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

Hi, and welcome, everyone. Mentice recently reported their Q2 2023 numbers, and I have the pleasure of introducing the company's CEO, Goran Malmberg; and the company's CFO, Gunilla Andersson, who will start off with a presentation of the report, before we go on to a Q&A session. Now without further ado, Goran and Gunilla, please take it away.

Thank you, Christian, and nice to be here. So it's a pleasure to present our second quarter and very strong start for the year. So just some highlights for the second quarter. Very strong net sales, SEK 74 million, up significantly from last year. And actually, the historically strongest quarter with respect to net sales ever for Mentice, which is very, very nice. Order intake as well strong, not at the same percentage level, but again, following the first quarter a very strong order for -- quarter for order intake. We are -- the growth are mainly driven by the device industry, and a lot of these companies are U.S.-based, a lot of the business in the second quarter are also driven by U.S. So a very strong year for the region as well. The order book is at a similar level to what we had in Q4 and Q1, but still at a record high level, SEK 125 million, which I think is especially nice given the amount of net sales and deliveries we have in the second quarter. We can see -- which is, I mean, obviously driven by the net sales and driven by the fact that we have maintained a good cost level, that we have a positive EBITDA delivery in the quarter followed by a positive EBITDA in the first quarter. So this is an unusual strong start for Mentice given our typical seasonality with a lot of the effects coming in the second half year normally. So this is a unusual sound start for Mentice. Positive operational cash flow, obviously, followed by net sales and positive EBITDA. If you look quickly at the -- let me see if I have it here. Yes. And sorry. And positive net income, obviously. Bottom line as well generating positive earnings per share for the quarter. If you look at the third quarter -- sorry, the first half year, January to June period, we have over 40% increase, going up to SEK 140 million almost from just short of SEK 100 million. Order intake as well not quite as large percentage growth, but still up significantly compared to last year. We have a high dependency on the U.S. region and Medical Device, which is nothing unusual. And I think we see generally a very strong demand from the device industry, not only in U.S., but across all regions. We obviously had a couple of larger accounts clients that have been substantial for the second quarter, but we see a general -- as I say in the report, a general very strong buildup of new opportunities from Medical Device. We had a slightly slower start for the Asian Pacific region both in the first and the second quarter. So that's really why we -- we obviously could have had -- mainly on the order side could have slightly higher. So this is something that we expect to be adjusted in the second half year. This is mainly a slower start for the Chinese region. And this is -- we hope that to be rebound or recovered for in the second year. For the first half year on, EBITDA is a 12.9% margin. Very nice. As I said, unusual comment as to start off the year in this way. So this is moving in a very nice direction and obviously, a substantial improvement compared to last year or the last couple of years, I would say. Net income for the period at breakeven as well, a significant improvement from last year. So I'm just -- and obviously, an improved operational cash flow, positive operational cash flow. Earnings per share at SEK 0, but also a radical improvement from last year. So the last disclaimer here is just what I said on the first slide that I think order intake is at a sensible level. On the net sales, we should not expect the same extrapolated growth for the rest of the year. Typically, we have a very strong quarter. So this is just to say that we shouldn't expect the same kind of growth quarter-over-quarter comparing last Q4 with this Q4. Still, we're looking very good for the year and we are confident that we will continue in a very positive way for the year. Moving to a little bit more details on the order side. We can see that we are rolling 12 increasing. As I said before, this is the highest order intake for Q2 ever, only surpassed by Q4 in 2022. You can see the chart I was referring to down on the left side, where you can see each quarter and development from the last 6, 8 years. As you can clearly see how we are improving on all accounts here. So I think this is a good overview on how our business is developing over a little bit longer period. We have a large growth of medical device industry. Again, a couple of large accounts have been the substantial reason for that. But we have a broad set of clients. And I think generally the demand from the hospital market looks -- sorry, from the medical device in this market looks promising. We had a little bit slower start in the first quarter, as you might recall, and we mainly saw from the Chinese region. We saw now in the second quarter that we are matching last year's numbers. The reason why we're not growing there is again related to the APAC region. Strategic Alliances is still low for the year. I don't see that as a larger concern. That's something we are working on. We have a lot of interesting dialogues with Strategic Alliances. I will continue to talk about that in a bit. And I will now move over to Gunilla to talk about the next couple of slides.

Thank you very much, Goran, and thanks for being able to present a strong quarter 2 for Mentice. As Goran has been alluding to, we have net sales in this quarter of SEK 74.3 million. This is actually the first time that Mentice is over SEK 70 million in one particular quarter. This is, of course, due to the large orders that Goran has been talking about, but we should also remember that growth looks really well as well and that is also due to Q2 last year being quite weak. So keep that in mind. We should also remember that we have currency impacts in our net sales, which is about 8.7% in this quarter, about 10% year-to-date. So that's, of course, also part of the margin improvement that we see as well. As Goran has been saying, it's Americas region that is really the strong growth over quarter-on-quarter, but also on the year-to-date level. The EMEA region bounced back in this quarter, so we can now see growth over the period. And it's APAC that is still in decline, and as we've been talking about, mainly due to the slower start in China. If we look at our segmental reporting -- it's on the right-hand side in the table there -- we can see that it's the system sales that is really strong in this quarter, and that is, of course, due to this repeat order from Medical Device, which is systems only. And then we can see that the system sales recurring is starting to become quite flat. The main reason for that is our own capabilities, and we are looking at increasing those capabilities during the second half, which means we can rebound to growth on that part again. We see as well the continuous move between software licenses on CapEx into recurring. So very similar numbers has been presented in the last couple of quarters. And the decline on accessories and spare parts that you see both for the quarter but also year-to-date is just timing differences. So nothing to worry about. And again, in the chart in the right-hand corner in the bottom, you can see the above SEK 70 million for the first time in the last quarters. Next page.

Yes. I'm moving over.

Goran was alluding to that SEK 125.3 million is a really good order book, and I agree. You can see on the graph on the right-hand side that this is now stabilizing on this level. We've been over SEK 125 million for the last 3 quarters. But also important to see is that about half, so SEK 54 million, is for 2023. So this is going to come in as revenue during the second half of this year. We can also see that we have a lot of the software subscription going into the next coming years. So this is the main part of what's behind or after 2023. So in 2024 and 2025 and onwards, that's the software subscription, which is also really alluding to the annual recurring revenue graph that you can see in the bottom. That is, of course, then this piece, it's the orange or more orange bar there, which is the software subscription part of our recurring revenue. So it's really good to see that this continues. And as we were talking about the system sales recurring, which is the rentals, that is really going to continue to grow in the second half. So nothing to worry about, that it's stabilizing on the level of SEK 18 million for now. If you press a few more buttons, Goran. Yes. So software license is up to SEK 39 million, which is then the highest we've had, but growing with a little bit of a slower pace. And in my view of life -- we started this model in 2019 and most of our contracts is 3 to 5 years, so we should see a bit of a slowdown, not because we are slowing down the sales, but just because the annual recurring trend in this is then getting to a bit of a slower growth path. Next page, Goran. So to summarize the second quarter, I think we are looking at a historic quarter for Mentice. I've tried to look back into the books of our company, and I can't find any second quarter being profitable on EBITDA ever before, of course, driven by these large orders from Medical Device. And we can see that very strongly in the quarter as order intake and net sales is above SEK 70 million, both of them. And that is because we have delivered that -- those orders that we received in the quarter as well, and they became net sales in the same quarter. Gross margin, 85.8%. It's also really good. It's still due to product mix, mainly, but it's also currency, remember that. We have the positive EBITDA, and again, really good and mainly driven by the gross profit that we incurred on the high sales. So it's as well the cost levels that we can see that we have contained and increased only in net with SEK 4 million. Based upon that, we decrease continuously our other costs, other external expense. And this is in line with the program we instigated in Q3 last year. But then the personnel cost, it's still because we are still capitalizing a little bit less than we've done in our past history to development projects inside balance sheet. We have a one-time pension adjustment coming into this quarter, and we have also put into our books and -- put sort of accrual for bonus to management based upon these good results. Last but not least, cash flow, which is my main topic of the world. I think it's the most important thing to be positive on cash flow. And we can see that we are positive in the cash flow with SEK 5.2 million, and this was what was really bad in the quarter of last year, looking at the negative SEK 18.3 million. So it's really good to see that we have been able to continue to generate cash flow. We've now done that for the last 3 consecutive quarters in a row. And we are also able to not increase our working capital as much as we did a year ago. So with that, I give the word back to you, Goran.

Thank you, Gunilla. So really as a summary -- I think most of this has been said. Really, really nice to see how we can start the year in this way. As we said last summer when we sort of initiated a slightly different approach with profitable growth, really making sure we can contain cost levels and increase the productivity of what we're doing. And as Gunilla said, it's really nice to see we have done that now with 3 quarters, and we're really getting a very good effect of that in the third quarter and for the first half year. Generally, we can see a very nice demand from the market. We obviously had multiple larger clients who are putting significant orders in, in both of the first, second quarter. But generally, I would say the demand from the market -- it's both an increased general demand and a market growth, but it's also competitive wins and us gaining market share. So that's a very nice combination. Also nice to see that the hospital market is back on par for the second quarter. And we have a hope to adjust the Asian market. That's really the reason why we're not back on track. So really, overall, super nice to be able to present this. And we have a very positive view for the remainder of this year as well and obviously going into 2024. So with that -- I mean, I would like to take the opportunity to -- sorry for jumping back and forth. A little bit slow transition on the slides. With this, I want to take the opportunity to thank Gunilla for her work. She's been with us for 2 years almost. And I mean, she keeps adding a lot of value with her know-how, [ professionalisms ]. And I just want to say thank you, Gunilla, and wish you all the best for the future. I'm sure you can add significant value to your next company as well. So thanks for that. And with that, we are done, Christian.

Perfect. Thank you so much for that great presentation. And now let's get to the Q&A. First of all, I wanted to really kind of elaborate a little bit more on different customer groups when it comes to order intake. During the last year, it seemed kind of like Medical Device customers were a little bit slower to put in orders. Would you say that was just a timing effect? Or do you think that the renewed strong order intake from the MDI segment is a sign that these customers have real confidence to invest even though there is a somewhat uncertain economic environment?

Yes. I mean it's a combination. I mean I clearly see there was a hesitation in 2022. But also we should remember as -- I know we talked about a lot in the Q4 Report and the Annual Report that we had a massive increase for Mentice with Medical Device in 2021. I think we increased with 60% over the year. And it's just logical that you see a bit of normalization before you get to the next level. But it's clearly -- I see that at the end of last year there was a lot of uncertainties in the market. And I mean, a lot of the big medical device companies sort of looked at where -- I mean, what we need to do from a cost perspective and things like that. And we generally see a much more forward-leaning approach to many of our larger accounts. I mean it seems like they are investing in the future in a different way. But it's also -- so it's a combination of the general market, but also obviously the planning of individual projects and the launches of new products, which is hard for us to control. So there's always going to be a bit of lumpiness and a bit up and down. But we see -- I mean it's not just -- even if we have a couple of larger clients in the first half year that have a dominance, there is a broad set of demand in the market. I mean 10, 15 of our largest clients overall have a strong demand, which gives us the confidence for the next coming quarters and the year and years. So yes.

Got it. And you also already touched on it in the presentation, but historically, you always have the strongest order intake during the fourth quarter. Looking at this year, do you think we will not see this pattern? And is this just an effect that we see this year? Or do you think it will become somewhat more even across quarters even during coming years?

No. I mean I talked a little bit about that, I think, in the presentation. We're just sort of highlighting a bit disclaimer, softening the expectation a bit that you will probably not expect 30% or more percent growth in the fourth quarter year-over-year. We had a strong Q4 in 2022. And given the very strong start in this year -- maybe we shouldn't expect a year-over-year growth of the same level in Q4. Still both Q3 and Q4 look very promising. So that's just what I'm saying, if that was clear.

Understood. Now looking at the large USD 2.4 million order that you received in the second quarter. Can you elaborate a little bit more on when this order will be delivered? When will it show up in net sales, so to speak?

Yes. I mean that's really one of the reasons why we sort of borrowed a bit from the future. We actually managed to deliver most of that in the second quarter, which is very nice, obviously. So a large majority of that order was especially shipped in the second quarter and taken to revenue in the second quarter -- past second quarter.

Got it. And when it comes to that -- such a large order from a client, obviously, if it's one of the largest MedTech companies in the world, it's not a lot of money for them. But for you, it's obviously a large part of your net sales. Can you talk a little bit more about whether there's any potential to transition these large customers to, for example, Strategic Alliances? Or does that depend more on what kind of strategic goals they have and how much the customer, so to speak, wants to collaborate?

I mean we have a lot more opportunity on the device side. And I think generally with Strategic Alliances, even if that's been focused on the imaging vendors, the idea is that we strongly believe in using these clients as partners, as channel to the hospital market. And I think that the imaging companies, the likes of Siemens and Philips and Canon, clearly is one avenue to that. But to your point, I think the medical device customers as well could be a very viable path or channel after the hospital market. I mean remembering that the hospital market is the holy grail, the ultimate large market where we just scratched the surface. But with that said, I mean there's so much potential still in leveraging the direct client -- in Medical Device as direct clients, there is much more on the -- what we've seen here now during the last half year with a couple of these large ones really increasing their use of simulation, that will continue. I mean we don't foresee a separation on these large accounts, the one that we have leveraged in the first half year or the trials around that. There's a lot of opportunities and a lot of growth in the market.

Very interesting. Now looking at the geographic distribution, you already talked about it a little bit, but would you say that the pattern during this particular quarter, a very strong growth in Americas, good growth in Europe and then relatively weak Asian market, do you think that's primarily an artifact of which customer groups were particularly strong? Or could you just elaborate a little bit more on how we should also think going forward about the growth and distribution geographically?

I mean we obviously see the U.S. market becoming -- the North American market becoming more -- even more important. And that's a transition we've seen over the last couple of years and I think mainly -- in my mind mainly driven by the introduction of the Medical Device regulation here in Europe, making it more difficult for device companies to launch new products here. Previously, a lot of these companies used Europe as their playground or their starting market for a new device, which is not the case anymore, which means a lot of these launches are actually happening in the U.S. because they don't have a time advantage to go to the other markets first. So that's sort of consolidating a lot of the U.S. headquartered companies' revenue back to U.S. So that's something that will happen. There's nothing that happened this year, that happened over the last, say, 3 years or so. But we can see that Europe is really delivering strong both on the hospital and the medical device side. So there we have a good distribution between the different business areas. On the Asia market, I think we have seen good development on industry but also hospital outside China. The main difference is really China that had sort of a slowdown for the first half year. Obviously, we should not forget that we had a larger order from Corindus Siemens in the first quarter of last year, which we didn't have this year. So that's sort of increasing the bulkiness. But even removing that, there's quite a bit difference or a bit decline in China year-over-year. So we obviously -- as I say in the report, we don't generally see this as a trend or an overall trend. We believe that we can recover and we see a lot of opportunities there as well, especially on the hospital market, but as well as on the industry side. And we see the U.S. device companies are continuing investing. And the growth level in China is larger than in anywhere else in the world for these device companies. So with that said, I mean I think we will find a way forward. And it's always hard to know why certain reason. Part of that could be us, part of that could be market coverage, it could be difference in regulation and things like that. I think just for us to continue the focus. And we have a good view of the future even in China. So we'll see if we can recover fully during the year or not. That's yet to be seen, I think.

No, that's really helpful. Now looking at profitability, can shareholders expect that you will post positive profitability every quarter now? Or does it somewhat depend on, for example, order intake and net sales? So do you think it's going to be especially distributed to be able to post profitable quarters consistently now?

Yes. I mean I will have a difficulty with my Board if I say so much here -- too much here now. But I mean I think that our ambition is to be positive per quarter. I think to your point, the lumpiness of delivery and orders -- sorry, delivery and hence net sales might cause issues in a certain quarter. So I think our overall ambition is to make sure that year-to-date wise, we need to be cash positive. We need to manage our costs versus order intake. And obviously, our ambition is to be both cash positive and profitable on a yearly level. But you can still have a quarter, an individual quarter that is lumpy due to the character of our business.

And looking at specific expense items on the income statement, which you already touched on a little bit. For example, personnel costs, can we expect that as you scale going forward, those will stay at around SEK 40 million? Or how should we think about that development going forward as the top line growth, so to speak?

So we -- from last summer, we clearly have an imbalance and the productivity, revenue generation per employee in our mind, mine and Gunilla's mind, was too low. And so therefore, we have said let's keep the cost level and try to push the top line so we can get into balance. And now, I mean, simple math. If you look at the first half year, we are -- we have increased from just south of SEK 2 million per employee up to almost SEK 2.5 million. So we have increased that over the last few quarters with 30% or so. With that said, obviously, we can't expect to continue to grow with the same staff. We need to increase more sales people, and sales people generating the requirement for more support, for more development, but also then more operations. So we will sort of follow where we are. And obviously, when we see we can add more people, we need to do that because that is really fueling the growth going into '24 and '25. I mean I -- we don't really need more resources to reach our 2023 targets. So that team is on the payroll. But in order for us to really continue with this growth level into 2024 and '25, we need to very soon start adding people. And we have that discussion. We haven't yet taken any decisions on that, but we need to start adding people in order to be prepared for '24 and '25 demands, if that makes sense.

Definitely. And looking at other external expenses, which Gunilla already touched on as well, it was around SEK 7.5 million, I believe, in Q4 and then SEK 12.5 million in the first quarter, and now SEK 15 million. Can you elaborate a little bit more on which factors affect other external costs? And then also how we should look at that going forward given the activities that you have planned?

I will let you answer that, Gunilla.