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Materialise NV (NASDAQ:MTLS)
Q2 2019 Earnings Call
Aug 6, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to the Q2 2019 Materialise Financial Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host, Ms. Harriet Fried of LHA. You may begin.

Harriet C. Fried -- Investor Relations

Thank you for joining us today for Materialise's quarterly conference call. With us on the call are Fried Vancraen, Founder and Chief Executive Officer of Materialise; Peter Leys, Executive Chairman; and Johan 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 second quarter of 2019. To access the slides, please go to the Investor Relations section of the Company's website at www.materialise.com. The earnings press release issued earlier this morning 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 on the Company's annual report on Form 20-F 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 the slide presentation.

And with that, I'd like to turn the call over to Peter Leys. Go ahead, please, Peter?

Peter Leys -- Executive Chairman

Thank you, Harriet, and thank you, everyone, for joining us today. You will find an agenda for our call on Slide three. As always, I'll begin with a brief recap of our results for the quarter, after which Fried will come on to discuss some of the many growth initiatives in Materialise Medical, including obviously the investments we made just last week in Engimplan, a Brazil-based manufacturer of cranio-maxillofacial, or CMF, and orthopedic implants and instruments. After that, Johan, will go through our second quarter results in more detail and then I will come back on to review our financial guidance for 2019. When we've completed our prepared remarks, we will be happy to respond to any questions that you may have.

Now, turning to Slide four, you'll see the highlights of our second quarter results. Despite the macroeconomic environment that remains challenging, Materialise continues to grow. Our total revenue rose 7%, our consolidated adjusted EBITDA was 10.5% and we were again very close to the breakeven point. Materialise Medical continues to perform strongly, with revenues growing 17% quarter-over-quarter and with an EBITDA margin of almost 19%. The revenues of Materialise Manufacturing grew by 5%, for a double-digit EBITDA margin of more than 11%. This quarter, Materialise Software performed below our expectations, with a growth of 2% and an EBITDA margin of 22%.

And I will now turn the call over to Fried, who will, as I explained earlier, among other things, expand on the investment in Engimplan that we announced last week. Fried?

Wilfried Vancraen -- Founder and Chief Executive Officer

Good morning and good afternoon to everyone. Thank you for joining us today. Our strategy to invest in a select number of vertical applications of 3D printing in the medical field has been very successful, and is evidenced by the continuing strong results of Materialise Medical. Going forward, we intend to continue following that course.

I would like to expand on a number of initiatives that are currently ongoing with Materialise Medical and that further execute and build on that strategy. First, our recently announced investment in Engimplan perfectly fits our vision to invest in meaningful applications of 3D Printing, more particularly, this initiative underscores our commitment to continue to invest in the verticals of cranio-maxillofacial surgery and orthopedic applications of additive manufacturing.

Engimplan develops, manufacturers and sells, through a network of distributors, its proprietary CMS and orthopaedic, which are mainly spine related implants and instruments in Brazil, a large market with significant growth potential that is not covered by our international collaboration agreements. While Engimplan's product portfolio currently consists mainly of standard products, they have certain custom solutions, including their own patient specific TMJ implant. Importantly, Engimplan is a very innovative company that is on the verge of introducing metal 3D printing in its production process. By including some of our own software and hardware solutions into Engimplan's product portfolio and by adding our technological expertise to Engimplan's production process, we believe we can create a lot of synergies and further strengthen Engimplan's market share in Brazil. We acquired a 75% stake in Engimplan through a mix of existing and new shares. The remaining 25% remains with the founding family that stays in charge of the company's daily management.

Turning now to Slide six. Another Materialise Medical initiative, our Mimics Enlight Medical cardiovascular planning suite, offers a good example of how we are leveraging the strengths of our Mimics Innovation Suite to provide concrete solutions to specific issues in selected medical verticals. Mimics Enlight Medical, which was developed in collaboration with the Henry Ford Health System in Detroit, enables clinicians to reliably plan and screen patients for structural heart and vascular therapy. The first release of Mimics Enlight Medical supports clinicians in planning and complex transcatheter mitral valve replacement procedures, allowing them to determine the appropriate size and positioning of the TMVR devices and to better plan surgical strategies to place in these devices. Mimics Enlight Medical received FDA clearance in June 2019 and a commercial launch is in the US, currently targeted for later this month.

Other planning tools that we have built from our Mimics platform include our shoulder and our knee planning tools. Similar initiatives are ongoing, including in the field of pulmonology.

Another promising program that is running within our Medical segment is our collaboration with the University of Michigan to develop and commercialize a 3D-printed tracheal splint to help children suffering from tracheobronchomalacia, a life-threatening congenital airway disorder. The design of these tracheal splints is also done with our Mimics Innovation Suite technology. The device has been accepted into the breakthrough device program in the US, formerly known as expedited access PMA. Today, the University of Michigan has treated 22 children with this device under the FDA's Expanded Access Program also known as compassionate use.

While the majority of our research and development efforts in the medical field are expensed, we also capitalize certain development expenses, in particular in relation to our tracheal splint project because of the exceptional results, and the development of our Mimics Enlight planning suite. Following receipt of the FDA clearance of our mitral valve planner, we stopped capitalizing the development expenses associated with this solution because this version is now ready for commercialization.

At this point, Johan will come on to give you more details on our second quarter financial results.

Johan Albrecht -- Chief Financial Officer

Thank you, Fried. I'll begin with a brief review of our consolidated revenue on Slide seven. As a reminder, 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 second quarter of 2018. As Peter mentioned in his opening remarks, in this year's second quarter, we generated a 7% increase in revenue, driven by our Medical segment. Deferred revenue from annual software sales and maintenance contracts increased EUR2.2 million compared to end 2018. For the quarter, Materialise Software accounted for 19% of our total revenue, Materialise Medical for 30%, and Materialise Manufacturing for 51%. Cross segment revenue from software products accounted for 29% of our total revenue.

Moving to Slide eight, you will see our consolidated adjusted EBITDA numbers for the first quarter. Consolidated adjusted EBITDA decreased 3% from EUR5,216,000 to EUR5,059,000. Our EBITDA margin changed from 11.6% to 10.5%. Unlike the previous period, the 2019 Q2 EBITDA included a positive effect of EUR644,000 by the new IFRS 16 accounting standard, that requires us to capitalize certain lease expenses as of 2019. This new accounting standard has little impact on our operating profit, as depreciation expenses increased by almost the same amount. The increased operating expenses, reflecting our continued investment in sales and marketing capacity, research and development, regulatory initiatives counterbalanced the growth of our top line.

Slide nine summarizes the results of our Materialise Software segment. Here, revenue was up by 2%, or EUR189,000. Recurring revenue was up 23%. Non-recurrent revenue was down 14%, affected among others by delayed OEM sales. The combination of lower non-recurrent revenue with the continued expansion in our sales and marketing capacity, and R&D initiatives, have led to a decrease in the segment's EBITDA to EUR2.1 million from EUR2.9 million in last year's period. The EBITDA margin decreased to 22% compared to 31% in last year's period.

Moving now to Slide 10, you will see that total revenue in our Materialise Medical segment grew 17% for the quarter to EUR14.5 million. Revenue from medical device solutions rose 13%, accounting for 67% of the total segment's revenue. Growth was boosted by direct sales of all of our medical device business lines. Revenue from our medical software, which accounted for 33% of segment revenue grew 28%. EBITDA for the Medical segment was EUR2.7 million compared to EUR2.1 million. The EBITDA margin was almost 19% as compared to 17.1%.

Now, let's turn to Slide 11 for an overview of the Q2 performance of our Materialise Manufacturing segment. There, revenue was up by 5%. The increase in our traditional manufacturing business, excluding ACTech, amounted to 7.7%, driven by a growth in end part manufacturing, confirming the positive growth since Q4 2018. EBITDA rose 25%, resulting in an EBITDA margin of 11.5%. This EBITDA growth reflected improved operational excellence.

In the second quarter of 2019 we added four printers 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 192.

Slide 12 provides the highlights of our income statement for the second quarter. Both revenue and gross profit rose 7% compared to last year's period. In total, sales and marketing, G&A, and research and development spending rose by 8.4% over the prior-year period. Sales and marketing rose by 11%, G&A increased 7%, and R&D rose slightly by roughly 5%. This R&D cost increase excludes expenditures in Q2 2019 of EUR366,000 that were capitalized as intangible assets and that from the tracheal splint and Mimics Enlight Medical initiatives that Fried already referred to. In total, the intangible assets related to those two development initiatives amount to EUR1,380,000 on our balance sheet, at the end of the second quarter of 2019.

Net other operating income decreased by EUR470,000 to EUR1.4 million compared to EUR1.8 million, reflecting a negative variance from miscellaneous elements that were particularly high in last year's period. The Group's operating profit was at a breakeven point, positive EUR36,000. Net financial result was negative EUR190,000 compared to a negative EUR375,000 last year. The variance primarily reflects the positive impact of the strong US dollar, mainly on the portion of the Company's deposits. Income tax amounted to EUR61,000 compared to EUR42,000 in the second quarter 2018.

Now, please turn to Slide 13 for a recap of balance sheet and cash flow highlights. Our balance sheet remains strong, with cash of EUR108.9 million compared to EUR115.5 million as of end 2018. The decrease of cash reflects our capital at work, with debt reimbursement, moderate capital expenditures but not all financed, and the payment of the EUR2.5 million convertible loan we extended in Q1 to Fluidda that we referred to in our previous earnings call.

Total debt rose EUR1.7 million from year-end 2018 to EUR107.7 million. This debt includes EUR5.1 million of total lease liabilities from the new accounting standard IFRS 16. On a comparable basis, gross debt decreased EUR3.4 million in the first half of this year.

Capital expenditures amounted to EUR3.1 million compared to EUR4.8 million in last year's period. Approximately half of these expenses have been financed. The EUR3.1 million includes EUR344,000 capitalized development costs explained above.

Cash flow from operating activities for the quarter was flat at EUR4.8 million. Total deferred revenue amounted to EUR30.1 million as compared to EUR27.8 million as of December 31, 2018. Of the EUR30.1 million, EUR24.8 million were related to annual software sales and maintenance contracts versus EUR22.6 million as of December 31, 2018. On July 1, we drew the second tranche of EUR25 million from our credit facility with European Investment Bank. At that moment, on the 1st of July 2019, our cash position increased on a pro forma basis to EUR133.9 million. Per definition, also the debt increased by the same amount, but as first principal repayments only start in 2022, ending in 2027, the structure of this loan further strengthens our balance sheet, allowing us to accelerate the pace at which we can advance our strategy through selective acquisitions, joint ventures and collaborations.

With that overview, I'll turn the call back to Peter.

Peter Leys -- Executive Chairman

Thank you, Johan. As indicated earlier, I wanted to conclude our prepared remarks this morning by touching briefly on our financial guidance. While our Medical segment continues to perform very well and our Manufacturing segment also performs relatively well given the macroeconomic circumstances, our Materialise Software sales have been below our expectations in the first and second quarter of this year. There are several reasons for the softer performance of our Software segment in the first half of 2019. Over this period there have been less new system sales than were generally expected; users of multiple machines were more cautious about adding new operators; and a number of transactions that we expected to close in the first half of the year were pushed out to a later date.

Based on the information we currently have, we expect that, in the second half of 2019, our Medical and Manufacturing segments will continue to perform well and that our Software segment will perform significantly better. However, this performance will not fully compensate for the shortfall of the first two quarters. Still, from a revenue and deferred revenue perspective, we are comfortable today that, on an organic basis, we will end the year within the guided ranges of revenues between EUR196 million and EUR204 million and of additional deferred revenues from software annuals and maintenance between EUR2 and EUR4 million.

Because our Software segment has been the biggest contributor to our EBITDA, the softer performance of Materialise Software for the first half of the year impacts our outlook for consolidated adjusted EBITDA. As a result, on an organic basis, we currently expect to end the year at the bottom of the guided range of EUR29 million to EUR33 million. We could compensate for the lower contribution to our EBITDA by Materialise Software by slowing down certain initiatives that are currently [Technical Issues] within Materialise Medical [Technical Issues] or by reducing our investment in other areas such as eyewear or footwear. We will not do that. On the contrary, we will continue to push these initiatives forward as fast as we reasonably can, thus putting the cash on our balance sheet to work.

Our continued commitment to increase our presence in promising verticals of 3D printing means that [Technical Issues] invest in internal but also in external engines for growth. The acquisition of Engimplan perfectly fits that strategy, as Fried explained earlier. Now, in the case at hand, because of the particular financial profile of Engimplan, this investment is immediately [Technical Issues] to our revenues, our adjusted EBITDA and our net profit. Engimplan had revenues of EUR6.2 million, had an EBITDA of EUR2.4 million and had net profit of EUR2.1 million in 2018, all these numbers are based on Brazilian GAAP and on the average currency exchange rate of the Brazilian as published by the European Bank for the month of July.

[Technical Issues] is expected to [Technical Issues] still this week; all shares, both new and existing, that we acquire will be fully paid in cash, at closing. [Technical Issues] Engimplan's results as of August 1, 2019. The expected contribution from Engimplan obviously further strengthens our confidence to maintain our revenue guidance and also give us some additional comfort to maintain our adjusted EBITDA guidance.

This [Technical Issues] concludes the prepared remarks. Operator, we are now ready to open to floor to questions.

Questions and Answers:

Operator

Thank you so much. [Operator Instructions] We have your first question coming from Troy Jensen from Piper Jaffray. Your line is now live.

Troy Jensen -- Piper Jaffray -- Analyst

Hey, gentleman. Congrats on good results here in a tough environment.

Peter Leys -- Executive Chairman

Hi, Troy. Thank you.

Johan Albrecht -- Chief Financial Officer

Thank you, Troy.

Troy Jensen -- Piper Jaffray -- Analyst

Hey. So, how about, first of all, the Software weakness, I get the OEMs were weak. We had picked that up too. But can you just touch a little bit about the margins -- the EBITDA margins in this segment? It seems like historically you guys have been closer to a 30% level or higher than that even up revenue levels in this segment. So just any comments there would be helpful.

Peter Leys -- Executive Chairman

Yeah. Troy, if you'll look at the numbers more carefully you'll see that we've continued our investments, first and foremost, in sales and marketing within the Software segment. And second, we've also continued to push a number of R&D initiatives. And it's the -- I mean, the mismatch if you want between the continued growth of our investments in R&D and sales and marketing on the other hand and basically flat sales that we encountered in the second quarter that basically resulted in the decrease of our EBITDA from above 30% to 22.1%.

And then the increased efforts in sales and marketing, I mean, is -- I mean, improves our continued belief in our Software suite and I continue to believe that we are very well poised to continue to grab market share in this difficult market environment but in the short-term, obviously, the impact to the margin is pretty -- yeah, it's pretty significant.

Troy Jensen -- Piper Jaffray -- Analyst

Okay. How about two just on healthcare that's been great little segment for you guys. Can you just touch on like knees within that? I'm assuming a lot of the growth coming from new applications and CMF. But how is the knee segment?

Wilfried Vancraen -- Founder and Chief Executive Officer

Well, it's performing -- the knee guides are performing on a kind of continuous basis. The amount of cases we handle at this moment is approximately at the same level as last year. So the growth is -- yeah, really in CMF, but also in the field of the implant we saw directly, for instance, the aMace implant or hip surgery. But the knee guides are flat.

Troy Jensen -- Piper Jaffray -- Analyst

Okay. All right. How about then just last question for me. Just Manufacturing did really well and I know you guys have been kind of hit with European automotive weakness. So, just curious dive into that a little bit and your thoughts on is auto bottoming here. Can we get better growth from that going forward?

Wilfried Vancraen -- Founder and Chief Executive Officer

Well, as you correctly stated, Troy, we were always worried about situation in the automotive market and our worries are not over yet. Actually, the numbers highlight a very good performance of our certified manufacturing business that has known a growth of close to 30% over Q2. And it is obvious that it compensates for quite some loss in the automotive sector, which me personally reminds of the year 2008 or 2009 when the situation in the automotive sector was even more dramatic than today. But nevertheless we see a bad situation in the automotive sector.

Troy Jensen -- Piper Jaffray -- Analyst

All right. Good luck to you in the second half.

Peter Leys -- Executive Chairman

Thank you, Troy.

Johan Albrecht -- Chief Financial Officer

Thank you.

Operator

Thank you. We have your next question coming from the line of Weston Twigg with KeyBanc. Your line is now live.

Jason Celino -- KeyBanc Capital Markets -- Analyst

Hey, guys. This is Jason filling on for West today. Thanks for taking our questions. One thing we wanted to ask was, with the FDA clearance of the cardiovascular planning suite. What has been early customer feedback you've been since that approval?

Wilfried Vancraen -- Founder and Chief Executive Officer

Well, yeah, the customer feedback is extremely positive. We are releasing this as was indicated on the basis of a patented collaboration with Henry Ford Health Center from Detroit. That is really delivering a unique planning methodology that is giving us system [Technical Issues] better results than competition, and that this is one of the new products that will enable further growth in our Medical segment. Please be aware that -- yeah, our Medical segment has grown to a considerable size and that's a new starting product line starts from zero. So before it starts significantly [Technical Issues] the top line it takes some time.

Jason Celino -- KeyBanc Capital Markets -- Analyst

And I think when you're giving Engimplan contribution and guidance it broke up a little bit. Can you maybe just state what those were again?

Peter Leys -- Executive Chairman

Yeah. So Engimplan, Jason, the 2000 -- I gave the 2018 numbers, which is revenues of EUR6.2 million and EBITDA of EUR2.4 million. We expect the Engimplan business to grow somewhere high-single digits, low-double digits in 2019 and we will consolidate those numbers as of August 1, 2019.

Jason Celino -- KeyBanc Capital Markets -- Analyst

Great. Thank you. That's all for me.

Peter Leys -- Executive Chairman

Sure. Thank you.

Operator

Thank you. [Operator Instructions] Your next question comes from the line of Gregory Ramirez with Bryan, Garnier. Your line is now live.

Gregory Ramirez -- Bryan, Garnier & Co -- Analyst

Thank you. Good afternoon and thank you for taking my question. I would just come back to the Software business because, in fact, I know if it's two-fold, but the line was very bad when you made the comment. So, could you just repeat your comments regarding this -- the prospect of this business for H2? You mentioned that there were some deferrals but what is your level of confidence as the transactions that you're expected in Q1 and Q2 with closing in H2?

Peter Leys -- Executive Chairman

Yeah. Well, thank you, Gregory, and my apologies for the line not being as clear as it should be. As I explained during the prepared remarks, our level of confidence is such that even without the contribution of Engimplan, the performance of Software in the second half of the year should be such that we should still be able to reach the bottom of the overall consolidated EBITDA guided range between EUR29 million and EUR33 million. So that implies that Software will perform significantly better in the second half of the year as compared to the first half of the year. Amongst others because we do expect that the number of deals that were missed in the first half of the year will slip into the second half of the year.

Gregory Ramirez -- Bryan, Garnier & Co -- Analyst

And it would be more Q3 or Q4, because last year your Software revenues were down. There was a different seasonality compared to 2017. And this time, do you expect a more pronounced seasonality?

Peter Leys -- Executive Chairman

We -- frankly, we expect, as always, but probably even more outspoken this year than the years before, we expect a very strong last quarter of the year.

Johan Albrecht -- Chief Financial Officer

Especially also that last year in Q3, we already had an increase of 17% compared to the year before.

Gregory Ramirez -- Bryan, Garnier & Co -- Analyst

Yeah, sure. So, do we have to expect some revenue decline in the Software division for Q3 this year?

Peter Leys -- Executive Chairman

Well, I mean, we have to -- I mean, if we have to do significantly better in the second half of the year than in the first half, then Q3 should be better, should be stronger quarter already with an even stronger Q4.

Gregory Ramirez -- Bryan, Garnier & Co -- Analyst

Okay. Thank you very much.

Peter Leys -- Executive Chairman

Thank you, Gregory.

Operator

Thank you. And I am showing no further questions at this time. I would now like to turn the conference back Mr. Peter Leys.

Peter Leys -- Executive Chairman

Thank you so much, and thank you all for joining us today for this second quarter call. Johan by the way will be in the US. Johan will be attending the KeyBanc Financial Conference in the course of next week. And, obviously, we look forward to meeting some of you at that conference or during any of the other conferences that we intend to attend in the second half of 2019. Thank you for your time. And we look forward to continuing the dialogue.

Wilfried Vancraen -- Founder and Chief Executive Officer

Thank you.

Johan Albrecht -- Chief Financial Officer

Thank you.

Operator

[Operator Closing Remarks]

Duration: 36 minutes

Call participants:

Harriet C. Fried -- Investor Relations

Peter Leys -- Executive Chairman

Wilfried Vancraen -- Founder and Chief Executive Officer

Johan Albrecht -- Chief Financial Officer

Troy Jensen -- Piper Jaffray -- Analyst

Jason Celino -- KeyBanc Capital Markets -- Analyst

Gregory Ramirez -- Bryan, Garnier & Co -- Analyst

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