Materialise NV

Ladies and gentlemen, thank you for standing by. Welcome to the fourth quarter 2024 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 would need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to turn the conference over to Harriet Breed of Alliance Advisors. Harriet, please go ahead.

Thank you for joining us today for Materializer's quarterly earnings call. With us on the call are Brigitte DeVette Biden, Chief Executive Officer, and Kuhn Balgis, 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 fourth quarter of 2024, as well as the full year. 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 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 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 may 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. And with that, I'd like to turn the call over to Brigitte de Wet-Wyden. Brigitte, please go ahead.

Good morning and good afternoon, everybody. Thank you for joining us today. I'm very pleased to present our fourth quarter and full year 2024 results to you. You can find the agenda for our call on slide three. Now, as you know, I've now been in my role as CEO for Materialise for one year. I'm proud of the achievements we have realized in this year, and I would like to highlight some major milestones realized in 2024 in this call. I would also reflect on the achievements and our results of the fourth quarter. After that, I will pass the floor to Koen, who will go in more detail through our financial results. Finally, I will come back and explain what we expect 2025 to bring. When we've completed our prepared remarks, we'll be happy to respond to questions. 2024 has been a difficult year for the industry, driven by high interest rates, geopolitical tensions, and a difficult economic climate. I am very proud that In this difficult climate, we realized 4% growth and managed to keep our adjusted EBIT stable while continuing to invest in our growth businesses and while making progress on our strategic objectives. On slide four, I will highlight some of those strategic objectives and major achievements in the various segments. Starting with medical. We continued to make progress on our journey towards mass personalization, where our aim is to bring personalization to many more patients. We broadened the patient population that can benefit from our solutions by reducing our lead times, thanks to the opening of our US plant, and further automating our processes in order to conquer the trauma market. So patients that cannot be scheduled and need to be treated within the week. We also brought personalization to new markets, and in particular to the cardiovascular market, where we complemented our existing planning solutions with simulation offerings from Fields, the company that we acquired in the third quarter of 2024. While the acquisition has had a negative impact on our EBIT on the short term and impacted our fourth quarter results, we are pleased with the customer feedback and the progress of the integration. As a highlight for the fourth quarter, I also want to mention the launch of our Mimix platform to accelerate the adoption of personalized solutions and help companies and hospitals bring personalization to more patients by making it easier and faster to segment images, plan cases, and design a personalized instrument or implant. The Mimix platform is an integrated cloud solution combining our strong desktop toolbox, Mimix and 3Matic, AI-based automation, and cloud-based 3D viewing capabilities in an end-to-end cloud-based environment. The Mimix platform addresses the challenges that customers face when scaling their personalized offerings, typically manual segmentation and design work, cumbersome communication between engineers and clinicians, stringent regulatory requirements, and growing patient privacy legislation. At the end of 2023, We launched a Mimix case management tool to provide an end-to-end workflow and generate efficiencies in the process of commercializing patient-specific devices. With the launch of the new Mimix platform called Mimix Flow, we've gone a step further, enabling our customers to collaborate effortlessly and benefit from AI-based automation in a frictionless way while staying compliant with the latest regulations. In our manufacturing segment, we continue to shift from prototyping to certified manufacturing of end-use parts, and in particular in our focus segments, in which we saw growth throughout the year and in which we continue to strengthen our position. Let me give you the example of the aerospace segment, which has been a focus segment throughout the year. In aerospace, we offer EN 9001, certified manufacturing for polymer and metal parts. We have production organization approval and have printed more than 500,000 flying parts so far. We saw 28% revenue growth in this segment throughout the year. As a next step in this market, we recently opened our aerospace competence center in Delft. The TU Delft, the technical university, is a leading university in aerospace and has a vibrant ecosystem that has developed around it. We are joining this selective aerospace networking space, allowing us to collaborate closely with aerospace companies in this hub and bring our knowledge to foster the smart use of additive manufacturing in the industry to our manufacturing services and our software. Our long experience in this market gives us access to performance data from hundreds of aerospace builds, including parameters like part density, tensile strength, and elastic modulus. With a clear view of process repeatability and reliability, we are well positioned in this space. Let me give you another example of one of our focus segments. At ACTEC, we expanded our market segments to the production of what we call huge and heavy parts. As you know, we expanded our facilities in Germany to accommodate production of this type of parts. we have seen growth above 30% in the segments throughout the year. Now, while making progress in our focus segments, we have also seen headwinds in the traditional business segments, such as prototyping and the casting of combustion engines for the automotive sector, accelerated by an increasingly unfavorable macroeconomic industrial environment in Europe and the general softness of the automotive sector in the fourth quarter. These headwinds in addition to the plant's reduced operational capacity at Agtech due to the opening of the new plant, led to a difficult Q4 with disappointing results. We expect these headwinds to continue in 2025. To adjust to this reality, we have taken action in the fourth quarter and implemented a restructuring in our 3D printing manufacturing activities to reduce our cost base in 2025. Now turning to software. In software, we had two main priorities throughout the year. First, strengthening our position in factory management based on CoEM through partnerships. And second, organically adding capabilities and expanding our position in the pre-print magics market by adding functionality for users that scale in end-use production. Throughout the year, we have made progress on both fronts. On the CoEM side, we announced numerous partnerships throughout the year, and we added functionality, for example, to monitor the builds and capture data in our QPC module. We continue to onboard new partners on this platform, which is an essential foundation to accelerating our future growth. In the preprint segment, we accelerated the shift towards a subscription-based model for Magix customers. We added functionality such as eStage for Metal Plus, a software that automates support structure generation and helps customers make metal additive manufacturing more economically viable. And we expanded our build processor functionality. In the fourth quarter specifically, we announced the launch of our Magix SDKs, expanding our users' ability to customize their 3D printing operations. This allows our users to create custom workflows in the metric software, protect the intellectual property behind component designs, and print high-performance geometries. With access to algorithms developed over 34 years, customers will now be able to scale additive manufacturing operations economically. Overall, I am proud of the progress that we made throughout 2024. Progress achieved despite the difficult climate throughout the year, and in particular in the fourth quarter, impacting our financial results. I will now pass the floor to Koen to summarize the financial results of the fourth quarter and the full year.

Thank you, Brigitte. Good morning or good afternoon to all of you on this call. I'll begin with a brief review of our consolidated revenue on slide five. As a reminder, please note that unless stated otherwise, all comparisons in this call are against our results for the fourth quarter and the full year 2023. In the final quarter of the year 2024, our revenue increased slightly to €65.7 million. Materialized medical continued its double-digit growth, increasing its revenue by more than 14%. and once again posted a quarterly revenue record. Manufacturing, on the other hand, remained confronted by challenging market conditions that even intensified in the last months of the year, while software continued its transition towards a recurring revenue business model, which will positively impact its revenue potential in the future. As you can see in the graph on the right side of the page, materialized medical accounted for close to half of our consolidated revenue during the fourth quarter of 2024. Materialized manufacturing for 35% and materialized software for 17%, reflecting the impact of the different growth rates of the three business segments. For the full year 2024, we generated over €267 million of revenue, which is 4% above 2023. Our medical segment represented 44%, manufacturing 40% and software 16% of the annual revenue total. The amount of deferred revenue in our balance sheet related to software licenses by 5.9 million, ending at 46.9 million euro. The total deferred revenue reported on our balance sheet was just above 59 million euro at the end of the year. On slide six, you will see our consolidated adjusted EBITDA and EBIT numbers for the fourth quarter, as well as for the full year. Consolidated adjusted EBITDA for the fourth quarter amounted to 4.3 million euro, decreasing from 8.5 million euros for the 2023 period. The corresponding adjusted EBITDA margin in the last quarter of 2024 was 6.6%. This decline in Q4 is mainly attributable to a combination of factors, including the startup of production in our new agtech plant, the difficult industrial environment, in particular in Europe, impacting our manufacturing results, but also restructuring costs. taken in manufacturing and G&A, and continued investments in medical, including the integration of FEOPs. Full-year adjusted EBITDA remained stable at €31.5 million, with an adjusted EBITDA margin for the full year to reach 11.8%. Consolidated adjusted EBIT for the fourth quarter decreased to €-1.2 million. compared to 3.2 million euro for the corresponding period of 2023, reflecting the impact of a lower EBITDA and higher depreciation charges. Our adjusted EBIT margin for the quarter was negative by minus 1.8%. Full year adjusted EBIT ended at 9.7 million euro compared to 9.9 million euro in 2023. Our adjusted EBIT margin for the full year reached 3.7%, compared to 3.9% last year. Moving now to slide 7, you will notice that a quarter's total revenue in our materialized medical segment increased once more by 14% to €31.8 million. Once again, a quarterly revenue record. This strong growth was generated by both higher revenue from medical devices and services sales and by higher revenue from medical software which grew respectively by 15 and 14 percent. Within our medical devices and services business we saw continued growth also here both in direct and partner sales. Increased costs, mainly coming from higher R&D spent as we made progress on various study and FDA approval tracks and the integration of FEOPs impacted the operational profitability in the fourth quarter. Nevertheless, we realized an increased adjusted EBITDA of €9.5 million, representing an adjusted EBITDA margin of 30% for the quarter. As a reminder, the 2024 numbers also include the impact of sales as of July 2024, which in its current development phase is still contributing negatively to our EBITs. On a full year basis, our medical segment revenue increased by almost 15% to €116 million, translating into an adjusted EBITDA of €35.6 million, an adjusted EBITDA margin of 30.6%. The share of medical software revenue remained stable throughout the year at around 30%. Slide 8 summarizes the results of our materialized software segments. In the fourth quarter, software revenue remained close to flat despite the further transition to a cloud and subscription-based business model. Recurring revenue from software maintenance and license sales, including COEM, increased once more by 19%. On the other hand, non-recurrent revenue decreased by 35%. The adjusted EBITDA in our software segments remained roughly stable in Q4 at 1.1 million euro, representing an adjusted EBITDA margin of 10.1%. Also, on a full year basis, our software segments revenue remained stable, around 44 million euro. which translated in an adjusted EBITDA of 5.6 million euro and adjusted EBITDA margin of 12.7%. While this includes also the impact of increased investments in our growth products. Now let's turn to slide nine for an overview of the performance of our materialized manufacturing segments. In Q4, we realized further growth in our strategic focus areas, aerospace and medtech. But this was more than offset by continued weak prototyping demands, by Agtech's new plant startup, and by strongly unfavorable macroeconomic climates in the industrial sector, particularly in Europe. Unlike our other reporting segments, the vast majority of the revenues in our manufacturing segments are generated in Europe. As a result of these, revenue decreased by 13% compared to last year's fourth quarter. As a consequence of this lower top line, also adjusted EBITDA ended at minus 3 million euro, while the fourth quarter of 2024 also included restructuring costs incurred to reduce our cost basis going forward. On a full year basis, manufacturing's revenue decreased by 3% to 106.5 million euro, realizing 1.7 million euro of adjusted EBITDA, representing an EBITDA margin of 1.6%. Slide 10 provides you the highlights of our consolidated income statement for the fourth quarter and the full year. Our gross profit for the fourth quarter ended at 36.4 million euro, representing a gross profit margin of 55.4%. Over the full year, the gross profit margin was 56.5%, roughly stable compared to prior year. Our operating expenses in the quarter increased by €3.6 million, or 10% in aggregate, with the largest increase coming from higher R&D spent, which grew by 20% compared to 2023. The high R&D spent in the fourth quarter was already mentioned, mainly driven by medical. Furthermore, Q4 costs included unfavorable impacts, as also mentioned from the active plant startup, VEOPS integration, and from restructuring costs to reduce our cost base going forward. For the full year, operating expenses were in aggregate 9.5% higher than in 2023, with the main impact again coming from increased R&D spends. The net operating income in the quarter was positive at €1.4 million compared to a negative €3.3 million last year, where 2023 included non-recurring charges from the impairment of goodwill, tangible and intangible assets for €4.2 million. For the full year, net operating income was positive at €4.2 million compared to a negative €6.5 million for 2023, As a result of all of these elements, the group's operating result in the quarter was negative at 1.3 million euro compared to also a negative 1.1 million euro in last year's period. For the full year, operating result increased to 9.5 million euro compared to 5.6 million euro in 2023. In Q4, net financial income amounted to a positive 3.3 million euro. interest income of 0.8 million euro from our cash reserves which are partly offset by interest expense on our reducing financial debts amounting to 0.3 million euro income tax in a quarter amounted to a positive 0.9 million euro in line with the prior year As a result, net profit for the fourth quarter ended positively at 2.9 million euro, representing 5 euro cents per share, compared to a loss, net loss of minus 0.5 million euro or minus 1 euro cent per share for the 2023 period. Over the full year, we realized a net profit of 13.4 million euro, resulting in 23 euro cents per share, compared to a net profit of 6.7 million euro or 11 euro cents per share in 2023. Now please turn to slide 11 for a recap of balance sheet and cash flow highlights. Also in the fourth quarter, our balance sheet remained strong. Our cash reserves at the end of the quarter amounted to 102 million euro. The cash position was impacted though by an anticipated bullet loan repayment of 10 million euro in Q4. over the full year loan repayments totalled 23 million euro and reduced our gross debt to 41 million euro the resulting net cash position at the end of the fourth quarter was 61 million euro slightly below the position at the beginning of the year compared to the balance sheet at the end of 2023 we reduced our net working capital over 24 by 1.8 million euro to an increased focus on the underlying components The total deferred income position amounted to €59.3 million at year-end, of which €46.9 million was related to deferred revenue from software licenses and maintenance contracts, as I already mentioned earlier. As you can see from the graphs on the right side of the page, cash flow from operating activities for the fourth quarter in 2024 amounted to €6.2 million, well above the last quarter of 2023. The impact from lower P&L components was compensated by favorable working capital movements. Capital expenditures for the quarter amounted to 7.8 million euro, which is higher than average and which is reflecting the active investments in the completion of the building and installation of new machinery. As a result of these larger than usual investments and as of some limited income from asset sales, our free cash flow over the quarter of 2024 turned negative by minus 1.3 million euro. Now for the full year, the operational cash flow increased to 31.5 million euro, up by 56% compared to 2023. The free cash flow remained positive over the year while we invested more than €26 million of CAPEX, including both recurring and non-recurring investments, and while we completed the FAOS acquisition. We have the bulk of investments in our new ACTEC facility behind us now, but we'll continue to invest in additional machinery as we gradually ramp up the new facility's throughput in coming months. And with that, I'd like to hand the call back to Brigitte.

Thank you, Koen. Let's turn to page 12 for a quick review of our financial guidance. Looking at 2025, we remain confident that our medical and software business will continue to grow, with the growth of our materialized software segment still not being fully reflected in the segment's revenues as we continue the transition towards a cloud-based subscription business model. At the same time, we expect that the uncertain macroeconomic industrial environment in Europe will persist in 2025 and will continue to impact our manufacturing segment, which is particularly exposed to the European environment. As a result, we expect revenues to be in the range of 270 to 285 million euro and adjusted EBIT in the range of 6 to 10 million euro. We intend to continue our investments in the growth markets of the future and in particular in the medical segment and the factory management solutions and software, while keeping a strong focus on cost control and optimization in our manufacturing segment and our corporate overhead. Whereas our guidance reflects the impact of the uncertain economic environment in Europe on our manufacturing business, We believe Materialize is ideally positioned in the market for personalized medical products and the market for additive software and for manufacturing services. Thanks to our strong product portfolio, continued investments in innovation, and our strong financial foundation. This concludes our prepared remarks. Operator, we're now ready to open the call to questions.

Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. And to withdraw your question, please press star 11 again. And our first question will come from Alexander Kramers with Kepler. Your line is now open.

I have a couple of questions, five if that's possible. First, could you remind us of the main margin difference between recurring and non-recurring revenue in the software segment? Second question would be, what is there the average lifetime on a subscription? And the third question also on software would be, how much of the revenue in software is now recurring versus non-recurring? I saw some highlights there, but I've calculated it's still about two-thirds recurring. non-recurring. Does that sound about correct? Then maybe I'm going to list all my questions first and then let you answer. So the fourth question would be if you could give us some granularity on the one-offs. I'm talking specifically on the increased R&D spend, the AC tech startup and the FIAPS integration combined with the destruction cost. If you could just give us a bit of a split how much that impacted the adjusted EBIT in the fourth quarter. given that the guidance of 11 to 14 million that you provided at the end of Q3 was clearly that had an impact there so and then the last question would be considering the difficult climate that you talk about was already present after Q3 yet you decided to send an optimistic message in October could you tell us what exactly has changed and that you didn't have the visibility on the fourth quarter by the end of October thank you

Thank you, Alexander, for the five questions. I'm trying to decide in which order I will tackle them or we will tackle them. While I have to admit that your first question is not exactly clear to me, so you wanted to understand the margin difference between the recurring and the non-recurring? Revenue in software?

Yeah, in the software segment. So you're going from a non-recurring to a subscription model. I was just wondering if there's any large margin difference there. Thanks.

No, I don't think you can expect a large margin difference on a difference.

The revenue recognition, Alexander, though, is different, of course, in the two scenarios. Whereas in the old perpetual license model, we take the revenue immediately into P&L, and whereas in a recurring revenue model, we gradually take it over the duration of the contract. Maybe they're picking also into your question on what the split is between recurring and non-recurring revenue within our software segment. There we see, as in the previous quarter, a continued transition towards recurring revenue. If you look at the situation at the year end, we're roughly at about 76%, so just above 75% or three-quarters of the revenue, the total software revenue, that we consider as to be recurring.

And then maybe tackling your software question on the average lifetime of the subscription. So most of our subscription-based revenue, you should expect an annual, so one-year lifetime. Then maybe shifting to the question on the clarification on the operational spend.

If I understood you correctly, Alexander, on how these different components that you mentioned impact the Q4 cost increase, without providing the detailed breakdown, I would say about half of the cost increase that I mentioned, quarter versus the last quarter of last year, which is between 1.5 and 2 million, that amount, which is half you listed and phelps integration the the restructuring costs that we took and the operation the purely operational impact from from from the active plant startup and then maybe commenting on your last question on the whether we saw it is coming or not well the first thing i would want to say we had sent the

With the third quarter results, we already indicated to be very cautious about around the fourth quarter results. to be expected, in particular in the manufacturing segment, as we were expecting the move to our new plant to reduce the operational capacity. The industrial climate was already very cautious at that point in time. However, what we did see is that in the fourth quarter, we saw that climate accelerated, in particular in Europe. And that is what you see now reflected in our fourth quarter results in the 2025 guidance. Does that answer your question, Alexander?

Yeah, about. Thank you.

As a reminder, to ask a question, please press star 11 on your telephone. And our next question comes from Troy Jensen with Cantor Fitzgerald. Your line is open.

Hey, good morning, good afternoon, Brigetta and Coon.

Hi, Troy.

Hello. So I guess my question is, first of all, deferred revenue, that was like a huge kind of growth in the quarter in the software segment. I guess I was more hopeful that we'd hear better kind of forecasts out of the software business, but can you just explain why such a big step function in deferred revenue is this quarter count?

The deferred revenue went up with just below 6 million in the fourth quarter, which is something we had anticipated. It's in line also if you look at the seasonality with prior years, there's quite some large contracts at the end of the year where we typically see in the first and the last quarter of the year a buildup of deferred revenue and then a depletion in the second and the third quarter. So for us, it works. in line with what we anticipated, though it was larger than last year, and which is, of course, also the effect from the conversion to more recurring revenue that we are doing. Okay, perfect.

And then just to follow up on this APEX question, how much of this $1.5 to $2 million that you're mentioning falls off quickly? Can you kind of help us out with that? We had big step functions and kind of growth in APEX sequentially in December. In March, are they going to be down now on a sequential basis because these one-time-ish items fall out, or do they still hang around also?

If I can just comment. So Kun pointed out at the increased R&D, the architect startup costs, and the C-ops integration. If you look at those three, the architect startup costs should taper down. The increased R&D, we do want to continue to accelerate our investments in the medical business in particular, as we very much believe in the growth, future growth there. Now, the fee of integration costs should also taper down as we go.

Okay. Do you think just like on an absolute basis, it's up or down sequentially? I mean, are you guys going to kind of cut costs now, Brigetta, to try to kind of get back to higher profitability levels?

Are these going to... It's essentially, you know, what I said earlier that, you know, throughout 2025, we'll certainly have a strong focus on cost control and optimization, in particular in the manufacturing segments going forward.

Okay. Yeah. All right, that's fine. So then how about just last on European weakness? I may get European auto, makes sense, but is it much broader than just the automotive vertical?

Can you repeat that question, Troy?

Just the European weakness, I would understand auto is really weak in Europe. Is it broader than automotive?

Yeah, the automotive sector is particularly weak in Europe. It's slightly broader because of the uncertainty, certainly in the fourth quarter, with also the impact of the Trump administration in the U.S. on Europe, et cetera. So there's uncertainty factors around that.

Great, I understand. Okay. All right, well, good luck here in 25.

Thank you.

I show no further questions in the queue at this time. I would now like to turn the call back over to Brigretta for closing remarks.

Thanks again for joining us today. We look forward to continuing our dialogue with you through investor conferences or in one-on-one meetings or calls. Please do reach out if you have any further questions. And with that, I want to say thank you and goodbye for now.

This does conclude today's conference call. Thank you for your participation. You may now disconnect.