Materialise NV
Q2 2018 Earnings Call Transcript
Published:
- Operator:
- Good day, ladies and gentlemen, and welcome to the Q2, 2018 Materialise Financial Results Conference call. [Operator Instructions] I would now like to introduce your host for today's conference Ms. Harriet Fried of LHA. You may proceed.
- Harriet Fried:
- 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 performance for the second quarter of 2018 and other recent activities. To access the slide that you've not done so already, please go to the Investor Relations section of the company's website at www.materialise.com. The press release that will be issued this morning can also be found on our page. Before we get started, 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 forward-looking statements are subject to known and unknown uncertainties and risks that could cause actual results to differ materially from the expectations expressed, including competitive dynamics and industry change. Any forward-looking statements, including those related to the company's future results and activities, represent management's estimates as of today and should not be relied upon as representing their estimates as of any subsequent date. Management disclaims any duty to update or revise any forward-looking statements to reflect future events or changes and 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 fiscal year ended December 31, 2017, filed with the SEC on April 30, 2018. Finally, management will discuss certain non-IFRS measures on today's call. A reconciliation table is contained in the earnings release and at the end of the slide presentation. With that, I'd now like to turn the call over to Peter Leys. Go ahead please, Peter.
- Peter Leys:
- Thank you, Harriet. A very warm welcome to everyone on the call today. And actually the term warm welcome is particularly appropriate here as temperatures are expected to reach an all-time high in Belgium today. We'd especially like to welcome those of you who are joining our call for the first time following the completion of last month's public offering. As always, you will find an agenda for our call on slide 3. I'll begin with a brief recap of our results for the quarter and then I'll touch briefly on the capital increase we've realized through our two recent offerings, as well as our plans for using that capital. After that, Fried will come on to discuss our strategic alliance with BASF, and the potential that the alliance holds for both the additive manufacturing industry in general and for Materialise in particular. After that, Johan will go through our second quarter numbers in more detail, and then I will come back on with a few concluding remarks. When we've completed our prepared remarks we will be happy to respond to any questions that you may have. Turning to Slide 4. You see the highlights of our second quarter results. Again reaping the benefits of our diversified business model, Materialise delivered another set of good results with total revenue increasing by 34%. Our Materialise Medical segment and the ACTech business that we added to our Materialise Manufacturing segment in the fall of 2017, both performed especially well. Including the impact ACTech which contributed revenue of €11 million and EBITDA of €2 million in the quarter, our adjusted EBITDA rose 91%, and our net results swung from a loss of almost €1 million to a profit of roughly €350,000. For the period, all three of our segments delivered EBITDA margins at or very close to double digits. Our Medical segment equaled the 17% record of the first quarter of 2018. Moving on now to Slide 5. As most of you know, we raised roughly US $70 million in the course of July, 2018, $25 million through a private placement with BASF, and US $45 million through a public offering including the full exercise of greenshoe. The public offering was more than 3x over subscribed. In addition on July 16, 2018, we drew a first tranche of €10 million from our €35 million credit facility with the European Investment Bank. As a result of all these operations in July, our pro forma cash position rose from the amount of €48.7 million that we reported at quarter end to a pro forma amount of €115.3 million. While our reported negative net debt position of €49.5 million at the end of the same period swung to a pro forma positive net cash position of roughly €7 million. This strengthened balance sheet will allow us to fund if and when appropriate the acceleration of some of the growth initiatives that we are currently engaged in. The proceeds of the successful private placement and public offering will also us if and when the opportunity arises to further accelerate our growth through acquisitions. I'll now turn the call over to Fried.
- Wilfried Vancraen:
- Good morning and good afternoon to everyone. Thank you for joining us today. Last year, Materialise took a strategic step for our industrial 3D printing activities in metals. With the acquisition of ACTech, a step that substantially contributed to the results we announced today. More recently, we also took steps to substantially strengthen our strategic position in the 3D printing of plastics. With the strategic alliance partnership agreement we entered into with BASF, a world leading chemicals company. As summarized on slide 6, BASF and Materialise share a common vision on the development of the additive manufacturing industry. First of all, we believe that the industrial use of additive manufacturing will grow substantially as long as meaningful applications can be further developed. Only through applications where substantial added value can be made, the 3D printing industry is going to achieve sustainable growth. Such applications require development efforts not only on the technical side, but also in market development as they rarely fit the same economic models as traditional manufacturing technologies. This approach is not new to BASF which has been at the forefront of many new plastics applications for decades. Second, BASF and Materialise believe that the larger industrial organizations will require an open ecosystem with freedom of choice to combine multiple material options with hardware and software from different vendors. An open environment is instrumental to getting the cost of additive manufacturing down while ensuring continuity of supply and a possibility to develop proprietary solutions for markets being served. At a more practical level, our strategic alliance with BASF has short and long-term ambitions. In the coming quarters, Materialise will act as an additive manufacturing pilot plant for several of the new materials that BASF is bringing to the market. Together, we will organize co-creation session with the help of customers from market such as market wearable, industrial goods and aerospace to develop larger scale additive manufacturing operations. The availability of performance materials such as polyamide 6 that can be produced at significantly lower cost under current standard material PA 12 will be instrumental to opening up broader markets. The fundamental reason why those materials have not successfully reached the additive manufacturing market before lies in the more difficult processing conditions on 3D printers. This is exactly where the material adaptation skills of BASF and the software skills of Materialise for process control complement each other to reach production quality results. While the strategic partnership will open opportunities for Materialise Manufacturing segment in the coming years, its impact on Materialise software segment should not be under estimated. Materialise software is ideally suited to serve as the backbone for large industrial groups to build production lines that are processing components in new performance materials. In the longer term, BASF and Materialise will focus on the development of new materials to enhance the penetration of additive manufacturing in vertical market such as shoewear and eyewear. Both cost reductions and performance improvements will be targeted. We are confident that our collaboration will enable new uses for the extraordinary potential of 3D-printed offers. At this point, Johan will come to give you more details on our second quarter financial results.
- Johan Albrecht:
- Thank you, Fried. I'll begin with a brief review of our consolidated revenue on Slide 7. As we can start it, I would like to remind you 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 second quarter of 2018 in our manufacturing business that do not affect for financial reporting purposes the results of our software and medical segments. When we provide certain numbers on a cross-segment basis, we present the ACTech numbers separately. As Peter mentioned in his opening remarks, in this year's second quarter, including ACTech's €11 million, we generated a 34% increase in revenue. Organically, our revenue grew to €34.1 million, or 1.5% compared to last year's period. Both our medical and our software segments have solid sales increases particularly when you take into account our deferred revenue from annual software sales and maintenance which rose by €2.4 million from the end of 2017 to €21.4 million. As a result of the ACTech acquisition, our revenue is distributed differently also this quarter than in last year's period. Including ACTech's 24% share, Materialise Manufacturing grew to 52% of our revenue this quarter, while Materialise Software accounted for 20% and Materialise Medical for 28%. The cross segment distribution of our revenues also looks different, in great part due to the ACTech acquisition. The total revenue from software products increased in absolute numbers by €624,000, it decreased relatively as compared to the other cross segment product groups by 8 percentage points to 29%. Moving to Slide 8, you will see our consolidated adjusted EBITDA number for the second quarter. As Peter mentioned earlier, consolidated adjusted EBITDA increased by 91%, rising from €2.7 million to €5,216,000. This result includes ACTech's contribution of €2 million. Our EBITDA margin rose 350 basis points from 8.1% to 11.6%. The significant increase in our medical segment's EBITDA was to a large extent offset by lower EBITDA in our organic manufacturing businesses. Organically, our adjusted EBITDA increased €513,000 to €3.2 million. The organic adjusted EBITDA margin for the quarter was 9.5% Slide 9 summarizes the results of our Materialise software segment. Here revenue increased 10%, or €826,000. Total sales including deferred revenue increased 15%. OEM sales rose 24% and direct sales grew 10%. The segment's EBITDA was 31.3% versus 35.5% in Q2, 2017. Moving now to Slide 10. You will see that total revenue in our Materialise Medical segment grew 16.5% for the quarter to €12.4 million. Revenue from Medical Device Solutions rose 29%, boosted by partner sales of 39%. Revenue from our Medical software decreased 5%, but including deferred revenue however medical software sales rose 9%. EBITDA for the medical segment increased $1.4 million to €2.1 million. The EBITDA margin was 17.1% as compared to 7.1% in the prior year's quarter, as a result of the higher revenue, improved gross margin and only 5.1% increase in operational expenses. Medical's EBITDA margin for Q2 remains at the record high it reached in Q1, 2018. Again, demonstrating the way that the successful investment in and development of a vertical can yield an impressive outcome. Now let's turn to Slide 11 for an overview of the Q2 performance of our Materialise Manufacturing segment. There, as we mentioned, revenue was up by 62%, including ACTech's strong €11 million revenue contribution. Organically, the segment's revenue fell 14% from what was an exceptional quarter last year. The decrease in a limited number of industrial end part manufacturing project impacted the revenue by more than 9%, while the market dynamics in Europe and particular in the automotive industry, there has been a slower than expected introduction of new models also tended to grow our top line. ACTech contributed €2 million to the total $2.3 million segment EBITDA as compared to €1.2 million segment EBITDA in the prior-year period. The increased operational expenses and in particular the continued investments in our R&D expenses with respect to our wearable and metal 3D printing product lines have resulted in a soft organic EBITDA. At quarter end, we had a total of 185 printers in production, which is up three over the number of Q1, 2018, representing the prints purchase to accommodate the increased activity in our medical segment. The total includes also the nine printers operated at ACTech. Slide 12 provides the highlights of our income statement for the second quarter. Gross profit rose 28% compared to last year's period. Excluding ACTech, gross profit increased 9%, while gross margin was 62.1% as compared to 57.7%. The fixed cost of sales related to the decreased manufacturing revenues weight 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 statement. In total, R&D sales and marketing and G&A spending rose by 23% over the prior-year period. Excluding ACTech, these operating expenses increased 10.5%. R&D rose 14% with increases in all three segments but in particular in manufacturing, reflecting continued efforts in our wearable and metal 3D printing business line. Excluding ACTech, sale and marketing rose 10% primarily as a result of increases in our software and medical segment. Excluding ACTech, G&A rose 8% 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. Net operating income increased by €613,000 to €1.8 million compared to €1.2 million last year. The group's operating profit amounted to €929,000. This operating result was affected by depreciation cost which increased from €2.7 million to €4 million, or to €3.1 million excluding the impact of ACTech. Excluding ACTech, we posted an operating loss of €122,000, compared to a loss of €295,000, reflecting an improved gross profit offset by higher operating and depreciation expenses in this year's quarter. Net financial result was negative €376,000 compared to a negative €427,000 for last year's period. This mostly reflected variances in the currency exchange rate and increased financial expenses of which €414,000 relates to ACTech. Income tax amounted to €43,000, of which €206,000 was related to ACTech compared to a cost of €191,000 in the second quarter of 2017. Net profit for the second quarter of 2018 was €369,000, or €0.01 per diluted share compared to net loss of €950,000 or a loss of €0.02. ACTech contributed €431,000 positively in the net result. Now please turn to Slide 13 for a recap of balance sheet and cash flow highlights for June 30. At quarter end, we reported cash of €48.7 million compared to €43.2 million as of end last year, and debt of €98.2 million, a moderate increase of €3.7 million from year end 2017. As Peter explained, the private and public capital increases in July had a major impact on our balance sheet after quarter end. Pro forma total equity increased to €133.6 million from €77.1 million as of end June this year, reflecting the net proceeds received from these operations. And as result, we have pro forma €150 million and a positive net cash position of €7 million. Capital expenditure for the quarter amounted to €4.8 million, of which €800,000 related to the expenditures made by ACTech, compared to €9.2 million in last year's period. Again, most of the capital expenditures have been financed externally. Cash flow from operating activities for the quarter amounted to €4.8 million compared to €3.6 million for the same period in 2017. Total deferred revenue amounted to €29.2 million as compared to €23.8 million end last year. Of the €29 million, €21 million were related to annual software sales and maintenance contract versus €18.7 million as of end last year. We should bear in mind that this cumulative amount of €21 million on our balance sheet also reflects to a very large extent deferred operating profit. With that overview I'll turn the call back to Peter.
- Peter Leys:
- Thank you, Johan. So to sum up, the last several months have been a very busy and exciting period for Materialise. With a solid quarter behind us, our strategic alliance BASF signed; our private placement closed and our follow on offering successfully completed. We now very much look forward to returning to the excitement of our daily business in the next few months. Our focus will be on continuing to enhance and streamline our operations, and to advance the plans that we already have put in place. Based on our performance in the first half of 2018 and our outlook for the rest of the year, we believe we are well on track to meet the full year guidance we provided in March of this year. Operator, this concludes our prepared remarks. We are now ready to open the call to questions.
- Operator:
- [Operator Instructions] And our first question comes from the line of Troy Jensen from Piper Jaffray. Your line is now open.
- Troy Jensen:
- Hey, congrats on the good results, gentlemen. Hey, so I guess, first I want to hit medical. You guys had record revenues this quarter. I would just love to know kind of what's really kind of driving the strength there? It seems like the entire vertical is strong, but has CMF been a driver yet? And will that be material and if you could just talk to the sustainability of the growth here in the medical business that would be great.
- Wilfried Vancraen:
- Well, indeed you are right, Troy. CMF is currently one of the major growth engines of our medical activities. Now to take that a little bit broader, within CMF is the first area where we also take our metal implants to the US market, and yes implants are having overall a bigger added value than the guide. So to the extent we will be able to bring more implants to the market in the future, this will drive sustainable growth in our medical segment.
- Troy Jensen:
- So, for you if you think of all three segments, do you feel like medical will be the fastest-growing for the next couple of years?
- Wilfried Vancraen:
- Well, we believe in equilibrated growth, definitely medical will keep growing steadily, but at the same time we have similar expectations for our two other segments as well.
- Troy Jensen:
- Okay, all right, that's fair. So guys if I just poke on one thing in the quarter the organic manufacturing business was down 14% organically. I do understand it had a hard comp versus last year, but it was the third -- I think the third consecutive quarter of year-over-year decline. So can you just talk about what's going on in that piece of the business?
- Peter Leys:
- Sure, Troy. So in manufacturing, I mean you definitely pointed out that, yes, we have an exceptional quarter in Q2 of 2017, which definitely should be taken into account when assessing the overall results of our manufacturing business in this quarter this year. What's happened is I'd say a number of things. First, as you know, we have invested over the last couple of quarters and years in setting up some additive manufacturing production lines for end parts for a number of particular customers. And what's happened now and this is all part of the business model is to some extent we have been but rather brutally a victim of our own success, because in a certain instance it turned out that this production line that we had set up that the product was so successful that the customer actually decided to take it back, and actually switch back to injection molding for larger volume production. In other instances, you have customers who are perfectly satisfied with the production line that we have set up internally, and then decide to either take it in-house or move the production to their own contract manufacturers, which overall is good news for our software business because our software will be used by those contract manufacturers or OEMs. But on short term, it means a loss of business for our manufacturing unit. So that is what happened and what impacted the results of manufacturing in this quarter as compared to the same quarter last year. And second of course, as we've explained I think also during the previous call, we are experiencing rather a softness in the European automotive business. In particular, we've seen less new models are being brought to the market, which of course also impacts some of our organic business that we have built and that to some extent does depend on the cyclical automotive business. So the combination of those two actually explain the softness of our manufacturing segment currently. I should add --
- Troy Jensen:
- Okay. Go ahead.
- Peter Leys:
- I was about to add, Troy, giving you an outlook that we do see “light at the end of the tunnel.” Maybe not for the third quarter, but in general the automotive industry seems to be picking up, that is what we see in the number of quotes. So we do expect that over time manufacturing will show better results as the one that is currently being reported.
- Troy Jensen:
- Okay, and then maybe last question for me. Today, when you guys talked about the BASF partnership here, it seems like you focused a lot maybe more than I had caught the first time about plastics here. So is this resins and filament that they're working on and is this --do they also have intentions to do more powder based metals with BASF or is this just kind of the first step to focus on?
- Wilfried Vancraen:
- Indeed BASF currently has mostly some filaments on the market, but they have a pipeline with quite a lot also in photopolymers and in, yes, powders for MJF and selective laser sintering and it's especially the photo polymers and the powders that are of course primary topics for Materialise while we will also do a bit of work on filaments, but the majority of the work will be related to powders and resins.
- Troy Jensen:
- If you did -- both you guys have partnership with HP I mean was that one of the basis of becoming kind of stronger partners? If you are focusing on powders and multi jet fusion here or is that maybe just reading too much here?
- Wilfried Vancraen:
- Well like I indicated. one of the powders that we are planning to further develop with the BASF for applications will also be with HP. So we definitely keep working on that Troy.
- Operator:
- And our next question comes from the line of Weston Twigg from KeyBanc. Your line is now open.
- Weston Twigg:
- Hi, thanks. First I was just wondering we just talked about the manufacturing piece but I wanted to gauge your confidence in the manufacturing rebound. You reiterated full-year guidance for revenue. How much of that is dependent on a manufacturing rebound?
- Wilfried Vancraen:
- Yes. We are quite confident in manufacturing rebound. We see it not only in the quote but also in some orders coming in of which especially those in a rapid fit business for instance, where we have seen yes good ordered intake but where the projects are taking longer than in the let's say past prototyping business. We can -yes, we can anticipate normally a very good fourth quarter although the third quarter will still be mixed given the length of the startup of those projects.
- Weston Twigg:
- Okay. So it sounds like there should be quite a --there should be rebound in Q4. Okay. The other questions I had one on the BASF deal. Can you help us understand when you might see revenue opportunities emerge from that partnership?
- Wilfried Vancraen:
- Well I although we will definitely --yes make serious efforts to launch till this year some initiatives. Revenue wise, the even next year --the real revenue will be relatively limited, but for 2020 and dissipate some larger production series order based on the BASF materials. And the real benefits are expected in a five year time frame,
- Weston Twigg:
- Okay, that's helpful. And then actually I had two more quick ones if you don't mind. The next one was just recently you reiterated your long-term targets of annual revenue growth of over 20% and EBITDA margins of over 20%. Organic revenue is growing slower than that so just wondering what needs to happen to hit those goals and how soon do you think you could get to that 20% level annual growth?
- Peter Leys:
- Troy, this is Peter speaking. West, I'm sorry. If you look at our organic growth of 1.5% you really have to break it down. Software is showing solid sales growth of 15%. Our medical segment is showing now a number of consecutive second quarters of very solid growth nearing the 20%. And if we can just get our regular manufacturing business simply back on track with even a single-digit growth, but add on top of that some of the growth initiatives within manufacturing such as the eyewear initiative or the work for aviation that we expect to grow faster through the collaboration with BASF, or some of the verticals in automotive such as rapid fit. If those initiatives that all sits within manufacturing, if they accelerate on top of a more moderate growth of the overall business of manufacturing; if you add all that then our target over 20% growth rates which would actually simply be the repetition of our revenue gagger over the last three to four years is definitely feasible. So, in short, if we can get some of the growth accelerators in manufacturing to work and get the regular business as a regular growth rate then we are very comfortable that we should be able to continue to post compound annual growth rates in the neighborhood of the 20% just like we've done the last three to four years.
- Weston Twigg:
- Okay, that's helpful. And then just finally for me, this is more housekeeping but what do you expect your diluted share count average share count to be for Q3 for modeling purposes?
- Peter Leys:
- While Johan is looking up some numbers, basically I don't know whether this will answer your question, West. We roughly added I mean 3 million-- we issue 3,450,000 additional shares and added close to 2 million new shares in the private placement at BASF. So that means you basically add 5.3 million new shares which would then be bring you to new total -- it's simply adding but Johan is there now. Johan can give you a more precise number.
- Johan Albrecht:
- This is about 10%.
- Peter Leys:
- Yes. But what is the absolute number?
- Weston Twigg:
- Okay. I didn't know if there are any other activities it would change that but simple enough, thanks guys.
- Johan Albrecht:
- 8 million.
- Operator:
- Thank you. And at this time, I'm showing no further questions. I'd like to turn the call back over to Peter Leys for any closing remarks.
- Peter Leys:
- Okay. Well, thanks again for joining us today. We look forward to continuing our dialogue with you at Investor Conference and on the roadshow or at our next quarterly call. For your information Johan will be attending the Keybanc Investor Conference in Vail, Colorado next week. Thanks again and goodbye for now.
- Operator:
- Ladies and gentlemen, thank you for participation in today's conference. This does conclude the program. You may all disconnect. Everyone have a great day.
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