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spk07: Good day and thank you for standing by. Welcome to the Q3 2022 Materialized Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Harriet Freed of LHA. Please go ahead.
spk05: Thank you for joining us today for Materialize's quarterly conference call. With us on the call are Free Funcron, 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 2022. 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 issued earlier today 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 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 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 results, the risks and uncertainties and other factors that may 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 conference call. A reconciliation table is contained in the earnings release and at the end of today's slide presentation. With that, I'd like to turn the call over to Peter Lays. Please go ahead, Peter.
spk04: Thank you, Harriet. And thank you, everyone, for joining us today. You can find, as always, the agenda for this call on slide number three. As a first item on our agenda, I will set the stage by simmering the highlights of our financial results for the past quarter. Then I will pass the floor to Frits, who will walk you through some of our recent business successes and initiatives. After that, Johan will go through our third quarter numbers in more detail. And finally, I will come back to give you some very quick observations about what we currently believe the last few months of the year may bring. And then we have completed our prepared remarks. As always, we will be happy to take and respond to your questions. So, let's turn to slide number four, which summarizes the highlights of our financial results. In the third quarter of 2022, we recorded €58.3 million in revenues, representing a growth of almost 12% compared to last year's period. Also, deferred revenue from maintenance and license fees further increased €3.2 million compared to the end of last year, which was driven by strong sales performances of our medical segment. Our adjusted EBITDA for the quarter amounted to €5.1 million compared to €9.7 million last year, and was impacted by both our continued investment, in particular in our COEM software solutions, but also by inflation-related higher expenses, in particular remuneration costs. Our earnings per share for the quarter were two cents. And with this, I would like now to pass the floor to Frits. Thank you, Peter. Good morning or good afternoon to all of you listening to this call. Even in the current uncertain economic climate, Materialise keeps consistently posting double-digit growth and investing in a sustainable future. Materialise Manufacturing posted a 14% growth in Q3 on a business that is going to exceed €100 million this year. This result is a combination of reliable and profitable rapid prototyping activity in a mature market and growth of our certified manufacturing activities in selected vertical segments such as aerospace, medtech, alternative drive systems and wearables. In those, we are building on early proven and long-term scalable opportunities for additive manufacturing. In aerospace, we have been consistently growing our customer base beyond our long-standing relation with Airbus. In last year's Q3 call, we talked about the materialized contribution to the eVTOL of lift aircraft. currently in regular production. A recent project that we can communicate about is shown on slide 5. It is the production of 60 components per plane in a new series of aerial surveillance drones for the company Atmos. At the beginning of 2022, we indicated we would invest in the future this year, and we are doing so consistently. During our Q2 call, we announced the acquisition of a second plant for ACTEC. This quarter, we launched a complete new materialized foot scan suite for materialized motion. And this one is illustrated on slide six. Is it the result of a major product portfolio upgrade a year after integrating RS-CAN and RS-PRINT into the newly formed materialized motion? The new food scan software is now a CE-certified medical device, and the FITS Plus insoles form a complete new line of medical-grade personalized insoles. that are based on years of scientific research in collaboration with multiple academic institutes to cater specific feed pathologies. Inflation is waiting on the current investments, but the outcome in the longer term looks very promising. Materialized medical is also consistently maintaining its double-digit growth rate on ever-increasing numbers. This is true both for the 3D-printed medical device business and for the medical device software business. In the medical device business, we are increasing our number of OEM partnerships in the ortho segment and growing both our partner sales and direct sales in the CMS segment. Simultaneously, we are increasing our software presence in medical device companies and point of care settings in hospitals. Our surgical planning platforms are systematically being extended from the workstation-based Mimics Suite and Mimics Enlight planning environment to cloud-based Mimics platform planning systems. Those combine the benefits of our global clinical engineering services with the increasing use of artificial intelligence-based automations. This variety of solutions allows us to cater the needs of large medical device companies with proprietary solutions as well as those of smaller companies that prefer a more out-of-the-box approach. This combination is the most complete offering in the industry. It supports companies that develop new devices or hospitals that develop new therapies from the initial R&D phase over the clinical study phase up to the scale and rollout phase, with dedicated tools for each of those phases. It is obvious that in a world with increasing cybersecurity and privacy threats, all of the successful certified applications listed above need a secure software platform. That is why we acquired Identify3D in September. Identify3D has a proven software toolkit that has been field tested by companies and government organizations to allow distributed, secured, additive manufacturing operations and supply chains. The tools of Identify3D are immediately compatible with the CoEM platform we launched at Rapid earlier this year. Even more important is that we can build on the extensive experience of the Identify3D team to advise our customers in configuring and implementing their own secure version of CoEM. CoEM is currently operational at multiple customer sites. The use of CoEM will also accelerate our own manufacturing and medical production lines. and we will be proud to announce a new set of partnerships at Formnext with Coriam. Multiple AM software suppliers and machine OEMs are joining the platform. We are looking forward to announce those in two weeks at Formnext and we hope to see you there as well. Thank you for your attention and over to Johan.
spk01: Thank you, Frits. I begin with a brief review of our consolidated revenue on slide seven. Please note that unless otherwise stated, all comparisons in this goal are against our results for the third quarter of 2021. Revenue increased 12% to 58.3 million euro. The increase took place in all three segments. The growth in our software segment was 4%. Our medical segment grew by 13%, and revenue in manufacturing increased 14%. Importantly, deferred revenues from software license and maintenance fees further increased up €3.2 million compared to the end of last year, further underscoring the strong software sales performance within our medical segment. For the third quarter of 2022, materialized software accounted for 18% of our total revenue, materialized medical for 37, and materialized manufacturing for 45%. Cross-segment revenue from software products represented 31% of our total revenue. Moving to slide eight, you will see our consolidated adjusted EBITDA numbers for the third quarter of 2022. Consolidated adjusted EBITDA was €5,072,000 compared to €9,739,000 for the same period last year. An adjusted EBITDA reflected the negative effect from the investments in our new businesses, linked 3D and identified 3D, labor costs and inflation. Slide 9 summarizes the results of our materialized software segment. Software revenue increased 3.8% to €10,863,000, supported by 37% of sales from renewed licenses and by usage from deferred revenue. Revenue from non-decarrying sales decreased 12%. As mentioned in our Q2 earnings call, it will take some time to convert the positive feedback we've received on our CoAM platform and applications into significant sales growth. We expect to see this growth only in the midterm because of the introduction time required and because of the nature of the cloud solutions we offer. In fact, in the beginning, the typical cloud pricing model has a temporary negative impact on revenue growth as a result of recognition of sales, but then boosts growth through renewed and growing licenses and services. In the third quarter, EBITDA margin was 1.9% or €202,000 compared to €3,708,000. The accelerated investments in our new CoAM business, which as of September also include expenditures of identified 3D, weight on the segments EBITDA, as we increased our R&D efforts by 103%. Moving now to slide 10, you will see that materialized medical continued growing at a solid double-digit pace of 13%, with revenue increase from software of 19% and medical devices solutions of 10%. Software sales even grew 32%, partly deferred in terms of revenue recognition. Adjusted EBITDA amounted to €4,765,000 compared to €5,251,000 last year. Our EBITDA margin decreased to 22.3% as a result of various effects. First, the portion of revenue in our sales from complex implants of medical devices increased significantly. We continued investing in people and in R&D and sales and marketing to sustain our growth and new business lines. And third, the effects of inflation and the war for talent impacted our results before we could adjust our annual price increases. Now let us turn to slide 11 for an overview of the Q3 performance of our materialized manufacturing segment. Revenue grew 14.1% to €26 million, driven by core manufacturing business lines and by the automotive market in particular. Solid order intake also looks promising for revenue in the next few months. Our new growth business lines iWear and Motion are experiencing fluctuating quarterly growth rates and will require more time to contribute significantly to the total segment's revenue. Meanwhile, our investment programs in these businesses are ongoing and together with the effects of inflation, labor shortages, and temporary higher costs of subcontracting affect the segment's profits. Adjusted EBITDA for the quarter amounted to €2,530,000 and an EBITDA margin of 9.7% compared to €3,546,000 last year. Slide 12 provides the highlights of our income statement for the third quarter. Cross-profit margin was 55% compared to 59.5% in Q3 last year. Our operating expenses increased €6.6 million, or 24.5% to €33.5 million. We invested significantly in our grow businesses, including Link3D and, since September, also Identify3D. Our expenditures in R&D increased 41%. Sales and marketing rose 22%, and G&A was up 14%. As explained in the previous sections, inflation and the war for talent also weighed on our costs. As a result of these factors, the group's operating result was negative €282,000 compared to €4,529,000. Net financial income for Q3 was €2,173,000 and included currency exchange gains of €2.7 million. mainly reflecting the strong US dollar-euro position on intercompany positions. Net profit for the quarter was €1,413,000 or €0.02 per share, compared to a net profit of €8,657,000. Now please turn to slide 13 for a recap of balance sheet and cash flow highlights. At the end of the third quarter of 2022, our balance sheet remained strong. Cash amounted to €150.6 million, while our borrowings position further decreased to €83.9 million. Cash flow from operating activities for the third quarter of 2022 was €3.8 million, compared to €4.4 million. Capital expenditures for the quarter amounted to €9.4 million, expansion of our AC-TEC business line in Germany. Also this quarter, capital expenditures were not financed. After the close of this third quarter, we entered into a credit facility agreement with KBC Bank that provides for drawing a total of 50 million euro during the next three and a half years at fixed interest rates and with full capital reimbursements between 2030 and 2033. This agreement will further strengthen our cash position in the future. Peter?
spk04: Thank you, Johan. Before opening the four questions, I would just like to confirm that the consolidation of Identify3D in our numbers as of September 1st of 2022 will not impact the financial guidance that we have provided earlier for the entire year. In other words, we expect our revenues to increase by at least 10% compared to last year, and we expect to post a full year adjusted EBITDA this year between 20 and 25 million. This concludes our prepared remarks, operator. So we are now ready to open the call to questions.
spk07: Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star 1 1 on your telephone and wait for your name to be announced. Please stand by while we compile the Q&A roster. Our first question comes from Jacob Sathon from Lake Street Capital. Please go ahead.
spk00: Yeah, hey, thanks for taking my questions. Congrats on the great results. Maybe looking at the medical software side, was that primarily from a single customer or is that just broad strength across the healthcare industry?
spk04: I want to say it's absolutely across a broader industry covering multiple medical segments like orthopedics, cardiovascular, pneumology, and craniomaxillofacial segments.
spk00: Okay. And have you started to see any early indication that sales cycles on software are lengthening, just given the environment that we're entering?
spk04: As our numbers show, not on the medical side, but we do see weaker investments happening on the industrial side.
spk00: Okay. And Maybe just on the inflationary kind of costs, have you been able to pass any of the subcontractor kind of increased wages or materials prices onto your customers at all? And kind of what have you guys been doing around that?
spk04: Well, we absolutely are doing so. Well, for some of our short-term activities, for instance, in rapid prototyping, we can adjust our price levels, I would say, on a daily basis. But that's not really happening. It's rather on a regular basis, monthly or so. However, for all of the bigger contracts, we normally include indexation clauses that happen only once a year. And for instance, the very big medical contracts, they are typically once a year adjusted in function of price indexes.
spk00: Okay. That was helpful. I'll take the rest of my questions offline. Thanks.
spk04: Okay, thank you.
spk07: Thank you. Our next question comes from Noel Diltz with Stifel.
spk06: Hi. Thanks for taking my questions, and congrats on the good results. First, I was just hoping you could comment on just how you're thinking about some of the risks that are out there. Obviously, a lot of concern around what might happen with energy in Europe. Can you just Give us some thoughts on how you're thinking about maybe even as you're looking out into 23, how you're thinking about some of those risks and where you think your business will be more resilient and less resilient in a potentially in a weaker economy.
spk01: Thanks.
spk04: I would like to say that we believe we will show resilience because in a more difficult supply chain economy, we are seeing increasing evidence that people turn more and more to additive manufacturing. So while there may be a recession, we still believe that additive manufacturing or the 3D printing industry is going to grow also in the coming year or years that's the first fundamental we have to we believe we will be able to benefit from secondly materialize has been attaching a big value to sustainability and as a consequence we have in the previous years already shifted to renewable electricity contracts which will also help us in the future to moderate the impact of increasing energy prices be it that it will not totally offset the overall market dynamics
spk06: Okay, great. That's very helpful. And then could you just expand upon on the labor front or the talent front? How are you, what are you seeing in terms of finding the people that you need and retaining folks? Could you just comment on that? Thanks.
spk04: Yeah, Noel, what we have been doing in the past there and that is something that we're really benefiting from now is we have talent centers and competence centers across the globe. We source our talent in Western Europe, but also in Eastern Europe, including in Kyiv, and actually we continue to hire in Kyiv. We also have very important talent centers, as you know, in the East and in the West, both in North America, but also in South America and Colombia. In the East, we have an increasing talent pool in Kuala Lumpur, And here in Europe, we not only source our people at HQ, but we're also actively looking for talent and finding talent in important countries like Germany, and also we're moving to the south, countries like Spain and the like. So now by having this broad pool, global pool of places where we can actually source talent and where we already have people that are present on the market and can actively talk to new recruits, We think that we can tackle the issue of the war for talent, albeit that even with this broad reach for talent that we have, it remains a difficult market, and pressure on remuneration, obviously, as we've explained earlier, is there, and it's probably going to be still there in the coming quarters.
spk06: Okay. Thanks very much. I appreciate it.
spk07: Sure. Thank you. As a reminder, to ask a question, please press star 1-1 on your telephone. Our next question comes from Alexander Kramierz of Kepler-Cheveux. Please go ahead.
spk03: Yes, hello. So, Alexander from Kepler. I was just wondering if you could just give us some more granularity on what exactly was the impact of the raw matter and the wage inflation, and then also the higher investment costs from the linked 3D and the identified 3D. I was just wondering that because especially the software segment is difficult to split out these effects. And then a second question on the medical contract. So you say that you adjust once a year. I was just wondering what the timing exactly or what's the bulk of the contract timing and does it also adjust for the wage inflation of next year? Because if I remember correctly, you have a large... wage pool in Belgium, so I guess that there it will be indexed to inflation. Just wondering that.
spk04: I will start with that. Alex, let me answer to your second question first, and then I'll go back to the first one and also make sure that we fully understood it. The indexation clauses on the large medical contracts they will take place they typically take place and at the end of the year so that is something that will be coming coming soon in other words in this year we have not been able to fully recover our increased inflated costs in these large contracts with our larger medical device partners The contracts have been drafted in a very standard and very straightforward way, referring to the Belgian index, so that will allow us to recover quite a bit of the also inflated remuneration costs, including as a result of the automatic indication of remuneration costs in Belgium, which is a unique feature that I'm sure you are very much aware of. With respect to your first question, Alexander, I may not have taken notes of all the parts of your question, but you were asking to what extent linked 3D and identified 3D have an impact on increased costs. Is that correct?
spk03: Yeah, so basically you have your R&D that went up with 3 million approximately. Then you also have the marketing expense that went up with 3 million. I was just wondering how much is that related to inflation, how much is that related to increase of higher investments due to Link3D, etc. So if there would be a split, I mean, I know the wage is of course around 10% or 7%, but I'm just wondering how much it is exactly.
spk01: It's hard to give you an exact number, but if you look at the variance compared to last year's quarter, you see the difference in EBITDA. Half of that is due to the higher investment and half of the rest is because of the cost increase of the inflation that could not immediately be calculated to certain customers. okay and could you maybe give uh then on on link 2d and identify 2d specifically a bit of granularity but that's effectively what i'm saying so the the difference between the ibida of q321 and q322 half of the difference is due to the investments in link 3d and identify 3d okay
spk03: all right that's perfect and then just uh one final question so um i remember a couple of calls ago you mentioned that you were uh that you would go back in the software segment to the maybe down margin of 30 to 35 by the end of next year are you still confident you will uh you will reach that level or do we have to take that um a bit on on the weakness that we have seen recently Yeah, just question if that's still maintainable in this high inflationary environment.
spk01: Alexander just referred to my previous response, which is I said that we are investing a lot in the new businesses of Link3D and Identify3D that are part of the software segment. So as I mentioned also in the prepared remarks, it will not come immediately on short term all the large profits from this new business it will take a little bit more time okay all right thank you for that that's all for me thank you Alexander thank you I'm seeing no further questions I'd now like to turn it back to management for closing remarks thank you operator and
spk04: Again, thank you all for joining us on the call today. We obviously look forward to seeing some of you at Formics and to continuing our dialogue with all of you through investor conferences or through one-on-one virtual meetings or calls. So if you have any questions, please feel free to reach out. Thank you again and goodbye for now. Goodbye. Bye.
spk07: Thank you for your participation in today's conference. This concludes the program. You may now disconnect.
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