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Materialise NV  (NASDAQ:MTLS)
Q1 2019 Earnings Call
April 30, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2019 Materialise's financial results. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time (Operator Instructions). As a reminder, today's conference will be recorded. I would now like to turn the call over to Harriet Fried of LH&A. Mam you may begin.

Harriet C. Fried -- Senior Vice President

Thank you for joining us today from Materialise's quarterly conference call. With us on the call are Wilfried Vancraen, Founder and Chief Executive Officer of Materialise. Peter Leys, Executive Chairman and Johann Albrecht, 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 2019. To access the slides if you have not done so already, please go through the Investor Relations section of the company's website at www.materialise.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 activity 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 Annual Report on Form 20-F filed with the SEC. Finally, management will discuss certain non-IFRS measures on today's call. A reconciliation table is contained in the earnings release and at the end of the slide presentation. With that, I'd like to turn the call over to Peter Leys. Go ahead please, Peter.

Peter E. Leys -- Executive Chairman

Thank you, Harriet and good morning or good afternoon to all of you. You will find an agenda for our call on Slide three. Now last time we talked was in March, we are in April now. So for those of you who have a good memory you will know that the structure of this call will be very similar to the structure of our call last month. So I will begin with a brief recap of the financial highlights of our quarter. Subsequently Fried will as always dive into some of the facts behind our figures. This time he will discuss some of the many growth initiatives that we are launching within our materialized Medical segment. And after that Johan will do what a CFO is best at. He will dive into more detail into the numbers of the past quarter. And finally, I will come back with a few concluding remarks. And so within 20 minutes roughly from now, we intend to close the call. But of course not after we have given all of you the opportunity to ask any questions which we will be very happy to respond. With that being said, if you could can you please turn to Slide four, where you will see the financial highlights of our first quarter results. We believe that all three of our segments turned in fairly good performances. Our total revenue rose by 7% and our consolidated adjusted EBITDA was 12%. For the period, we were again floating with the break even point. As you may remember in Q4 of last year, we landed just north of the break even point. We landed just south of that same break even point in the first quarter of 2019.

Now even though seasonally the first quarters of our year are typically not the strongest quarters of the year, we are proud to be able to announce that Materialise software and Materialise medical both combined solid double digit revenue growth numbers with strong double digit EBITDA margins. Also importantly Materialise manufacturing where revenue also picked up with a positive gross growth again realized an 18% EBITDA growth. These we believe are the most important financial highlights of our quarter and with that I would like to turn the call to Fried.

Fried Vancraen -- Chief Executive Officer

Good Morning and good afternoon to everyone depending on which continent you're. Thank you for joining us today. Several achievements during Q1 2019 underscore the long term strategy of Materialise to create significant self good mate value. We do so especially in patient specific medical applications. Our mimics innovation suite it's, as you know, the leading platform not only for researchers in the academic world, but also in hospitals and in medical device companies. All those stakeholders develop new treatments, instruments and devices that required so-called engineering anatomy terminology trademarked by materialize. By providing a virtual analysis, planning and design environment based on patient's specific medical images, our mimic innovation suite allow the improvement of both standards and customer instruments, devices, and treatments. The leading position of the Mimics Innovation Suite in research is illustrated by the fact that it is currently referenced as the tool used in more than 13,500 scientific publications. This number can be objectively obtained from Google Scholar search and it is three times higher than the closest competing software. The relevance is also indicated by 23% sales growth of our medical software in Q1. Importantly, in Q1 we received a renewed 510(k) clearance for Mimics Medical that expands its scope significantly to new imaging modalities and new applications, such as hospital based 3D printing for diagnostic purposes. This extension will allow hospitals and medical device companies to expand their treatment and product offerings based on Materialise technology. Because Mimics received regulatory clearance not only in the US but also in the EU, Japan, Korea and several other (ph) juridictions in the past, the Mimics Innovation Suite remains very well placed to be the preferred choice for global companies. As you know in famous and or orthopedic applications worldwide, the Mimics Innovation Suite is used for clinical cases on a daily basis. During the past quarter we achieved several milestones that will lead to a serious increase in Mimics value for patients in new areas, such as the cardiovascular and the pulmonology field. Based on Mimics, we released a research version of a dedicated planning tool for mitral valve replacement in research environments. 510(k) clearance for this tool is still pending. Once finalized, this tool is very well placed to help scale up mitral valve replacement which is considered as one of the most promising recent evolutions in cardiac surgery. We also took in the past quarter an initiative that will over time strengthen the position of the Mimics Innovation Suite in a pulmonology field. We entered into an agreement to accelerate the evolution of fluidda, a world leading lung imaging company that is both active from the US and from Belgium. Fluidda uses artificial intelligence and advanced machine learning in combination with Mimics to analyze low dose high resolution CT scanned images with advanced computer based flow simulations. So they allow for better care of lung patients. Fluidda's proprietary technology for functional respiratory imaging has been used in more than 80 clinical studies over the past 10 years. It supports the respiratory health community and clinical research in enhancing drug development and patient care. Fluidda and Materialise have already elaborated for years. But we believe that a more intense collaboration in the coming years will lift the functional Respiratory Imaging Technology from research to daily practice for specific applications and that this will in turn open the potential of patient specific treatments in lungs with new device designs, some of which could be patient specific.

To summarize, with the Mimics Innovations Suite Materialise contributes to a wide variety of medical treatment and device innovations. Our broad positioning in research allows later participation in the scaling of selected developments. This is a proven concept in CMS and Orthopaedic markets. Now we are entering to a new initiative, the Cardiovascular and the Pulmonology clinical markets. And at this point Johan welcome in to give more details on the first quarter financial results.

Johan Albrecht -- Chief Financial Officer

Thank you Fried. I begin with a brief review of our consolidated revenue on Slide six. As we get started, I'd like to remind you as they do each quarter, that when we refer to sales in our presentation, we mean revenues plus deferred revenues. Also please note that unless otherwise stated all comparisons in this call are against our results for the same period in 2018. As Peter mentioned in his opening remarks, in this year's first quarter we generated a 7% increase in revenue driven by our Software and Medical segments. We also realize a strong EUR 2.3 million increase in deferred revenue from annual software sales and maintenance contracts. For the quarter Materialise Software accounted for 20% of our total revenue, Materialise Medical for 29% and Materialise Manufacturing for 51%. Cross segment revenue from software products accounted for 30% of our total revenue and grew one percentage point in our sales mix. Moving to slide seven, you will see I consolidated Adjusted EBITDA numbers for the first quarter. Consolidated Adjusted EBITDA increased twelve percent rising from EUR 5.2 to 5.8 million. Our EBITDA margin rose 50 basis points from 11.9% to 12.4%. Our EBITDA was affected positively EUR 600,000 by the new IFRS accounting standard that requires us to capitalize certain lease expenses as of 2019. This new accounting standard has no impact on our operating profit as depreciation expenses increased by the same amount. For the ramp up in our R&D, sales and marketing capacity, our regulatory initiatives, counterbalance the growth of our top line. Slide eight summarizes the results of our Materialise Software segment. The revenue was up 12% or EUR 1,240,000. Recurring revenue was up 28%, what non-recurring revenue was down slightly. The segment's EBITDA amounted to EUR 2,961,000 compared to EUR 2,300,000 in last year's period. The EBITDA margins increased to almost 32% compared to 28% in last year's period which is a continuation of the good performance we produced in Q4 2018 when the EBITDA margin was 30%. Moving now to slide nine, you will see the total revenue in our Materialise medical segment grew 14% for the quarters to EUR 13.6 million. Revenue from Medical Device solutions rose 16% accounting for 66% of the total segments revenue. Revenue from our medical software which accounted for 34% of segment revenue grew 9%. In addition, our medical segment realized additional annual and maintenance software sales during the quarter for an amount of EUR 900,000 which we deferred to future quarters. Excluding this deferral affect medical software sales up 23%. EBITDA for the medical segment was EUR 1.8 million compared to EUR 2.1 million. The EBITDA margin was 13% compared to 17% primarily as a result of the addition of competition engineers to accommodate anticipated growth in our Medical Device business, as well as investment in our sales capacity and regulatory initiatives and R&D investments that are aimed at fully realizing the potential of our existing partnerships and products, but also as Freid mentioned earlier at gradually expanding our technology into new areas.

Now let's turn to slide 10 for an overview of the Q1 performance on Materialise's manufacturing segment. Their, revenue was up by 2.3%, growth was driven by a 6% increase in the revenue of our traditional manufacturing business confirming the positive growth of Q4 2018. More importantly EBITDA rose 18%resulting in EBITDA margin of more than 15%. This EBITDA growth reflected improved operational excellence. In the first quarter of 2019, we added one printer as compared to the previous quarter which brings the total amount of printers that we have in production in our manufacturing and medical segments to 188.

Slide eleven provides the highlights of our income statements for the first quarter. Both revenue and gross profit rose 7% compared to last year's period. In total, research and development, sales and marketing and GNA spending rose by 8.5% over the prior year period. R&D rose slightly by roughly 1%, marketing rose 14% and GNA rose 6%.

Net other operating income increased by EUR 700,000 to EUR 1.2 million compared to EUR 549,000 reflecting a positive variance for miscellaneous elements such as also tax receivables, grants and R&D credits and operational exchange gains. The group's operating profit amounted to EUR 1,476,000, 31% above last year's level.

Net financial result was negative EUR 592,000 compared to a negative EUR 710,000 last year, primarily reflecting variances in the U.S. dollar currency exchange rate, mainly on the portion of the company's deposits. Income tax amounted to EUR 1.1 million compared to EUR 500,000 in the first quarter of 2018, the increase of EUR 565,000 primarily reflects the change in deferred taxes from a positive deferred tax income of EUR 320,000 in the first quarter of 2018 to a negative tax expense of EUR 290,000 in Q1, 2019. This non-cash income tax variance impacts our net result negatively, turning it into a net loss for the first quarter of 2019 of EUR 304,000 or minus EUR 0.1 per diluted share compared to a net loss of EUR 183,000 or a loss of zero euro cent last year. Now please turn to slide 12 for a recap of balance sheet and cash flow highlights.

Our balance sheet remains strong with cash of EUR 111 million compared to EUR 115.5 million as of December 31st, 2018. This reflects the impact of the EUR 2.5 million convertible loan that we extended to Fluidda. In the context of the partnership that Fried referred to earlier on the call. Total debt rose EUR 3 million from year end 2018 to EUR 109 million.

Capital expenditures amounted to EUR 3.7 million compared to EUR 4.7 million in last year's period. Most of these expenditures have been financed. Cash flow from operating activities for the quarter amounted to EUR 4.1 million a decrease of EUR 2.1 million reflecting variances in working capital and more particularly as a result of the increased variance of work and contracts in progress.

Total deferred revenue amounted to EUR 31.2 million as compared to EUR 27.8 million as of end last year. Of the EUR 31.2 million, EUR 24.9 million were related to annual software sales and maintenance contracts versus EUR 22.6 million as of end last year. In that overview I turn the call back to Peter.

Peter E. Leys -- Executive Chairman

Thank you your Johan. Let's turn to slide 13. I just wanted to conclude our prepared remarks here this morning by touching briefly on our financial guidance based on the Company's performance in the first quarter of this year and our outlook for the rest of the year. We believe that we are on track to meet the full year guidance that we provided last month in March. In keeping with the usual seasonality of our business, we expect our financial performance to be weighted toward the second half of 2019. This concludes our prepared remarks. Operator, we are now ready to open the poll to questions.

Questions and Answers:

Operator

Thank you ladies and gentlemen (Operator instructions). Our first question comes from Troy Jensen with Piper Jaffray. Your line is open.

Troy Jensen -- Piper Jaffray -- Analyst

Hey gentlemen, congrats on the nice results.

Peter E. Leys -- Executive Chairman

Hey, Troy. Thank you.

Johan Albrecht -- Chief Financial Officer

Thank you.

Fried Vancraen -- Chief Executive Officer

Thank You

Troy Jensen -- Piper Jaffray -- Analyst

A few questions for me, you know as usual here. But- I will start with manufacturing. Like I said I was pretty impressed that the operating margins, the

EBITDA margins went to 15% from 8% last quarter given relatively flat sales. So, can you just talk about kind of what drove that? Was that mix more end product production or was there other kind of initiatives to improve the margins?

Fried Vancraen -- Chief Executive Officer

Well, we do have continuous initiatives to try to improve the margin. We attach in our manufacturing operations currently more value to improving our EBITDA margin than to driving the growth. As we have said at multiple occasions in relation to our strategy, we are not aiming to be the manufacturer of the world but we want to have a very performing manufacturing activity that can later be translated in our software stores so that it can help many people around the world.

Troy Jensen -- Piper Jaffray -- Analyst

Yeah. But Fried just to challenge you a little bit the -- I mean the 15% operating margins is the highest, EBITDA margins is the highest you've had as a public company in the manufacturing segment. So I guess I'd also like to know to, I think you guys stopped reporting end parts versus prototyping. Could you give us any kind of color on maybe how the end parts segment is growing for the business?

Peter E. Leys -- Executive Chairman

Fried already alluded to it. We do have a clear strategy within our manufacturing business to go for the high EBITDA generating manufacturing work more than to then based on a lower EBITDA generating standard prototyping work. So our manufacturing business line continues to grow stronger than our prototyping work and Johan actually has the figures for you.

Johan Albrecht -- Chief Financial Officer

Yeah, the prototyping is a little bit flat compared to Q1 2018 and the growth which is on our end part manufacturing is more than double digits growing. So one or both combining are giving the nice increase.

Troy Jensen -- Piper Jaffray -- Analyst

So did you -- why did you guys stop giving those numbers out? Are you still always like the end part growth for the business?

Peter E. Leys -- Executive Chairman

We decided to stop it. I mean every decision has pros and cons. Troy, at a time when we no longer made a distinction between our AC tech business and the organic growth, we decided to just offer another mix. But it's a metric that we definitely keep on hand on our personal dashboard here within the company and we may actually revisit because indeed it does reflect the continued growth of our end parts manufacturing business line within manufacturing, it's fully in line with our strategy and in the case actually explains the improving margins.

Troy Jensen -- Piper Jaffray -- Analyst

Yeah, exactly. It's a good driver for this industry and for you guys it's it's good to see. But let me shift gears now to on the medical side. I do think Johan talked about some of this, but the operating margins kind of went the opposite direction. I think they're about a 24% in December they went down to 13%. I said operating again I mean EBITDA margins. I guess we did have a sequential decline in sales. But can you just talk about it. I think it sounds like is really just all investments and further opportunities in the healthcare versus anything else in the margins.

Fried Vancraen -- Chief Executive Officer

I think this is also consistent with what we announced last year. We got regularly questions whether the margins would remain that high and we tried to consistently say no they will go down again because we plan important asset levels in order to further grow our medical activities. And I want to say there that multiple levels include R&D but it goes much further. Because for instance at the regulatory front which is costing quite some money we are like nearly all medical device companies that are operational in Europe under heavy investment program to bring all of our clearances in line with a new medical device directive.

Troy Jensen -- Piper Jaffray -- Analyst

Yeah. Okay fair. Hey, last question then I'll see the floor here. And maybe for Fried, I just love to know kind of your thoughts on the macro in Europe. Stable, better, worse, is it just kind of mainly limited to automotive or any other industries you need to worry about?

Fried Vancraen -- Chief Executive Officer

Well, we definitely are facing issues in the automotive industry. There are a lot of programs as far as we know on hold, both for the economic situation and the interactions with China and so on. But also a (ph) change because of new regulatory situation especially related to the fuel engines that has forced a lot of the money toward the refiling and adjustment of the regulatory clearances again in the automotive companies so that they have much less people available for instance to work on new engine development. And this is really impacting our sales at this moment. But in the other sectors, I must say that we face not an very exciting climate but a stable climate as you mentioned before.

Troy Jensen -- Piper Jaffray -- Analyst

Okay, perfect. All right. Gentlemen, keep up the good work.

Peter E. Leys -- Executive Chairman

Thank you, Troy. Bye.

Operator

Thank you. Once again ladies and gentlemen if you have a question at this time, please press the star and then the number one key on your telephone keypad. Our next question comes from Weston Twigg with KeyBanc Capital Markets. Your line is open.

Jason Celino -- KeyBanc Capital Markets -- Analyst

Hey guys. This is Jason Celino on for West today. Thanks for taking our questions. One actual follow up to the last question on macro. So this has been a topic that we've been discussing for the last couple of quarters but relative to maybe three to six months ago, you know. How have customer customer conversations changed or stayed the same related to the macro environment?

Fried Vancraen -- Chief Executive Officer

Again, I think while the U.S. economy is doing very well at this moment we are facing a much lower situation in Europe. Let's not materialize in particular. I can only repeat what I said in my previous answer. We especially impact in everything that is automotive related.

Jason Celino -- KeyBanc Capital Markets -- Analyst

Okay, great. I appreciate the go ahead. Related to the medical business growth on the revenue side. I know that you know that kind of de-accelerated 13.6% growth in the quarter. Can you maybe discuss what specifically drove that? I mean, it's lesser than the 20% growth we've been seeing over the last couple of quarters.

Peter E. Leys -- Executive Chairman

There's a there's a bit of a mix there. As John already explained. I mean we definitely had still good and solid growth in our devices business, revenue growth on software side was a bit softer this quarter with a 9% growth that we had significant revenues that we fetched for almost one million euro on the softer side within medical segment. Actually if you look at the growth numbers of the software sales revenue plus deferred revenue. Then as Fried already indicated we had a 23 % growth. I think overall our medical segment had a very strong quarter albeit that if you express it in recognized revenues the consequence of the deferral of some of the software revenues results and the somewhat softer growth, but still a growth that we consider very acceptable and solid at this stage of the business.

Jason Celino -- KeyBanc Capital Markets -- Analyst

Okay, great.

Unidentified Participant -- -- Analyst

I must appreciate (inaudible).

Peter -- -- Analyst

Cool. Thank you James.

Operator

Thank you. And I'm showing no further questions at this time. I would now like to turn the call back to Peter Leys for any further remarks.

Peter E. Leys -- Executive Chairman

Thank you, Operator and I thank you all for joining us on the call today. For your information, Fried we'll be in Detroit at RAPID next month where we will be unveiling various enhancements to our products and partnerships. So we look forward to continuing the dialogue with you there. I myself will be in Boston for a financial conference in the month of June of this year. So we look forward to seeing many of you at these events. Thank you again for dialing in and talk or see -- to you or see you later. Goodbye.

Fried Vancraen -- Chief Executive Officer

Thank you.

Johan Albrecht -- Chief Financial Officer

Thank you.

Peter E. Leys -- Executive Chairman

Good Bye.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.

Duration: 32 minutes

Call participants:

Harriet C. Fried -- Senior Vice President

Peter E. Leys -- Executive Chairman

Fried Vancraen -- Chief Executive Officer

Johan Albrecht -- Chief Financial Officer

Troy Jensen -- Piper Jaffray -- Analyst

Jason Celino -- KeyBanc Capital Markets -- Analyst

Unidentified Participant -- -- Analyst

Peter -- -- Analyst

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