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

My name is Rikard Engberg, and I'm an equity research analyst at DNB Carnegie Bank. With me, I have Frans Venker, CEO; and Ulrika Drotz, CFO of Mentice, to present the Mentice Q2 earnings. Welcome, Frans and Ulrika.

Thank you, Rikard. Thanks for having us.

So the scene is yours.

Thank you, Rikard. So we are going to present the Q2 interim basically report, which we have in the earnings call today. So myself, Frans Venker, together with Ulrika Drotz, our CFO for Mentice. And what we have today is, first of all, highlights in an overview, which I will present, the financial results by Ulrika. I have some concluding remarks, and then we have questions and answers effectively what we see. So what we see is overall key strategic measures that we implemented within the Mentice organization in a cautious market. And so we had net sales of SEK 63 million. And what we saw is that the rolling 12 months net sales came out at SEK 261 million compared to SEK 281 million last year -- last quarter, which is 7% lower than effectively the previous quarter on a rolling 12 months. Order intake, SEK 57.5 million, also rolling 12 months, down 3% due to primarily weaker demand in APAC. And that's also what we see is flat sales activities across EMEA and Americas. We see the order intake of growing in EMEA and Americas, but APAC is where we see a weaker demand, and that is primarily also due to the lumpiness of the business, but also the development that we need to do with the medical device industry in order to capture that growth. Overall, we saw -- we had FDA clearance, but also Brazilian clearance for our new release of Ankyras, and that is really advancing our product offering across those markets. And also what we see is that we are tracking towards the business case that we had, as I said when we implemented this also as an acquisition for Ankyras, and we're tracking well in that and also are discussing also with other companies, medical device industry companies in order to sign up towards Ankyras and make them part of the ecosystems in order to drive flow diverters as also measurement of our pre-procedure planning. What we did this quarter was as well as a strategic workforce alignment, which was initiated and announced in June of this year. And it enables an estimated annual cost savings of approximately SEK 25 million. We have finalized and implemented this realignment now. And so that is in full execution, and we expect also the first results already to come in also in Q3 of this. What we also did with this is a rights issue towards our shareholders up to 10% receipts of the shares. And what is very good news is that there is a significantly high underwritten of -- underwriting of these shares up to 66%, which means that there is strong support not only from our current shareholders, but also from our Board, and it is also our management team towards the strategy that we have implemented for growth. And for that reason, we see it as a positive outlook. Healthcare Systems business, as we also stated in the first quarter, is under review, and we're looking for ways in order to drive a compelling value proposition also in this space that can be grown. We're doing this together with the team in order to see what kind of proposition actually can scale and how we can drive revenues for the next years for our hospital business. What we do see, of course, is that in the United States, a new bill was being released, the One Big Beautiful Bill. And that will also require us to be very specific on clinical evidence towards how we are going to drive solutions in the market and how they impact actually Healthcare Systems in, first of all, improving outcomes, but reducing also the cost base. And that's what our simulation solutions are designed for and that clinical evidence will be part of that Healthcare Systems business review that we have implemented. So in all, if you look at the business highlights, as I stated, we did a strategic workforce alignment that we initiated in June and already have implemented now and it's towards July, where the cost savings are coming in, in Q3. We did this with quite a bit of speed in order also to make sure that those benefits are kicking in effectively quite soon. And as stated also, this will help us with SEK 25 million on an annual basis from a cost base reduction standpoint. What we do is -- also did as part of that reorganization is that we consolidated our research and development, but also manufacturing activities for physical simulation towards Denver to Denver, Colorado. And that finalizes then also the vascular simulation and also Biomodex integration that we initiated a few years ago as part of acquisitions, and that basically finalizes then the integration of that. Now we have continued partnerships with 27 of the 30 largest medical device industry companies. And they are really reward us for our unique capabilities that we have towards our realism and realism that we offer as part of simulation towards devices that we implement for device companies and help physicians and care providers to provide patient care. But our strong commitment, what we see from those device companies is helping us also towards the solid activity that we see in the remainder of the year for business going forward. We have done and are doing a strategic view of our Healthcare Systems market as I initiated as well and see for ways for sustainable, profitable growth for the years to come. Ankyras, I explained as well in Q2, what we saw is that we got clearance in Brazil and the United States. And that is helping us and will drive already profitable growth also for Q3 from an impact standpoint and helps us also to become part of the treatment base and the treatment market of our business. Then finally, what we have done is for foreign exchange, we have hedged our dollar and euro for the remainder of this year. And so that will help us in order to compensate for fluctuations that are coming towards, yes, basically the Swedish krona. And finally, the rights issue, what I explained, up to 10% of the share capital, what was announced. We expect this to be closed by September. And as I stated also, this was quite positive and underwritten towards the -- from the current shareholders, but also supported by the Board and the management team of Mentice. So in all, that will help us set up for future growth and profitable growth for the future to come. Maybe Ulrika, if you could give a little bit more details towards the financials, please.

Yes, thank you. I'm happy to. So I will start with giving you some of the highlights for the second quarter 2025. Net sales, SEK 63 million. Compared to last year, yes, it's a decline organically of almost 33%. And we need to remember that Q2 2024 was the so far all-time high record with sales over SEK 100 million. So we are comparing with a very, very strong quarter from last year.

Fair point.

The order intake, SEK 58 million, an organic decrease of SEK 40 million. Yes, there is an FX effect as well. And when we look at, as Frans mentioned, the cautious medical device industry market and Americas being our biggest market, this actually affects -- the main impact comes from the Americas and above all, also from APAC. From an EBITDA level, it's a minus result of SEK 8 million. We have in these minus SEK 8 million costs taken for the strategic realignment that Frans mentioned. So adjusted, it's more or less a quarter where we reached a 0 level of EBITDA. The order book has a growth of 4.3% if we compare with the second quarter 2024, although there is an effect of FX with a reduction of minus 5%. Of the order book of SEK 112 million, the majority is planned for 2025, almost SEK 62 million. And the operational cash flow, yes, it's affected by the result during Q2. So it's minus with SEK 7 million. To comment a bit more about the cost and the effect of the strategic realignment, and we've said many times in these earnings calls that we prefer to look at our business from a rolling 12 months perspective. And the following graphs that you will see are based on a rolling 12 months perspective. So the sales has had a negative development of minus 7%. And the EBITDA, what was, as I mentioned, affected with SEK 7.6 million that was taken in the quarter, and we estimate this to be the full cost for the strategic realignment. And these costs are related to 2 separate areas. The biggest one is the workforce reduction where the majority has happened in Sweden, but also in the U.S., France and Spain. And the second part is cost for consolidating the Physical Sim business from Paris and Stony Brook outside of New York to Denver in Colorado, which Frans also mentioned. And we estimate the annual cost savings of these actions to be towards SEK 25 million. On a rolling 12 months perspective, looking at the order intake, we see a growth within the MDI, the Medical Device Industry segment, which is our biggest segment. We see an increase in the Americas region and in the EMEA. And this is unfortunately more than offset by the drop in APAC. And the second quarter last year was a very strong quarter for APAC. So this actually also affects these figures. Looking at HCS, the Healthcare segment, there is a stable growth in all the regions. Looking at net sales, order intake becomes net sales. So from a rolling 12-month perspective, we see a decline of 7%. This is an effect of the very strong quarter in 2024 and the cautious market within the MDI segment, which affects the region Americas and APAC. And we see for EMEA a stable growth, both within the MDI segment and the Healthcare segment. And finally, some comments about the recurring revenues, where we see an increase of 9% versus last year, and we see the biggest increase in the software licenses, where we also see that we have 58% of these revenues coming from the region EMEA and 35% from the Americas.

Very good. Thank you. So I would like to make some concluding remarks. So what we see is a cautious market overall due to macroeconomical factors, and that is affecting our business also. Still, we have a solid pipeline and interest from the medical device industry despite what the longer sales cycles that we currently see. New clearances for Ankyras, which we have for Brazil, but also the United States. And that keeps us on track, for growth, but also contribution -- profitable contribution in the third quarter. Positive effect on basically the reduced cost that we implemented for the strategic workforce and the realignment that we have done, as also the rights issue that we implemented and just announced also. Again, it means a SEK 25 million on an annual basis from a cost base reduction standpoint. The rights issue will generate approximately SEK 32 million and will contribute towards, first of all, our cash position, but also investments that we're doing towards growth, both in R&D, but also in our sales organization in order to capture profitable growth for the years to come. And again, I would like to state that it was underwritten well by currently the first -- first and foremost, the shareholders in place, but also the Board and the management team, which really underlines and supports the strategy that we have implemented for growth, not only in the medical device industry segment, but also for health system sales as also for robotics. And also that latter part, the continuous long-term strategic focus on strengthening the business for our Healthcare Systems market is going to be critical. And despite laws that are basically are implemented in the United States, we see ways in order to truly drive profitable growth there and make sure that we have a profitable future for the years to come. So in that, what we see is that business highlights, it is what we see, as I stated, extended procurement cycles. We have done the workforce alignment, regulatory milestones as also our approach that we're currently looking towards the image-guided interventional therapy space. With that, I would like to give it back to you, Rikard.

Thank you, Frans and Ulrika. And I have prepared a couple of questions. [Operator Instructions] So my first question is, what are the main measures that you have taken in order to achieve close to breakeven adjusted EBITDA despite the sales development in the quarter?

No, it is primarily 2 measures, but also Ulrika, correct me if I'm wrong. It's, first of all, the high gross margin that we basically have for our product portfolio, which is just over 90% this quarter. And that is primarily due to, first of all, cost reduction measures that have been implemented within the cost -- in the portfolio. So especially the hardware portfolio. It is also the mix where we are focusing more on software sales than only on the hardware components to it, and that really supports us, as also a geographical mix will also play into this. When it comes towards also the EBITDA levels, it is also related to very strict cost measurement. And that's also what we have in place in order to make sure that we really look at, first of all, our discretionary spend, but actually our overall spend in order to make sure that we get the profitability where it needs to be. And to your point, this really sets us up very well that if we get and when we get the revenues to grow and really grow, it will really offset and help us towards EBITDA levels for the years to come. So that is the mission that we need to drive is profitable growth, but growth for Mentice.

Okay. Great. And have you taken any initiatives for the APAC market in order to return to rolling 12-month growth?

Yes. Because what we see is that, first of all, there's quite a bit of lumpiness -- or lumpiness, but indeed, it comes in chunks actually in time. And so what we have done as part of the strategic review that we implemented in Q2 and is still ongoing is that we're looking at the Medical Device Industry market in order to see how we can grow this more effectively also in the APAC side. So we do this globally, but we also would like to see this basically growth in APAC because the activity is there, and we anticipate also that we can grow in this area. And it's simply that is our commitment that we are driving at this moment, so it's currently under strategic review and more on this on basically the next months and quarters.

Okay. Great. And historically, Mentice has seen quite lumpiness over quarters and will emphasize on the second half of the year. Is this a pattern that you might -- that might repeat itself this year? Or has the seasonal pattern changed?

Of course, we hope that. What we do see is that we have solid activity both on the Medical Device Industry side with deals, which were also already ongoing in Q1 and Q2, which we expect actually to close in the latter half of the year. So I would say solid activity towards Medical Device Industry side. Hospital is basically continuing as expected. So in that sense, we expect a decent, a good Q3 and Q4.

Okay. Great. And also, can you explain what is driving the rolling 12 months growth in sales in both EMEA and the Americas?

Yes, sure. It's related to our activities and our strong position that we have with the Medical Device Industry businesses and the companies. What we do see is that we are connected and partnering with 27 of the top 30 Medical Device Industry companies. And what they really reward us and also tell us that we are unique from a realism perspective. So we have the ability to truly provide simulation solutions that help the Medical Device Industry in order to teach but also train their physicians to implement new devices. And we are rewarded for that in our unique solutions that we provide. And for that, that is also driving the growth if it comes towards the European or EMEA perspective, but also the Americas. And so we saw our order intake also from a rolling 12 months. We saw it actually growing quite significantly, almost -- both almost double digits. And so -- but that was unfortunately offset by what we saw in APAC. So especially in EMEA and Americas, that was doing well. Did I miss anything, Ulrika?

No, I think you put it together nicely.

Okay. Great. And moving on forward to equity rise, how approximately will you use the proceeds that you will get in this?

Yes. So what we have done is a rights issue indeed, which was announced today. Our expectation is that we're going to get approximately SEK 32 million out of this. And that will support 3 things. That is, first of all, the cash position that we have on hand. The second piece is related to investments, investments for growth opportunities that we see for the future to come. Those investments will go, first of all, into R&D and innovation in order to drive realism further that is required, especially for the health care market where they, for example, would like to have patient-specific simulation, which means that you can navigate or simulate on a patient that is actually not simulated, but the real patient on the table and that you can do that in a virtual environment. So that is what we would like to bring to market. Secondarily, it's also linked, as I stated also towards clinical evidence and business proof points in order to sell our solutions in the market, but also with the right sales organization that we have done in place with the support structure. So it is -- that is what we are driving of what we are doing with the proceedings. It will approximately be even 1/3, 1/3, 1/3 with respect to what we get out of this.

Okay. Great. And now moving on to some questions while we're looking forward a bit. So basically, first of all, what is like the main area where you aim to see cost reductions going forward given the announced programs?

So cost reductions, going forward, what we have actually implemented already is basically a reorganization. And so we have driven efficiency and effectiveness measures. So we have consolidated, for example, our efforts into basically the physical simulation activities, which we're bringing over to Denver. And we're really committed to the portfolio going forward, but in a more efficiency and effective way going forward. At this moment, we need to remain frugal from a cost base perspective, but I don't see further cost reduction measures needed. Ulrika, anything you see where we need to do that?

No, I think the measures that we have taken now is to support the strategy for the growth going forward. And there are, as you said, cost reductions within the consolidation of the Physical Sim. And then obviously, the majority of the cost reduction comes from workforce reductions, which have been done both in Sweden, the U.S., Spain and France.

Okay. Good. And how has the market received the new updated Ankyras products? And what is your strategy for this going forward?

Very good question. So actually, it's gone quite well. So we -- it is according to our internal expectations also when we acquired Ankyras. And especially with the current approvals and clearances that we received in the United States as also in Brazil, we see the uptake also coming along. And so it is tracking close towards what we anticipated from an uptake perspective. And currently, we are in discussions also with other device companies in order to see whether we can accelerate this growth. We really need this Ankyras project -- product also in order to support our business if it comes towards pre-procedure planning and especially to get into treatment of the neurovascular domain. And so the link that we can provide and also to our virtual simulation, so the combination of vertical simulation as also pre-procedure planning is a unique but also very powerful solution in order to grow in the health care space. So we anticipate this to be a stepping stone, not only for neurovascular, but potentially for other clinical domains as well, where we would like to do similar measures in order to grow our business going forward.

Okay. Great. And also, like if we look on the -- the Healthcare segment, how is the strategy for that going forward?

It is something, which is currently under review. So because -- so we have been in this market for quite a while, from my perspective, not growing fast enough, and that is related to we need to create more clinical evidence on our outcomes, how it contributes towards cost reduction and also how it contributes towards clinical outcomes. And that is what we're currently looking at it with the team in order to see, can we create propositions that are easier to scale towards larger networks of delivery networks for health care in order to grow further there. And that is our anticipated strategy, what we will do, and we will hear more in the second half of how we're going to do this. So we're currently reviewing it. It is not in execution yet. We're reviewing the strategy as we speak.

Okay. Great. And lastly, can you please discuss a bit on how the new US budget rules and bills will affect your business going forward?

Yes, it's a very good question because there's a lot happening in the market, specifically also in North America, where there was a new bill going through Congress, the One Big Beautiful Bill. And what you see is that -- and also what you read from the news is that it will have quite an impact in the future of patients who are going to be insured under Medicaid. And that will probably also have an impact towards revenues of hospitals. And so it will have a negative impact of hospitals. And specifically, what we read is that -- and what we see and anticipate is that for smaller hospitals, they will be more impacted. And what it means for us is that our solutions are even more important, as I said, first of all, to support clinical outcomes, but also cost reduction for hospitals, especially when it comes towards image-guided interventional therapy clinical procedures. And we need to make sure that we have the clinical evidence that is supporting those outcomes so that we can show that our solutions help in order to -- with clinical treatment care. So in that sense, it confirms our strategy that we are relevant as simulation and that we need to drive those solutions in order to improve outcome, create access to care, be there for care providers and lowering cost.

Okay. Excellent. Frans, Ulrika, thank you for coming here to DNB Carnegie Bank. And thank you, everyone, who has been watching.

Thank you, Rikard, for having us.

Thank you.