Materialise NV (NASDAQ:MTLS) Q1 2024 Earnings Call Transcript

Materialise NV (NASDAQ:MTLS) Q1 2024 Earnings Call Transcript April 25, 2024

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Operator: Good day, and thank you for standing by. Welcome to the Q1 2024 Materialise N.V. Financial Results Conference Call. [Operator Instructions]. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your first speaker today, Harriet Fried of LHA. Please go ahead.

Harriet Fried: Thank you, everyone, for joining us today for Materialise’s quarterly conference call. With us on the call are, Brigitte de Vet, Chief Executive Officer; and Koen Berges, Chief Financial Officer. Today’s call and webcast are being accompanied by a slide presentation that reviews Materialise’s strategic, financial and operational performance for the first quarter of 2024. To access the slides, if you haven’t already done so, please go to the Investor Relations section of the company’s website at www.materialise.com. The earnings press release that was 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 date. 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 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 now I would like to turn the call over to Brigitte de Vet.

Brigitte de Vet: Good morning, and good afternoon. Thank you, everyone, for joining us today. Looking at the agenda for our call on Slide 3. You will recall that in our last earnings call, I described my observations about the market dynamics and our strong position in this market, built on the foundation of the last 34 years. I also clearly described our priorities for 2024. Today, I will build on that theme and share with you key highlights of our team’s performance in the first quarter 2024 as well as the progress made on our strategic priorities. After that, I’ll pass the floor to Koen, who will go through our first quarter numbers in more detail. Finally, I will come back and explain what we expect the remaining months of 2024 to bring.

And we’ve completed our prepared remarks, we’ll be happy to respond to questions. Looking at our key results for Q1 2024, summarized on Page 4, you can see that we were able to deliver profitable results in line with our expectations. For the comparisons versus the first quarter of last year, on this call, please bear in mind that the first quarter 2023 was a particularly strong quarter with record high revenues and high EBITDA supported by significant tailwinds mainly in our Medical and Manufacturing segments. Over the first quarter of this year, our total revenue decreased slightly by 3.4% to €63.6 million compared to the record first quarter 2023, that I just referred to. When compared to the first quarter of 2022, our consolidated revenue still grew by more than 20%.

At the same time, our gross margin increased to 56.5% and from 55.9% over the same period last year. Adjusted EBIT amounted to €2.7 million, representing 4.2% of revenue. Net profit amounted to €3.6 million or €0.06 per share, which is stable versus the very strong first quarter of 2003 — 2023. Our net cash position at the end of Q1 2024 was €69.2 million, an increase of €6 million versus the beginning of the quarter. Koen will elaborate further on these results in his remarks later in this call. Moving now to Slide 5. I am also very pleased that we made progress in our strategic priorities and achieved critical milestones, including the introduction of new technologies and the expansion into new markets and segments, to capture the growth opportunities in the market for mass personalization and in the market for end-use parts and to ensure sustainable healthy growth in the near, mid and long term.

In Medical, we managed to keep the momentum and grew further compared to an exceptional Q1 2023 that was already 33% higher than Q1 of 2022. We continue to drive adoption of personalized cases in our existing markets. And this is reflected in 2 elements. First, the growth in number of cases delivered to patients, in particular in the U.S. and Europe in our existing and new segments. We managed to expand into the Trauma segment with the first cases delivered into this segment from our U.S. manufacturing plant, which enabled us to deliver a shorter lead times. This is building a solid platform for further growth in 2024 and beyond. Second, we made progress with our new software solutions and in particular with Mimics Flow, a case management solution used to manage workflows for 3D labs in hospitals for which we have received the first order in this [indiscernible] only limited launch phase.

We also achieved key milestones to break into new markets in the future. We received IDE approval for our Tracheal Splint program, which is part of our respiratory business line. And we got FDA and MDR clearance for our Software [indiscernible]. To offer planning services for transcatheter aortic valve replacements in our Cardio business line. Moving to software. As mentioned in our last call, our focus is to capture the growth opportunities in the market for the manufacturing of end-use products. We launched key new products that add value for users of additive manufacturing in this segment. At aMace, we launched e-stage for Metal+, a software that optimizes data and build preparation for Laser Power Bed Fusion, using physics-based modeling to automate support structure generation that will also help make metal additive manufacturing more economically viable.

Laser Powder Bed Fusion is the leading segment for AM, accounting for over 52% of the industry’s global revenue in 2022, it’s is also one of the most complex technologies to use with many potential challenges. By automating support structure generation with e-stage for Metal+, users can reduce support volume up to 80%. They can simplify support removal, ease powder extraction and decreased build-plate machining after an effortless part removal. Automating support structure generation at the sweet spot of printability and required supports, saves time, material and post-processing costs. We also released an additional module on our OEM, QPC, quality process and control system. Layer analysis, a module that allows to auto-detect and quantify defects in 2D layer data and map them to 3D models for early scrap detection and root cause analysis was released at Rapids last year.

Process lab, a tool to trade process biometer and test lab results was announced at Formnext last year and we leased in the first quarter of this year to the market. This QPC process lab enables customers to transform additive manufacturing process monitoring and quality data into actionable insights using AI and IoT connectivity in a secure, collaborative and open software system. We also made progress in shifting our business model to cloud and subscription-based agreements to better suit the market for end-use products. While this shift is negatively impacted — impacting our Q1 software revenues, it prepares us for further scaling in the market for serial end-use products. In manufacturing, we focused on capturing growth in selected segments to drive revenue in 2024, even as market circumstances remain difficult for our 3D printing service business due to very weak prototyping demand.

Keeping in mind that the first quarter 2023 was a very strong quarter with 25% growth in revenue. I am pleased with the performance in the first quarter of this year and in particular, with the strong progress in our certified manufacturing business driven by Aerospace and Medtech. Both industries are strictly regulated in our ability to provide process documentation and historical process performance data enables us to drive growth in both segments. Koen will now take you through the detailed results by segment.

Koen Berges: 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 6. As a reminder, please note that unless stated otherwise, all comparisons in this call are against our results for the first quarter of 2023, which as Brigitte already indicated, was an exceptionally strong quarter. Now compared to this high baseline, revenue in the first quarter of 2024 decreased 3.4% to €63.6 million. However, Materialise Medical continued on its growth path and increased its revenue by 8%. On the other hand, revenues at our Software segment were impacted by the accelerated transition towards a cloud-based subscription business model, and low prototyping demand had an unfavorable effect on our Manufacturing segment, resulting in revenue decreases of 8% and 11%, respectively.

As you can see in the graph on the right side of the page, Materialise Medical accounted for 41%, Materialise Software for 16% and Materialise manufacturing for 43% of our total revenue over the first quarter of 2024. Deferred revenues related to software maintenance and license fees grew further in the first quarter of this year by €0.5 million, bringing the total amount carried on our balance sheet to €45.4 million. On Slide 7, you will see our consolidated adjusted EBIT and EBITDA numbers for the first quarter of this year. Consolidated adjusted EBIT ended at €2.7 million compared to €5 million for the same period of last year, representing a decrease of 47%. Our adjusted EBIT margin was 4.2% compared to 7.6% last year. Consolidated adjusted EBITDA for the first quarter amounted to €8.1 million, decreasing from €10.3 million last year.

Our adjusted EBITDA margin reached 12.7% compared to 15.6%, the prior year. Now this decrease reflects partly the impact from continued investments in innovation to secure long-term profitability. We fully executed our planned R&D investments despite being confronted with less favorable market conditions. In Q1 of 2024, R&D spend corresponded to more than 16% of our total revenue. The decrease in adjusted EBIT and EBITDA is also partly due to the high reference point in the comparisons shown, being the exceptionally strong first quarter of 2023, which was impacted as set by one-off tailwinds in our business segments. Moving now to Slide 8. You will notice that the quarter’s total revenue in our Materialise Medical segment increased by almost 8%, building further on an already strong revenue growth in 2023.

This solid growth was generated by both medical software and by revenue coming from medical devices sales, which grew respectively by 6% and 9%. Adjusted EBITDA grew further to €7.9 million with an adjusted EBITDA margin that remained stable at 30.3%. Slide 9 summarizes the results of our Materialise Software segments. In the first quarter, software revenue decreased by 8% to €10.4 million. However, recurring revenue from software maintenance and license sales, including CAM, increased by 4%. On the other hand, nonrecurrent revenue further decreased by 31% driven by the accelerated transition from perpetual license sales to cloud and subscription-based agreements but also by the more difficult market conditions. Accordingly, adjusted EBITDA decreased to €1.1 million, representing an adjusted EBITDA margin of 10.4%.

Now let’s turn to Slide 10 for an overview of the performance of our Materialise Manufacturing segment. In the first quarter, Manufacturing continued to operate in a difficult market environments compared to a strong Q1 2023 and as a result of low prototyping demand, revenue decreased by 11% to €27 million. On the other hand, we noticed promising further growth of our certified manufacturing business, in particular, in Medtech and aerospace market segments. Adjusted EBITDA dropped to €1.5 million and an adjusted EBITDA margin of 5.7%. Slide 11 provides the highlights of our consolidated income statement for the first quarter of this year. As you will notice, we increased our gross profit margin by 60 basis points to 56.5% compared to 55.9% in Q1 of 2023, which compensated part of the lower revenue.

Our operating expenses in the quarter increased by €1.8 million or 5.5% in aggregate with the biggest increase coming from the higher R&D spend. Net operating income in the quarter was positive with €0.8 million compared to last year. As a result of these elements, the group’s operating result in the quarter was €2.6 million compared to €5 million in last year’s period. In Q1, net financial income amounted to €1.5 million, including a positive currency exchange result of €0.7 million, interest income of €1.2 million from our cash reserves and interest expense on our financial debt of €0.4 million. Income tax expense in the quarter amounted to €0.5 million compared to €0.7 million last year. As a result, net profit for the first quarter was positive at €3.6 million, representing €0.06 per share coming very close to the net profit of €3.7 million or also €0.06 per share for the corresponding 2023 period.

Now please turn to Slide 12 for a recap of balance sheet and cash flow highlights. In the first quarter of this year, our balance sheet remained strong. Our cash reserve increased to €129 million, by the end of the quarter. Loan and lease repayments reduced our gross debt to below €60 million resulting net cash position at the end of the quarter was €69 million, an improvement by €6 million compared to the position at the beginning of this year. Our trade receivables and trade payables positions both decreased while inventories remained stable. The total deferred income position increased further to €52 million, out of which €45 million was related to deferred revenue from software licenses and maintenance contracts as already mentioned.

As you can see from the graph on the right of the page, cash flow from operating activities for the first quarter was high and amounted to €10 million while capital expenditures for the quarter amounted to €2.8 million, all of which were internally financed. And with that, I’d like to hand the call over to Brigitte again.

Brigitte de Vet: Thank you, Koen. Let’s turn to Page 13. I’ll conclude my remarks with a discussion of our full year 2024 guidance. The fundamentals of our 3 business segments are strong, and we therefore remain confident that we are well positioned to deliver on our growth objectives. We continue to expect to report consolidated revenue for the full year 2024 within the €265 million to €275 million range we communicated in our prior earnings call. We are also maintaining our adjusted EBIT guidance of €11 million to €14 million for the fiscal year. This concludes our prepared remarks. Operator, we’re now ready to open the call to questions.

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Q&A Session

Operator: [Operator Instructions]. Our first question comes from the line of Alexander Craeymeersch of Kepler Cheuvreux.

Alexander Craeymeersch: A couple of questions from Kepler Cheuvreux side. I’m a bit surprised at how many times you stressed that Q1 2023 was exceptional, especially in manufacturing. So that was definitely not as stressed as last year. So could you maybe elaborate on what was so exceptional? And then are you also indicating to us the market, that these are also not realistic numbers in the next years in Manufacturing? And then second question would be, you also stressed that the Medical segment was exceptionally strong in Q1 2023, yet you were able to book better results than last year. So why was one exceptional different than the other exceptional? And then the third question would be on the low CapEx levels. You’re building the ACTech plant that’s coming up live in H2 2024.

Why was there not a lot of CapEx coming into the cash flow statement. I was just wondering why that was exactly whether those projects are either being delayed or — and then maybe on the ACTech following up on that specific topic. I was just wondering with the ACTech plant coming up, whether you’re not feeling any overcapacity considering that the volumes of manufacturing are trending lower. I’ll keep it there, wait for my colleagues then and then maybe ask some questions again afterwards.

Brigitte de Vet: Yes. Thanks, Alexander, for the questions and for joining the call. So I’ll really start answering, and then I’ll let Koen pitch in for the CapEx question. So your first question on exceptional manufacturing results. So last year — well, essentially, your question being, are these structural or not and what can we expect for the future? If we look at what happened in the first quarter last year in manufacturing, I see a structural part in a nonstructural part. And let me explain what I mean. So the results last year were driven — the exceptional results last year were driven by two main factors, One is that our ACTech business had very strong revenues at that point in time. And over the last couple of quarters, we have noticed that we have capacity constrained at ACTech, which leads to the revenues being lower than what we think or what we strongly believe is possible in the market.

And with the capacity extension that we are now planning, we believe that, that gives us a road towards further increase in growth of those revenues going forward. So I think there’s a structural element at ACTech that gives us a path towards future growth in the Manufacturing segment. The second driver of that exceptional result last year is non — not so structural, I would say, and which is why we call it exceptional. What was this? You might know that as part of our services within the manufacturing unit, we deliver consulting services to customers and consulting services as such have the beauty of — when we have these contracts that they come at a very healthy profitability for us. But the nature of those consulting services is that you don’t necessarily have a recurring element because once the consulting project is over, you start from scratch.

And we had a very strong revenue component in our first quarter last year on that business line specifically. And that’s, honestly, in all transparency, I’m not confident that we will be able to repeat that every single quarter going forward. So the answer on manufacturing is a bit mixed. But yes, there is a structural element there that gives us a path towards future growth as soon as we have resolved the capacity constrained at ACTech. Switching into Medical, which was your second question. So yes, we had an exceptional quarter last year, essentially because we were able to take — for a specific period of time, we were take on — able to take on business from another part in the market and wasn’t able to deliver for a certain time and we benefited from that in the last — in the first quarter last year.

Now despite that exceptional gross number of 33%, we delivered even stronger growth on top of that this year. And that is — I referred to it in my remarks, we have been able to break into this Trauma segment, which is an additional market segment for us, which had large potential, and we have proven this year in the first quarter that we can actually access that potential with the short lead times that we can offer. And again, that gives us a path to continued further growth on that baseline that we have seen. And that’s one of the drivers of that additional growth despite a very strong first quarter last year. And then I’ll hand it over to Koen for the CapEx question regarding ACTech.

Koen Berges: Yes. So I think, I can confirm, Alexander, that the investment program is in full execution, and this is still fully on track to have a start-up of the plant later on in this year, as we’ve indicated before. Now the reason why the investment is limited in the cash flow statement of the first quarter is because we include, of course, only the cash component of CapEx investments in our cash flow statement. And you will see that there is a ramp-up of investments that are being made, but where the cash out has not been made to the suppliers and will typically come or mainly come in the second quarter and the third quarter of this year. That is because at that point, also the machinery will be installed in the factory and will be started up and the way we have negotiated most of the contracts with these suppliers is that the bulk of the payment is delivery of the machinery, which is going to take place — is taking place in the coming weeks.

And of course, then the results of the payment term to be applied. So you will see a different picture for sure in the second quarter and partly also the third quarter, I would, the deferred — the late payments related to ACTech investments.

Alexander Craeymeersch: Could you maybe indicate there how much we need to foresee in terms of CapEx, maybe just for the full year, but then maybe for Q2 and Q3, specifically.

Koen Berges: I think we’ve always indicated the total order of magnitude of the investment is around €30 million and upwards, and it will depend — will come in several stages. But that has been spread over a number of years. So I think I don’t have the exact number. It will also depend on the exact timing of what will be delivered when. But I think you can expect our free cash flow, as I’ve indicated also in the last call, might be negative in the second quarter driven by this nonrecurring CapEx.