Materialise NV

Q2 2021 Earnings Conference Call

7/29/2021

spk01: Ladies and gentlemen, thank you for standing by and welcome to the materialized Q2 2021 financial results 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 one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star then zero. I would now like to hand the conference over to your host, Ms. Harriet Freed of LHA. Ms. Freed, please go ahead.
spk00: Thank you for joining us today for Materialize's quarterly conference call. With us on the call are Freed Van Cron, Founder and Chief Executive Officer of Materialize, Peter Leys, 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 second quarter of 2021. To access the slides, if you have not already done so, please go to the industrial relations section of the company's website at www.materialize.com. The earnings release that was issued earlier today can also be found there. Before we begin, I'd like to remind you that management may make forward-looking statements regarding the company's plans, expectations and growth prospects, among other things. These forward-looking statements are subject to known and unknown uncertainties and risks that could cause actual results to differ materially from the expectations expressed, including competitive dynamics and industry change. Any forward-looking statements, including those related to the company's future results and activities, represent management's estimates as of today and should not be relied upon as representing their estimates as of any subsequent day. Management disclaims any duty to update or revise any forward-looking statements to reflect future events or changes in expectations. A more detailed description of the risks and uncertainties and other factors that could impact the company's future business or financial results can be found in the company's most recent annual report on Form 20F, 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 also at the end of the slide presentation. And with that, I'd like to turn the call over to Peter Ley. Peter?
spk02: Thank you, Harriet, and thank you, everyone, for joining us today. You can find the agenda for our call on slide three. As the first item on our agenda, I will summarize the highlights of our financial results for the second quarter of 2021. Then I will pass the floor to Frit, who will give you more insights into our current intentions with respect to the use of the proceeds that we raised earlier this month. After that, Johan will walk you through our second quarter numbers in more detail. Finally, I will come back and give you some observations about what we currently believe the rest of the year may bring. And when we've 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. Quarter over quarter, our revenues grew 33% to €50.7 million, and our adjusted EBITDA more than doubled to €6.9 million. These results are, we believe, excellent. Of course, the second quarter of 2020, the benchmark, was the quarter in which our business as a whole suffered the most from the COVID-19 crisis. As a result, while the comparison between last year's and this year's second quarter remains very relevant, it may provide less insights into our current performance than the insights that quarter-to-quarter comparisons provide in more normal circumstances. Therefore, internally, in 2021, we also benchmark our results against the previous quarter to better understand the trends of where our business is going in the short term, as well as against the same period of 2019, which we believe is a better reference period than the horrible year 2020. So I would like to share some of the conclusions of these additional benchmarking exercises with you. On a sequential basis, compared to the first quarter of 2021, our revenues grew by 11.3%. and our adjusted EBITDA increased by a stunning 30%. But only do these numbers confirm that our business is recovering from the crisis. They also show the recovery is happening at a swift pace that is in fact faster than what we had expected only a few months ago. Importantly, our second quarter revenues and adjusted EBITDA also increased when you compare them with our results of the same period in 2019. To be more precise, our revenues grew by 5% and our adjusted EBITDA increased 37%. This tells us not only that we are swiftly recovering from the crisis, but in fact that we are back on the track of posting genuine and healthy growth. These, we believe, very solid and promising results underscore what we had explained during our recent capital increase. The newly raised funds will not just be used to help us recover or to help us return to growth, which are things that we are already experiencing today. In fact, we intend to use these funds to further accelerate the key growth drivers of our business. In particular, the continued rollout of our Magix and Mimix software platforms, the expansion of our presence in the CMF market, and the go-to market of our wearables platforms in general and of materialized motion in particular. With that, I would now like to pass the floor to Frit, who will explain our current intentions with respect to the use of proceeds in more detail. Frit? Thank you, Peter. Indeed, we intend to allocate the bulk of the proceeds we raise to the key road drivers that we discussed at length during our last earnings call. And let me briefly reiterate what these are. First, we will continue to invest in the expansion and innovation of our two market-leading horizontal software platforms, Magix and Mimix. The Magix platform, as you know, enables users of AM technology to be more productive, more cost-efficient and more sustainable. The sales of our Magix flagship product remains strong throughout the pandemic and showed again considerable growth in Q2. We are currently in the process of adding more extensive process planning and manufacturing execution functionality to our platform, and we are also making many Magix functionalities accessible through the cloud. Both initiatives are intended to further expand our market share and to make our solutions even more relevant in the developing and part manufacturing market. As many of you know, we believe we can significantly accelerate these efforts through the acquisition of Loon3D later this year that we intend to finance entirely from our balance sheet. The MEMIX care and innovation suites help researchers, medical device companies and hospitals to engineer on the human anatomy, which in a number of instances will lead to the 3D printing of unique anatomical models and personalized medical devices. Over the last couple of years, the successful introduction of our Mimix platform in hospitals has contributed significantly to the overall success of our medical segment. We are currently in the process of developing additional artificial intelligence functionality for Mimix and intend also to introduce augmented reality and virtual reality functionality to the Mimix suite. Today, we are developing these new features internally. With the funds raised, we intend to increase our internal development capacity and do not exclude that we also undertake other initiatives and if they could speed up some of these developments. Second, in addition to the software platforms, Materialize empowers a limited number of specific meaningful applications of 3D printing, both in medical and in paramedical fields. Our current so-called key verticals are situated in the orthopedic, CMF, footwear, and eyewear markets. Each of those verticals, in particular CMF and footwear, has shown significant growth recently and we intend to continue to invest in initiatives that will accelerate that growth. We bring our CMF product portfolio to the market mainly through our partner Johnson & Johnson. The success of our CMF personalization platform is an important contributor to the overall success of our medical segment. The acquisition of EnginePlan in Brazil in 2019 allowed us to expand our product portfolio in CMF and to also be more present in markets where our partner has less focus. With the funds of the recent capital increase, we intend to continue to invest in success of our partnership with Jensen & Johnson and also to look at M&A active opportunities that offer synergies similar to the strategic fit that EnginePlus offers. We have been active in the footwear market, in particular the design and production of personalized insoles since 2014 through the joint venture Aresprint. In 2020, we acquired 100% of the shares of Aresprint and also substantially all assets of Arescam, the company that makes pressure plates and related software. As a result, we now have a complete one-stop shop product offering for personalized in-sources. This solution is unique and patent-protective in the sense that it takes the dynamic aspect of the food into account on a scientifically substantiated basis. Here also, we intend to increase our expenditures and investments, in particular with a view to accelerating our go-to-market. In the eyewear market, we have built a dedicated eyewear additive manufacturing line in Poland and have our own dedicated sales force that is active in Europe. We have a number of ongoing initiatives that relate to the digital customer journey preceding the choice and or the production of the frames. On both fronts, the physical production and the digitization of the customer journey, we do not exclude M&A activity. Finally, we moved into a new metal 3D printing center in Bremen in Germany in the first quarter of 2021. The official opening is planned for October 7th. Metal is one of the growth drivers of our manufacturing unit. While we expect continuous growth of that particular sub-segment of materialized manufacturing, we do not plan any M&A activity in that area. However, we do intend to intensify our partnership collaborations with metal machine manufacturers to achieve seamless and highly automated metal 3D printing workflows in the new facility, which will also benefit materialized software. To conclude, MateriaLine is coming out of the Corona crisis with renewed growth in our key focus areas and with a solid and strengthened balance sheet that will allow us to accelerate the growth with internal as well as external initiatives. And Johan will now provide you with the numbers that prove this statement.
spk03: Thank you, Preet. I'll begin with a brief review of our consolidated revenue on slide 6. As a reminder, when we refer to sales in our presentation, we mean revenues plus deferred revenues. Also, please note that unless otherwise stated, comparisons in this call are against our results for the second quarter of 2020. Like Peter did earlier, because the second quarter of 2020 was very significantly impacted by the COVID-19 crisis, I will sometimes refer to 2019 to make the figures more comparable. Revenue was €50.7 million for the period, 33% above the level of the same period last year. The positive growth took place in all three segments. The growth in our software segment was 5%, our medical segment grew 50% and revenue in manufacturing increased 39%. Compared to the second quarter of 2019, our overall revenue grew by 5%, driven by a healthy growth of 8% in software and a very strong 21% revenue increase in medical. Manufacturing revenues were 5% lower in Q2 2021 than in 2019, but recovered 22% from Q1 2021. Importantly, deferred revenues from software licenses and maintenance fees increased by €1.7 million compared to the end of last year. further underscoring the strong software sales performance within both our software and our medical segments in the second quarter. For the second quarter of 2021, materialized software accounted for 20% of our total revenue, materialized medical for 34% and materialized manufacturing for 46%. Cross-segment revenue from software products represented 31% of our total revenue. Moving to slide 7, you will see a consolidated adjusted EBITDA numbers for the second quarter. Consolidated adjusted EBITDA more than doubled, increasing from €3,382,000 last year to €6,925,000 this period. While the revenue grew 5% compared to 2019, EBITDA grew 37%. This increase compared to 2019 was the result of a variety of positive factors. First, a revenue growth. Second, an improved gross margin triggered by increased insourcing and continuous productivity improvements. And thirdly, disciplined spending, in particular with respect to overhead. Importantly, The increase of our EBITDA did not come at the expense of our R&D spending, which actually increased by 12% compared to Q2 2019. And the initiatives to enhance our internal business application platform continue and are still on track. Slide 8 summarizes the results of our materialized software segment. Software revenue increased 5.2% to 10%. Deferred revenue grew an additional half a million euro. Decurrent sales increased 24%, but were offset by a smaller usage of deferred revenue from license and maintenance fees compared to last year. Non-recurring revenue increased 15%, driven by new perpetual license fees and royalty income. EBITDA margin was 31.2% or €3.1 million compared to €3.8 million. As the segment did not receive governmental support as we did last year, remuneration costs rose and weighed together with the increased efforts in R&D in our digital transformation project on our EBITDA. Nevertheless, this quarter's EBITDA was 52% or 1.1 million euro higher than in Q2 2019. Moving now to slide 9, you will see that total revenue in our materialized medical segment increased by almost 50% to 17.5 million euro. More meaningful is the 21% growth compared to the pre-pandemic second quarter of 2019. Revenue from medical software sales grew 16% compared to 2019, where revenue from medical devices and services increased 23% compared to Q2 2019. Revenue from medical software sales accounted for 31% of the segment revenue. Adjusted EBITDA not only quadrupled to €4.5 million from €1.1 million, but was also 65% higher than in Q2 2019. As a combined result of continued top-line growth, production efficiencies, insourcing programs, and lowered operating expenses, the EBITDA margin increased to 26% from 10% last year and 19% in Q2 2019. This all while we accelerated the execution of our R&D programs. Now let us turn to slide 10 for an overview of the Q2 performance of our materialized manufacturing segment. Revenue increased 39% or 6.5 million to 23.3 million euro. Importantly, revenue also increased 22% or more than 4 million from the first quarter of this year as we were able to translate the positive signs that we noted in the previous quarter, in particular from automotive and industrial client segments, into effective revenue growth. Adjusted EBITDA for the quarter rose to €1,850,000 compared to €650,000 in 2020. As the level of capacity usage increased, gross margin returned to pre-corona levels. Operating expenses remained 3% below Q2 2019. As a result, EBITDA margin improved to 8% from 4% last year. Slide 11 provides the highlights of our income statement for the second quarter. Gross profit margin grew to 56.1% from 52.3% and 54.8% in Q2 2019. The solid margin was due to the increased revenue, the higher level of capacity usage, and productivity improvement in all of our segments. Operating expenses increased 18%. saved through various government support programs. Our sales and marketing spending increased 18%, G&A expenditures increased by 23% and research and development expenses, which we maintained at existing levels throughout the crisis, were €6.8 million or €800,000 higher than last year's quarter. This quarter's net operating income was €843,000 compared to €892,000 last year. As a result of all these elements, the Group's operating profit was €2,421,000, compared to an operating loss of €1.9 million in last year's period, and compared to 2019, a small result of €36,000. Our financial result was positive. compared to a negative €300,000 in the previous year. The result includes currency exchange gains of €2.1 million, including on a portion of the funds we raised during the quarter. The second quarter of 2021 contained income tax expenses of €131,000 compared to a positive €191,000. in the second quarter of 2020. The profit for the quarter was 3,443,000 euro compared to a net loss of 1,969,000 for the 2020 period. Now please turn to slide 12 for the recap of balance sheet and cash flow highlights. In June 2021, a balance sheet was boosted by the capital increase of 74.3 million euro from the issuance of 4 million new shares. This excludes the 14.4 million US dollar growth proceeds from the issuance of 600,000 additional new shares following the full exercise of the green shoe in July. Our cash amounted to €182.8 million compared to €111.5 million at the end of last year, while our borrowings position decreased by €8.2 million to €106.8 million. Only €18.7 million of our debt was short-term at the end of June. Excluding the capital increase, our net cash position in Q2 2021. Equity increased €75.7 million to €208.8 million as a combined result of the capital increase of €74.3 million, the first six months net loss amounting to €200,000 and a positive conversion difference of €1.5 million. Total deferred revenue amounted to 37.2 million euro, an increase of 2.3 million compared to December 31, 2020. Of the 37.2 million, 32 million were related to annual software sales and maintenance contracts, versus 30.2 million as of end last year. Cash flow from operating activities for the second quarter of 2021 were €8.9 million compared to €7 million for the 2020 period. This quarter, our operating cash flow consisted of EBITDA of €7.3 million, while our working capital improved €1.6 million. Capital expenditures for the quarter amounted to €2 million and were not financed. The financial investment of Q2 2021 included a US$2 million option price and a US$1.1 million working capital loan paid to Link3D, in line with the announcement made in our last earnings call. Peter?
spk02: Thank you, Johan. If you could kindly turn the page to slide 13. Before opening the floor to questions, We would like to try and give you some insights in what we currently believe the remainder of 2021 may bring. We currently see a positive, albeit fragile and fairly diverse, global trend of businesses gradually recovering from the pandemic crisis. Assuming that this trend continues in the right direction over the next few months, currently expect our consolidated revenues for the entire year 2021 to exceed the level that they reached in 2019 which was close to 197 million euros we also see a likelihood of our revenues come close to 200 million euro this would represent a growth compared to 2020 between 15 and 17%. As is traditionally the case for our business, we expect that the majority of the revenues of the second half of this year will come from a particularly strong fourth quarter. As our revenues grow, we intend to increase our operational expenses accordingly with the view to accelerating our growth in the near future, fully in line with what Fried explained earlier. Therefore, we currently believe that adjusted EBITDA for the full year 2021 will reach up to €25 million. With this, I would like to conclude our prepared remarks. So, operator, please go ahead and open the call to questions.
spk01: Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question will come from Jason Salino with KeyBank. One moment. Please go ahead.
spk04: Hi. Thanks for taking my questions. Hey, Jason. You know, for my first one, you know, when you say the recovery in your end markets is happening, you know, more swiftly than expected. You know, that's definitely good to see, but maybe from a linearity perspective, how did this develop, you know, through the quarter? Was it more immediate or is it just the confidence from the quarter as a whole?
spk02: Of course, we cover multiple markets and overall the trend has been positive throughout the quarter. Certainly, as our numbers show, in medical we have seen a continuous increase in sales, but that was also true for software. The only market that is still relatively unstable is the automotive market, which is no longer suffering from COVID, we assume, but as many of you know, is suffering from supply chain problems and is still in a very unstable phase.
spk04: Okay. And then for my second question, as it relates to the commentary for the end of the year, You mentioned that you could exceed 2019 revenue levels, but as it relates to the manufacturing segment, is this also a segment that could exceed 2019 levels? Thank you.
spk02: Jason, as you've seen in the past few quarters, also in this quarter, we have continuously and also strategically been growing in particular our software and medical segments. And while manufacturing has recovered and we expect that it will continue to recover, we do not expect that the mix between the three segments in 2021 will be the same as the mix that it was in 2019. I mean, as a result of the continued exercise of our strategic priorities, we do expect that software, and in particular medical, will represent a more important part of the overall revenues.
spk04: Great. Thank you. I appreciate the color.
spk02: Sure. Thank you.
spk01: As a reminder, ladies and gentlemen, if you would like to ask a question, please press the star then 1 key. Our next question will come from Troy Jensen with Lake Street Capital. Please go ahead.
spk05: Hey, gentlemen. Congrats on the nice results. Hey, Troy. Thank you.
spk02: Thank you, Troy. Thank you.
spk05: Hey, so I guess I got a few questions here. I guess I want to start out with digital manufacturing. It seems like this past quarter or this first half of this year has been a surge in interest, right? And we've seen Shapeways, Fathom, and Fast Radius kind of all enter this market via SPACs. And really, they're just doing 3D printing and CNC and injection molding. And you have some software to automate that. Just curious, your guys' thoughts. I mean, I know you're huge in 3D printing. I'm assuming you've got CNC and injection molding with ECT. And is this digital manufacturing or just manufacturing in general for you guys' segment an area that you think is going to be a big growth driver?
spk02: Well, Troy, we are fundamentally a 3D printing company and we intend to remain very focused on key core 3D printing applications, the meaningful applications as we have said so many times. which means that we do not intend to substantially broaden our scope to CNC machining and other conventional manufacturing technologies with a digital source on top of it. So I think there we differentiate in strategy from the companies you mentioned earlier.
spk05: Okay. All right. Staying in 3D space. I get it. And then software competition. Peter, were you going to say something? Sorry. All right. I'll keep going.
spk02: As the numbers show, there is only a 5% revenue increase in our software segment, but this hides a 24% sales increase in our segment due to the deferred... that are associated with our recurring income flows. So we put the cash in already, but we have to spread it over the license periods, this means. Show that our software is still highly appreciated by our existing customer base, where we see very high And on top, compared to the same period last year, we more than doubled the amount of new users, which shows that our software is still high in demand and is not experiencing, at this moment, very negative effects from competition.
spk05: I guess I want to dig into that a little bit. I didn't get all my question in there. But if you just look at software competition, it seems like that's kind of picked up, right? I think I saw Dendrite and HP is kind of snuggling up together. You know, Shapeways is going to try to offer, you know, kind of their software package to customers. Your revenues on software has been flat, you know, December, March, and June. I get your comment, you know, deferred revs grew, right? So sales are growing. But any concerns on some of these new entrants and competing, you know, more effectively against you?
spk02: Well, George, we always have to be very respectful for competition so for now over 30 years because we have always experienced competition but we do believe that especially those new players have quite some hurdles to take. I do think they are very ambitious in addressing a very broad scope of software solutions which is hard to build up. Again, while we truly have respect for their offerings and know that we have to be careful to swiftly accommodate with the new trends in the software industry. We believe we have a very solid base and we shouldn't be too afraid of competition.
spk05: Gotcha. All right, perfect. One last question and I'll see the floor for either Peter or Johan, but I guess I'd just be curious on your thoughts on Q3 specifically. I mean, we've got typically it's a seasonally slower quarter, right? Especially more in Europe. you know, offsetting that, you know, we've got, you know, just kind of the just general recovery happening. So, you know, I get the big Q4, you know, that typically happens, but your thoughts on sequentially what Q3 could look like?
spk02: Yeah. Thank you, Troy. I think it is a good question. And when we articulated our guidance, we really wanted to emphasize that we expect Q4 that is not just traditionally the strongest quarter, but also in terms of continuous sequential growth and further recovery, we see that more happening also in Q4 than in Q3. We do expect to meet the 200 mark that we set there as an ambition that will mainly come from the fourth quarter, which basically means that you should not expect much growth from Q2 to Q3.
spk05: Perfect. Thanks, guys. Keep up the good work, gentlemen.
spk03: If I can add maybe one more point to that, Troy, is that if you look at the guidance that Peter has given, that does not include the effect of the growth of deferred revenue from maintenance and license fees. Even if the Q4 is a traditional best quarter on a seasonal basis, we also have there the effect of the growth of sales that we don't that we cannot recognize as revenue yet, but we expect also significant growth on that perspective. Thank you.
spk01: And I'm showing no further questions in the queue at this time. I would now like to turn the call back over to Mr. Peter Leys for any further remarks.
spk02: Thank you, operator. Thanks again to all of you for joining us today on the call. We obviously look forward to continuing our dialogue with you through investor conferences or in one-on-one virtual meetings or calls. We will have a physical representation at Rapid in Chicago this year where Frit plans to be present. If you want to talk to Frit or other company representatives at Rapid and have not yet reached out to us, then please feel free to do so. Thank you again and goodbye for now.
spk01: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

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