Mentice AB (publ) (MNTC) Earnings Call Transcript & Summary

Hello, and welcome to the Mentice 2021 Q3 interim report. The report will be presented by Mentice CEO, Goran Malmberg. My name is Stacy Hammar, and I will be moderating this webcast. After the presentation, you will be given the opportunity to present your questions to Goran Malmberg and CFO, Gunilla Andersson, in the meeting conversation feed. [Operator Instructions] This meeting will be recorded and available with the report on mentice.com. I will now leave the way to CEO, Goran Malmberg.

Thank you, Stacy. Welcome, everyone. Nice to have the opportunity to present the third quarter, and I will start the presentation. So disclaimer, we can move over. And today, I have with me Gunilla Andersson, so she can help you with the financial part of the presentation.

Good morning, everybody.

So moving today to the first slide, the third quarter of 2021, nice way to present on that. We're going to go into the financial details in a bit. But on the top line, both with respect to orders and net sales, we're really pleased with the continued strong performance for this year. So I will let Gunilla go through the financial details.

Yes. Order intake in the quarter amounted to SEK 51.8 million compared to SEK 34.6 million last year. And this is actually very close to 50% growth for the order intake. And this leaves us then for the first 9 months at SEK 131.9 million in order intake compared to SEK 95.5 million last year. The order book by the end of the period was SEK 83.6 million an impressive almost 100% growth. And this leaves us with very good confidence for the remainder of the year and start of next year. Net sales amounted to SEK 38.7 million compared to SEK 33.4 million last year. This is a growth of close to 16% for the third quarter and takes us to SEK 117.4 million for the 9 months with a growth of 28.1%. Gross margin for our sales in the quarter was 86.3 compared to 84.2, and this is a continuous improvement for end of last year. And it's also very close in the 9 months to the last year's numbers as well at 84. So cost levels, operating expense for the first 9 months, higher than last year, 22% up. And we will talk a little bit more about what is the impact of that in the quarter that is SEK 35.1 million compared to SEK 26.4 million. And this then includes as well, both for 9 months, but also for the third quarter, our Vascular Simulation business we bought in October last year. And for the quarter, that impact is SEK 3.5 million. Cash flow from operating activities totaled negative SEK 7.7 million. We also had a negative cash flow third quarter last year, SEK 6.2 million. And this leaves us with [negative] SEK 12.5 million for the first 9 months compared to positive SEK 10.5 million last year. And then last but not least, operating income before depreciation, the -- totaled close to 0, negative 0.6 for the third quarter and then taking us to negative 9.6 for the first 9 months.

Thank you, Gunilla. So just to reflect a bit -- a reflection for me on what we just heard. Again, I mean, we followed Q-o-Q, that was our strongest ever from sales and order intake with the third quarter. That's typically a slightly more difficult quarter since the summer quarter with kind of vacations in large parts of the world. So despite that, we have a really strong top line in the quarter. And historically, the strongest Q3 ever. The Medical Device is the main driver here obviously still, orders up for the first 9 months of 70%. We had 60-some percent after the second quarter. So continued really strong performance from the device industry, really across all regions. We can see from a device that the large clients with substantial orders are adding absolute. I think we have four -- I know we have 4 clients that now have generated over SEK 10 million and actually most of them over SEK 15 million so far this year, which is really nice. I mean, we have -- if you go back a couple of years, we typically see we have maybe 1 client over 10, and then we had a couple around 10. But already now, we can see these 4 clients moving up more kind of over that limit to SEK 700 million. The product mix, Gunilla kind of talked about the gross margin. Also, really nice to see that we have a better product mix overall over the year, and we're maintaining that high level. We were slightly below last year early in the year, mainly due to currency exchange, but we have worked that up, and we have a higher degree of software components. And the one of you that follow the details looking at the details for last year would remember that we -- for the full year last year had a lower gross margin. We were down to 76%, 77% that was specifically due to the fourth quarter of 2020 where we introduced the new hardware device. And we had a lot of sales just with hardware, which impacted our gross margin significantly in the fourth quarter, but also that had an effect over the full year. So the question here would be, can we maintain this level of gross margin for the full year? And we believe we can. The other thing we can see now is that we see that the hospital market is opening up, obviously, we still have struggles in Europe and Middle East, but both the Asia and the North Americans market are showing signs of activity, and we have some good progress during the quarter. We are still behind both 2020 and 2019. But we really see that we get access, and we have dialogues and that there is good activities. One nice win for the hospital side, which we noted in the report this morning is that we won a tender in Tamil Nadu for the Tamil Nadu Medical where we're delivering the first industry intended to deliver that in the third quarter. That's one of the orders that actually moved into the fourth quarter, but that's a SEK 4 million, SEK 4.1 million, SEK 4.2 million, first installment of that contract, but it's a several phases of that order. So that's a significant first order in India and really nice since we have invested in India now for a couple of years and this is really first payback on that. India, obviously, being one of the growing markets, and I believe one of the most important next growth market for Mentice. We talked a little bit about more of the financials. We had a negative cash flow from the operation as we said, and that's really due to the buildup of inventories. We've obviously seen on the year, we have -- we will need to secure kind of logistic delivery. So we are building a bit of that, also we have some orders and deliveries, as I see in the next point here, that moved into the fourth quarter that also impact the cash flow. So we think that will be sorted out in Q4. Our EBITDA, same thing, we had hoped to be able to deliver about SEK 6 million or a little bit more SEK 6 million more in the quarter on net sales, and that obviously the direct consequence of that is that the EBITDA is lower. We can see -- I just want to make a comment, you could react to say that 20% to 22% up on cost, but just break that down a bit. We -- if we look at the added cost for the Vascular Simulation organization Q3 over Q3, that's the SEK 3.5 million. We also had -- We also obviously are starting to travel again. So that's about SEK 1 million. We had really low. We phased down consultants. We also had furlough. So temporary release of staff last year. So that's about [2.5 ] million or so. And then we're also activating less development for this year. So all of that adds up to, I believe, about SEK 8 million or so and the complete -- the total delta, however, between the year is, yes, between 25% or 26% or [ 29% ]. So a lot of that delta is really baked into those 22%. So the actual growth in costs due to personnel is much slower than that, less than 22%. So again, I am sort of repeating that, the comparison, obviously, that's not unique for Mentice, our company will have the same, but to comparing Q3 over Q3 is really difficult because last year, we're really not sure about what would happen with the pandemic. We had a full effect of furlough. And we had clear 3 to 4 week in several months in the last year's kind of Q3. So the direct comparison that is not fairly easy to do. But I think it's nice to see that we are now back to normal levels. We are using consultant to normal levels. We are growing organization. So we have moved, if you compare year-over-year, we go from 91 to 102 in staff. And if you look to the FTEs, full-time equivalent, we have moved from about 100 by the beginning of this year, up to 120 right now. And that's obviously to build the organization for the need or the requirement we have for 2022 and onwards. So we had a balance, I mean, besides the fact we moved revenue into our net sales into Q4. We had closed a breakeven in the first 9 months, but obviously, that moves into the fourth quarter. Yes, I said that. So the business, generally, I think really we continue to build on our market position, our augmentation on really being into the daily clinical practice, our focus on the image-guided interventional therapies, what we used to call endovascular, is really paying off. I mean the attitude from our clients looking at the relevance of using our solutions to improve performance and to help physicians make better kind of decisions is really paying off, and it's a message that we are pretty unique with as we know that no one else has approached the market in the same way. We see, as we talked about the last couple of quarters, we see a large interest for the online, remote and software only applications, which will continue to help our product mix and the gross margin. From the acquisition from Vascular Simulation a year ago, we see that it makes a lot of sense and the combination of what we refer to as the physical models combined with traditional Mentice virtual models or environments. It's really something that no one else can provide. There's no competitor in the market that can really do that and that plays into our ability to go upstream with our clients to help them with solutions for conceptual design and earlier stages in the product development process. It makes a lot of sense. We also see the discussion with the imaging vendor, Siemens and Philips mainly, but also some of the others and the discussion on robotics, mainly so far focused on the Corindus side, which is the robotic arm of Siemens. But there, we see a large interest, great interest and building up the relationship there, and we see a lot of opportunities to use our technology to help this company get the products out to the market. Yes. And the last time, I sort of alluded to already, but you really see that the pandemic here with still, we see in lot of parts of the world the elective procedures are still down. I mean I heard this week that the -- in Canada, the elective procedures are completely stopped now for a couple of weeks. And obviously, all of that changed the attitude of full time doctors because there's no relevant way to maintain skill set and be ready for activities and simulation and the solution we have is really the only rational way for them to maintain their skills and their ability to perform when -- where they need to be on a patient. So really, in summary here, we are expanding the vertical footprint in the image-guided therapy areas that's we're really excited about that avenue, and we see we get a lot of good feedback from the market on those kind of dialogues. And we also obviously have a clear ambition to further acquire businesses in the future here, demonstrate or articulate what is our direction for the future. It's not, as I said before, just training and simulation. It's really moving in a different direction, which would in my mind, distinguish Mentice from other vendors in this marketplace. So Q4, first key drivers for Q4 and 2022 and beyond. It is sort of a summary. I'm not going to spend a lot of time on this as I've sort of already touched on most of these. But again, in summary, the combination of the virtual and physical from the Vascular Simulation acquisition is really important for us to provide a broader set of products. Vascular Twin, which is now a Mentice registered trademark, the digital twin environment for us today use the Mentice physics and platform to replicate the real patient and to allow that real patient to be used for all kind of activities. Again, it's really our future and our avenue forward. The large clients, mainly in the medical device side, but also with it can be imaging side as well. We have a lot more opportunity there. So we can see we can do much more and I think with a growing product portfolio as well. There's clearly where the majority of the growth will come for the next foreseeable future. Strategic alliances, specifically related to the imaging companies for Siemens and Philips. We spent a lot of time of the year on the further integration, the applications we can provide in their software layer, how we can get under the hood with these companies after the market makes a lot of sense. That also still is negatively impacted by the hospital market, not fully back to being at normal levels. But I think the engagement and the activities really talks for the kind of opportunities in the future. The neurovascular piece, we have talked about that over the last year or so that that's our focus. We have almost dominant market position there for the medical device industry. I think all of the major device companies use our products. In terms of the KOL, the key opinion leaders in that field. We work with rock stars on that industry from all regions. And I think our technology where we are is a good base for what we are looking forward. So we will see new products coming out in that area. Both from the perspective of planning and precision medicine-related solutions for more experienced doctors, advanced cases and so forth, but also for products for juniors and new comers into that field. AI and machine learning, everything we talk about here related to robotics to the integration with imaging, with the software applications we're looking at. We see AI machine learning the important part of that going forward. Robotics, as I've sort of talked about already, but the -- it's not about training really. It's about adding functionality, adding ability for this company to use this platform for both for their product development for providing a kind of decision tools, decision environment for physicians, but also for the robot, helping the robot to prepare for a specific case. So that's where we see a lot of interesting possibilities for the future. So some more specifics here. We see a positive outlook for Q4. We see -- we are continuing at the same pace as we have done for the first couple of quarters this year. And as we said on the first slide, we have almost 100% up on the order book with more than SEK 30 million planned for the fourth quarter. But also, we're building order book for the next couple of years. We have SEK 25 million for the 2022 and another SEK 25 million for 2023. And I think after Q4, we will see an even larger order book for the full year 2022 and '23. So that's obviously important for us to build revenue for the future. It's something that we haven't really talked about. I mean our ARR transition, obviously, to some extent, is impacting our short-term sales. We haven't presented any numbers on that, but I think this is really the avenue. This is the way we are going. The medical device will continue be the main driver, clearly. We hope to see a more significant pickup for hospital and imaging, but we can't plan for that really. It's a question when that market is clearly opening up. If we look at the confirmed order book we have for Q4, which is SEK 30 million plus. And with the net sales at the end of Q3, we are already above last year's full result. We had -- last year, we had SEK 137 million in net sales. And we're already now at SEK 148 million -- SEK 149 million before we started the fourth quarter. We can see a positive indication, as I say, for the hospital market, both direct and through Siemens and Philips, but as I said before, still below 2020 as well as 2019. We did announce 1 order from Abbott a week or so ago for $822,000. I think it was 8 million-ish. So Abbott totally have generated over $1 million in orders for the -- for the first couple of weeks in October. But if you look at the order intake in October, it's already now SEK 23 million in basically 3 weeks. So we had a really good start for the first -- for the fourth quarter, sorry. And we're obviously continuing to build an organization for 2022, which is in the plan. And yes, what I'm saying is that we obviously, its little bit late in the year with respect to the earnings side, it's unclear if we will be able to catch up for the full year, but that's obviously what we are working with. So that's -- I hope that gives you -- will give you a good overview over the quarter. And with that I -- we'll, yes, so the last point here. So [indiscernible] some starting in the fourth quarter, a positive view of the net sales and the increase in net sales for the full year. Market position, clearly. We're taking market share, but we're also defining new markets, and we see good demand for what we do in all markets. So that's really the conclusion of what I wanted to say. So with that, I will turn it back to you, Stacy, and see if we have any questions.

Yes. Thank you, Goran and Gunilla. Okay. We have 1 question at the moment from [ Yan Nim ]. He just asked cash situation.

Yes.

Yes. At the end of the quarter, we have close to SEK 12 million in [Technical Difficulty]. All right. And we also have a [Technical Difficulty] of SEK 20 million that we haven't used at all. [Technical Difficulty].

So -- We have a strong cash position expected for the end of the year.

For sure.

Okay. Thank you. We have 2 people with raised hands, so I will unmute so they can present their question.

Sure.

[ Richard Envec ], you may ask question now. You have to unmute yourself first.

I have 2 small questions. The first one, if you look at your software sales at the moment, and you're talking about that you move towards ARR phase. Approximately, how much would you say of your software sales at the moment are recurring.

I don't have the percentage number in my hand actually. So -- but I mean, we have all of the software sales to the hospital side is recurring. We have moved a transition completely over to that. And then in the industry side, we see several large clients are moving into a rental or non-CapEx related acquisition of our products. So for example, Abbott , all of the orders for Abbott are really related to rentals. So I have a -- I don't have a number in my head and I believe that should on that, and that's something we will work into report for next year. That's the decision and discussion we had in the Board. So I'm sorry, I can't give you an exact number, Rick, but that's something we clearly report.

Okay. Good. So if I were to make an estimate of the recurring revenue, I would take SEK 25 million that you state and then also add a portion of the software sales.

Yes. So -- Okay. Sorry, can you repeat? So the SEK 25 million, which was software union?

Well, you say, rental? And then if I were to -- out of the software sales. And then I would -- basically, it will be a percentage of efforts also recurring.

Yes, yes. Absolutely. Yes. You said you had 2 -- a couple of small questions.

Those are related.

All right. All right. Okay. Okay.

We have another question here from Christian Lee, so I will just allow his microphone.

Can you hear me?

Yes.

I have a couple of questions. The first one is regarding the gross margin. You mentioned that you see that you can maintain the gross margin level. Did you mean the level of 82% that you showed in the first 9 months or 86% in Q3?

That's a good question. I would be a little bit too bold to say 86% and 87%. We had a really strong gross margin in the third quarter. But when I say maintain, I'm saying, we maintain 84-ish, 84, 85 in that level. I think to go beyond that on that in estimates it's a little bit kind of premature. But we will be able to maintain where we are for the first 9 months also for the full year. And as I said, comparing to last year, we -- the fourth quarter last year, really hard the overall margin for the year that was down 76%, 77%, which we don't see this year, we believe we can maintain the 84-ish kind of percent.

All right. Excellent. And my second question is regarding your order book. You wrote in the report that you are planning to deliver approximately SEK 30 million for the remainder of 2021. Does this include the delayed delivery of SEK 6 million?

Yes, it does.

Okay. Can I ask you about this dynamic between the order intake and revenue recognition? You have shown in a couple of quarters, a very strong order intake, but the revenue seems to lag a little bit. So could you please elaborate on that?

Yes. Okay. No. I mean I think what happened here now in end of Q3 was we had a logistic or delivery-related issue. It was one part of it. So we couldn't deliver systems as expected. We had components issues that were -- currently us from delivering the kind of G5 unit in India in the quarter. So that has some effect but we also had delays from mainly some Asian clients in terms of their acceptance through [kind of] receive systems. So the -- both of those issues are kind of resolved going into fourth quarter. So we are building up the production capacity and the specific situations with these clients in Asia, we have sorted out as well. But it's obviously annoying. It's on the news as well that we had a similar issue back in -- to some extent, Q4 and Q1. And now this impacted us with SEK 6 million or so in this quarter. So yes. We have seen some issues, obviously, over those quarters in terms of the customers’ ability to receive systems. We have logistics and shipping systems and I think sort of issues. So that's really the basis of those. Was that an answer, Christian? I'm not sure.

Yes. My final question is regarding your comment on the hospital market. so that the hospital market in Asia and North America is slowly opening up, but still behind 2019, understandably also 2020. Could you please explain how come is behind 2020 as well?

Yes. I mean I think that we had -- in 2020, we still had purchase decisions that was initiated before the pandemic started. So we had in all regions, really. So when you have obviously purchase process started. So some of that effect, we got the orders really that has had already a momentum to close. And then going into the pandemic in the end of last year, a lot of these processes were stopped. So that would be one logic, really, for while we still have slightly lower lag effect, really. But what we see now is that these acquisitions are opening up, but knowing that the hospital market doesn't operate that quickly. I mean, in the industry, we can, in many times, turn around an order in a couple of weeks or less than a month, while in the hospital market, any purchase really can take 2, 3, 4, even 6 months. So that's, I think, why we see this lag or even the comparison with 2020.

There appears to be no more questions. Now would you like to make some closing comments and if not, we can close the meeting.

Okay. Thank you, everyone, for joining and looking forward to present the fourth quarter in a couple of months. Thank you.

Thank you.