Materialise NV

Ladies and gentlemen, thank you for standing by and welcome to the Q3 2020 Materialized Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star then 0. I would now like to hand the conference over to your speaker today, Harriet Freed of LHA. Thank you. Please go ahead.

Thank you for joining us today for Materialize's quarterly conference call. With us are Freed Von Kron, Founder and Chief Executive Officer of Materialize, Peter Lays, Executive Chairman, and Johann Albrecht, Chief Financial Officer. Today's call and webcast are being accompanied by a slide presentation that reviews Materialize's strategic, financial, and operational performance for the third quarter of 2020. To access the slides, if you've not already done so, please go to the investor relations section of the company's website at www.materialize.com. The earnings release 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 certainties 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 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 the company's most recent annual report on Form 20-F filed with the SEC. 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 introduction, I'd like to turn the call over to Peter Ley. Go ahead, please, Peter.

Thank you, Harriet, and thank you, everyone, for joining us on the call today. You can find the agenda for our call on slide number three. While we fully recognize that the continuing COVID-19 pandemic is having a devastating impact on the personal lives of many people around us, we believe that, nevertheless, the third quarter of 2020 has been a promising period for Materialise as a company. First and foremost, we have experienced an exceptional sense of commitment, responsibility, and solidarity throughout our entire workforce worldwide. The solid results for the quarter and the many initiatives that we will talk about during this call illustrate the dedication and tenacity that the more than 2,000 materialized team members have shown over the last couple of months. As a first item on our agenda, I will summarize, as always, the highlights of our third quarter results. During the last couple of months, Materialite has done much more, however, than just weather the storm. As most of you undoubtedly noticed, we announced strategic collaborations and investments in both our eyewear and footwear verticals. I will share some further transactional and financial data about the DETO and our SPRINT transactions as a second item of the agenda. Then, I will pass the floor to Frit, who will give you more context about our wearable strategy in general. Frit will also spend some time explaining how these two transactions will strengthen the position that we are building in both the eyewear and the footwear industry. After that, as always, Johan will walk you through our third quarter numbers in more detail. This time, Johan will also spend some extra time on the international internal digitization project that we have launched recently. And finally, I will come back to give you some qualitative insights into what we currently believe the rest of the year may bring for Materialise. And when we have completed our prepared remarks, we will be happy to respond to any questions that you may have. So, let's turn to slide four, which summarizes the highlights of our financial results for the past quarter. In Q3 of 2020, our medical business rebounded exceptionally well with a revenue growth of more than 10% compared to the same period last year. and with a record EBITDA margin in excess of 30%. Our other software and manufacturing businesses continued to be impacted negatively by the crisis, and as a result, our consolidated revenue decreased by almost €10 million to €40.8 million. Still, disciplined spending, in particular in G&A and in sales and marketing, resulted in a solid EBITDA margin of 14.8%, a small decline of roughly one percentage point compared to last year. Importantly, these solid results allowed us to increase our R&D spending by more than 4% as compared to last year's period. At the end of the third quarter of 2020, we had cash and cash equivalents in excess of €110 million, with short-term debt at the end of the quarter of less than €18 million. Now, turning to slide 5, as indicated earlier, I would like to briefly talk about the two transactions that we announced earlier. On September 21st, we announced a strategic partnership with the California-based developer of virtual eyewear trial platforms, Ditto Inc. Earlier today, we announced the acquisition of the shares of RS Sprint and of the key assets of RS Scan from our Washington-based partner, Superfeed, the market leader for insoles in the U.S. As I mentioned earlier, Frits will expand more on the strategic rationale of these two transactions. But before he does so, I will give you some of the key transaction highlights. First, eyewear with respect to Ditto. In September, we extended to Ditto a $9 million convertible loan facility to enable it to accelerate and expand in collaboration with Materialise, its front-end digital eyewear solutions. In the third quarter, Detour drew 2.5 million US dollars from the facility, and we expect that the remainder of the facility will be drawn in the next few quarters. Detour will use the proceeds of the loan to finance its software development work, including with the help of Materialise, and also to extend its global sales team. The purpose of the collaboration is to strengthen Ditto's state-of-the-art virtual trial platform by adding Materialize's customization and 3D printing functionalities. The sales of Ditto's digital eyewear solutions will generate a royalty stream for Materialize. We also believe that the collaboration with DITO will help boost other pioneering initiatives that we have taken in the eyewear market, including our collaboration with ROYA. Now, turning to footwear, as you may know, we currently operate our footwear platform through RSprint and RScan. RSprint, a 50-50 joint venture between Materialise and Superfeed, develops, produces and sells the FIT's personalised insoles and owns the related IP. RScan, a Superfeed company, develops themselves intelligent foot and gait analysis software and devices. The RScan product captures foot-related digital data that are generated by pressure plates and scanners and translate these data into personalized science-based foot care solutions, including the design of customized fingerprinted insoles. Under the transaction that we announced earlier today, Materialise will become the 100% owner of RSprint, and the material RS-PRINT will subsequently acquire substantially all assets of RS-CAN, including, importantly, the foot and gait analysis tools. The total price of this transaction is €8.2 million. Importantly, Superfeed remains very much involved in the project and has committed to invest significantly over the next three years in the distribution of the FITS insoles and the RSCAN technology in North America. Superfeed, which remains the manufacturer of the FITS insoles in North America, will work alongside our existing distributor Go4D in that region. So, now that we have those financial and transactional data behind us, I would like to turn over the call to Frits to give you some more context. Good morning and good afternoon everyone. Thank you for joining us today. As Peter already mentioned, our medical activities rebounded quickly and solidly after the lockdown in Q2. Interestingly, but not surprisingly, we saw a similar swift rebound to pre-COVID levels of both our eyewear and footwear activities. The good results of our healthcare and wearables verticals underscore that on the short term, meaningful applications of 3D printing are less cyclical and resistant sensitive. In our opinion, these good numbers also indicate that on the longer term, these applications will gain more and more traction in the new post-corona economy. Encouraged by the success of our investments in healthcare applications, Materialise started developing personalized solutions for the wearables market as early as 2014 because we realized that 3D printing in general and personalization in particular can offer exceptional value in wearable applications as much as it does in medical applications. There is indeed a great analogy that can be drawn between the suite of solutions that we offer in the medical market and the personalized solutions that we offer to the eye and footwear markets. In both instances, our solutions start by scanning patient or customer specific data. On the basis of that custom input, we then offer the expert, being a surgeon, a podologist or an optician, unique insights in the morphology and needs of his patient or customer. Both our medical and wearable solutions subsequently involve an important design step that is on one hand highly automated in order to be cost-effective, but on the other hand remains human-centric, as it always requires the control and input of the healthcare professional. Also, in both instances, we can offer customized 3D printed devices in the form of custom implants, insoles or eyewear frames, if the expert concludes that this is the best solution in the given circumstance. Finally, our medical and wearable solutions meet some of the high sustainability standards of the current generation, as they remain purely digital until the decision is made to produce a device, which will only be produced to order, reducing waste associated with overproduction and inventories. which will be produced at a location that is as close as possible to the point of care or point of sale, further reducing waste resulting from unnecessary transportation. Scientific research and good relations with academics in the respective fields are critical ingredients for the solutions that we develop. Equally essential to turn our science-based intelligence into practical and affordable applications are artificial intelligence-based software tools that assist the healthcare professionals to help their patients with the right diagnosis and treatment options. Finally, advanced certified 3D printing capabilities are required to make personalized, high-value products that outperform traditional manufactured alternatives and that enable the end customers to have a better and healthier life. In other words, a lot of knowledge, tools and processes that we have acquired and developed for our medical applications over the last few decades can be recycled to help to advance eyewear and footwear initiatives. We are truly excited that despite the difficulties caused by the COVID-19 pandemic, but also thanks to our financial strength, we have been able to structurally enhance our position in both the eyewear and the footwear sector over the past quarter. Thanks to the deals we have closed with market leaders Ditto and Superfeed, we are able to cover the complete customer journey of people who need a new pair of eyewear glasses or a new pair of insoles. Additionally, we cover this entire customer journey in a full digital backbone that has the potential to develop into a de facto standard digital platform. This is a situation similar to the one we obtained with the MIMIX Innovation Suite that has become the de facto standard for engineering on anatomy. It will give us the opportunity to accelerate the development of new applications that allow support of healthcare providers and to accelerate the scaling of the market access. With Ditto, We developed more accurate mobile scanning solutions that allow the visualization, fit and design of frames virtually on the basis of a scan of the consumer's face. This virtual try-on tool supports both in-store and online sales of eyewear shops and chains. The tool serves as a critical front-end in the digitization of the customer journey and the logistical chain, with 3D printing as the production technology of choice at the back-end. 3D printing enables one-of-a-kind iWare frame production, as well as more optimized series sizes for standard frames. Ditto and materialized researchers have joined forces to support the opticians with better tools to ensure not only the optimal solution for the patient or customer from a technical perspective, but also to assist in the best choice from an aesthetic perspective. Anascamp is a leading provider of pressure plates. optical scanners, and software analysis tools that enable dynamic foot and gait analysis. It was already our joint venture partner in AeroSprint. Together, we developed FITS insoles, a range of science-based, personalized insoles for runners, bikers, skiers, golfers, and more sport activities. This range is now being expanded to enable a wide variety of personalized corrective treatments for patients suffering from food problems. Thanks to the integration of the LS-CAN and LS-PRIM teams and the support of materialized R&D specialists, we intend to further accelerate our application-oriented development efforts. Healthcare professionals such as orthopedic or sports doctors, physiotherapists, chiropractors. Pediatrists will receive new software tools to deal with the foot and gait problems of their patients in a better way. It will also provide those specialists access to new revenue sources. such as insole sales and in the long term even complete footwear solutions our collaboration with superfeed a leading provider of standard insoles will ensure a capable and strong distribution channel in the u.s superfeed will also provide localized production in the u.s The focus of the Erascan and Erasprint sales teams will consequently be on the rollout of a distribution network and over time accelerate sales in Europe and the rest of the world. We also believe that the comprehensive product portfolio and distributed production with 3D printing will allow us to develop partnerships for distribution that span Asia. After the integration offers in 2021 are completed, we believe that wearables will contribute considerably to the growth of materials. I would like to close by stating that our industrial activities are also slowly recovering from the steep decline in orders we experienced in Q2 and during the summer holiday. This recovery is not immediately visible in the financial numbers as the decline in Q2 was still moderated by the executions of orders from Q1. a reduction of working progress and a reduction of working capital. This trend is now gradually being reversed in a build-up of orders, in a build-up of working process and working capital. However, the second wave of COVID-19 cases may undermine this positive trend. Nevertheless, Materialise is continuing its efforts in R&D, resulting in a renewed product portfolio that is preparing to allow our activities and those of our 3D printing customers to choose more sustainable solutions in the long run. If you are interested in learning more about these new offerings, we invite you to our new virtual product launch event on November the 18th. And with this message, I will pass the floor back to you.