal, yes we recuperated some of the opportunities [ph] [indiscernible] behind due to the economic [indiscernible] by the end of 2019.

Okay. Is it so am I hearing you right, you're saying that OEM sales are growing faster than maybe Magics and Mimics?

Well, bill processes are definitely performing strong. I would never say that you mentioned Mimics, that's part of our Medical segment, and Mimics has been performing extremely strong as well, especially we see and we have seen an uptake in the hospital market segment of Mimics. It has long been slower, but now at the end of last year we have seen several major deals coming through.

Sure. And then Magics guys, but we can move on to the next one. So the Brazilian acquisition Engimplan just curious if that was in line with your expectations?

Well, yes those results were in line with the expectations.

So if we exclude that, I think the chart showed that you only had 3% growth in medical sales. So just thoughts on what's going on there, if the CMF is still kind of the biggest driver for that segment?

Yes. In the first place we have strong growth in the medical software. As I mentioned, the sales themselves were up 25% that were then tempered by the deferred revenue aspects of that. It was limited to 8%. And in the medical devices there we see 14% of increase and that includes the group of Engimplan. Excluding Engimplan, we are also up in the single digits growth and there we see effectively a growth of production sales where in the past year we still have recurrent services as well that we see now that they are in a good sustainable group of production sales. This is bit how we move on and that you can grow in the future.

Yes, we have a couple of research contracted in 2018 that we didn't have in 2019. So - especially the implant business in CMF has been growing very steadily.

Okay. And then maybe last question from me, just an update on the BASF partnership?

Well, there we continue the collaboration. We have several new materials launched together with BASF at [indiscernible] and especially the TPU has been quite successful in uptake.

Okay, so good luck here in 2020.

Thank you very much.

Thank you, Troy.

Thank you, Troy.

Thank you. And our next question comes from the line of Jason Celino with KeyBanc. Your line is now open.

Hello, thanks for taking our question.

Hi, Jason.

Following up on kind of the last questions, the Software was very strong, but was that impacted at all by disruption in Asia that you mentioned or…?

No, coronavirus really started to happen in January. So our results of last year were not negatively impacted. And they were also at a good level in Asia.

Okay. And then relative to the guidance for - or the commentary of the impact for your Asia business, does it skew more towards medical versus software or is it more of an even kind of impact?

It impacts even basis the software sales from the Software segments and the Software sales from the Medical segment. But as you know Jason, software sales within the Medical segment only roughly represents 30% of total sales within medical. So overall, the Software segments will be more impacted by this temporary situation in Asia, than our overall Medical segment will be impacted.

Great, thank you. I think that's all from me.

Thank you.

Thank you. [Operator Instructions] And our next question comes from the line of Gregory Ramirez with Bryan Garnier. Your line is now open.

Yes, but that's it. Thank you for taking my question.

Hi, Greg.

I would like to the growth which you expected on EBITDA for 2020 something around, yes it requires an OpEx increase of 2% to 9%, which means that it will be expected to grow in line with the revenues. Maybe could you explain a little bit how you will manage your operating costs this year depending on the obviously the revenue mix, as I can assume that if the software division will be - I don't know if it will be in decline is it a credible scenario that it will be in decline whatever it is, the Software division or Medical Software at least for each one, but how you will manage the OpEx depending on the revenue mix that also on the sales commissions as well as managing G&A costs? Thank you.

Yes. Thank you, Gregory. May be one clarification, we do not expect a decline within the software or medical segments. As a matter of fact like in 2019, we expect the bulk of the growth of our overall revenues in 2020 to come from those two segments. Now, with respect to your question on how are we going to further manage OpEx. As you have noticed, we have significantly invested in sales and marketing in 2019. These investments typically do not immediately generate a return as salespeople need to be trained, need to be introduced to the market and the like. So we do expect to be able to benefit from the investments in sales and marketing that we have done in 2019 throughout 2020, and so that is definitely one way that we will manage our OpEx. As I have also noticed, we have, we believe our G&A expenses under control in 2019. That does not mean that G&A should be the case in any organization remains under scrutiny also within Materialise. So, we will also continue to manage those expenses tightly. And as we are a high-tech company, you can expect continued investments in R&D in 2020 in line with the efforts that we have undertaken in 2019.

Okay right and just on the - to come back you mentioned on that no software activity will be in decline for the full-year. I understand it, but is it a possible scenario in H1, only in H1?

Well, H1 as we explained with the current situation with the coronavirus, we are constantly assessing and definitely software sales and this growth of software sales both in Software and in Medical will be impacted by the situation in particular in Asia. Now, whether that will result in a stabilization of those sales or a negative growth is an assessment that we make on a day-to-day basis, Greg, it's difficult to assess, but H1 would definitely be impacted. And hopefully the virus will not survive the summer, we'll be able to recover the loss in Software in the second half of the year remains to be seen and we will keep you updated during the course of the year.

Maybe just for [Technical Difficulty] Gregory, we have also a lot of recurrent revenue from maintenance and renewals of license fees. We don't expect that these revenues will be impacted even in this virus season, so people continue and companies continue to renew business. And as you know from previous calls that represents roughly 50% of the Software revenue as well. So, there will be an effect, there will be an impact. It will be in the first place in this Asian region, but the effect you can make an estimate based on what we said, but we are looking it up day-to-day.

Thank you. And that concludes today's question-and-answer session. I would now like to turn the call back to Peter Leys for closing remarks.

Thank you [technical difficulty] and thank you all again [technical difficulty] in April and I plan to be in Boston for financial conference in June. So we look forward to seeing some of you at these upcoming events. Thank you again for dialing in. And we look forward to continuing the dialogue. Good bye.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.