Prodways Group SA (ALPWG) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Prodways Group 2019 Results Conference Call. I now hand over to Elodie Robbe-Mouillot, Investor Relations. Madam, please go ahead.

Good morning. We remind participants that this presentation contains statements on past events and forward-looking statements regarding future goals or targets. Forward-looking statements reflect current expectations for results and future events that depend on known and unknown risks, uncertainties and other factors. Some of these risk factors are set forth and detailed in our annual reports. I now hand over to Raphaël Gorgé, Executive Chairman of Prodways Group.

Thank you, Elodie. Good morning. Thank you for joining us today for Prodways Group results. Olivier Strebelle, Prodways Group CEO, and I will first update you with our full year 2019 operational highlights. Then Laurent Cardin, our new Prodways CFO, Group, will share our full year 2019 financial highlights. And finally, Olivier Strebelle and I will provide you with an update of how we are dealing with the unprecedented COVID-19 crisis and our 2020 perspective. Let's start with our 2019 operational highlights on Slide 5. We are very happy with the past year, as we delivered all our top 2019 priorities. First, we and especially Olivier continued to consolidate and integrate Prodways Group to shape its future. Second, we achieved some significant commercial successes. And third, we continued to seize targeted M&A opportunities to strengthen our capability with the acquisition of Surdifuse L'Embout Français in January. And finally, we continued to deliver revenue growth of plus 17%, exceeding our peer group, and continued to improve profitability, reaching EUR 5.3 million EBITDA in 2019. I will now leave the floor and introduce you to Olivier, Prodways Group CEO, to comment those successes.

Thank you, Raphaël. I'm Olivier Strebelle. I'm the CEO of Prodways Group. A few words about myself before we get into the presentation: So I joined Groupe Gorgé in 2014 as EVP for business development. Prodways was by then a 30-people company. Before joining Groupe Gorgé, I spent 10 years at McKinsey & Company, the consultancy firm, both in the London and Paris office. And before that, I graduated from an engineering school in France, École Centrale Paris. Since 2014, I've been mainly focusing on the development of Prodways Group, at Groupe Gorgé first, until I became CEO last summer. So moving to Page 6. 2019 has been indeed a successful full year of integration and consolidation for Prodways Group after a phase of accelerated growth, especially through acquisitions. In 2019, 4 pillars have been leveraged on this topic of consolidation and integration. First, we implemented a strong people strategy, putting in place the [ We Are Prodways ] culture across the company, finalizing corporate staffing and strengthening Prodways Group's HR policy. Second, we implemented cost and revenue synergies, especially within our printers and materials activities on one side and within our earmolds companies. Thirdly, we enhanced sales and marketing, implementing commercial synergies and sharing commercial excellence across the group. Finally, we continued to transform the group through operations enhancements and accelerated digital strategy. All this groundwork had already strong impacts in 2019, especially on profitability improvements, and will continue to bear fruits in the years to come. On Slide 7, we highlighted some commercial successes we are particularly excited about. So first, we announced at the beginning of the year 3 major successes for our printers product technologies in R&D and manufacturing applications with 3 chemical leaders with whom we already had some strategic agreements on materials. We sold indeed 7 printers to BASF, DSM and Arkema for R&D on new materials and industrial applications [ out of our product ]. These successes validate our product offering strategy and our strong [ signal ] from leading chemical companies regarding the 3D printing potential for industrial applications. Second, in 2019, our MOVINGLight technology gained traction in the dental and clear aligners sectors, where the productivity and accuracy of our printers are paramount. Linked to the growth of the clear aligner adoption, we had great technical and commercial successes in 2019, with blue chips customers who have been launching their clear aligners offers and are moving to industrial production phase. Thirdly, we saw as well in 2019 successes in preproduction, testing out 5 MOVINGLight machines for aerospace, with milestone reached. Moving to Slide 8. In January 2019, we acquired Surdifuse L'Embout Français. Surdifuse L'Embout Français is a major French player in the manufacturing of customized ear tips, for which 50% of the productions relies on 3D printing. This transaction is part of our vertical integration strategy and strengthen our medical activities, which are a major growth driver in the Products division. Through the merger between Surdifuse L'Embout Français and Interson Protac acquired in 2017, we ambition to become the French leader and one of the main European player in both the customized ear tips for hearing aids and for the hearing protection by [ end ] markets. The synergies between these 3 historic players are being implemented through common brands, the launch of new 3D-printed products and the enhancement of clients' proximity and digital services. As shown in 2019, we remain ready to seize M&A opportunities that will bring us complementary skills or strengthen our existing capabilities. I will now hand over to Laurent Cardin, our new CFO of Prodways Group.

Thank you, Olivier. Moving to Slide 10. In 2019, revenue stands at EUR 70.3 million (sic) [ EUR 71.3 million ], up plus 17.1% compared to 2018 and plus 6.3% on a comparable basis, exceeding listed peer group. EBITDA rises to EUR 5.3 million, up plus EUR 4.1 million compared to last year, thanks to the second half strong progress in profitability despite the traditional seasonality in the product division. IFRS 16 standard contributes EUR 2.1 million to this performance. EBITDA margin increased strongly at 7.5% compared to 2% in 2018. EBIT stands at minus EUR 0.5 million (sic) [ minus EUR 1.5 million ], up with EUR 1.4 million (sic) [ EUR 2.5 million ]. After taking into account other items in operating income for EUR 2.4 million relating mainly to the amortization of intangible assets recognized at fair value during the acquisition, restructuring costs and free share allocations, operating income improved by EUR 1.2 million to minus EUR 3.8 million in 2019, driven by strong performance in the second half. Financial results stand at minus EUR 0.3 million compared to minus EUR 0.1 million in 2018. Taxes are minus EUR 0.3 million compared to minus EUR 0.6 million in 2018. Finally, the net result group share stands at minus EUR 4.2 million, up plus EUR 1.3 million compared to 2018. On Slide 11. The Systems division, comprising 3D software, 3D printers and related materials and services, reported revenue of roughly EUR 45 million for the financial year, an increase of 16.8% in reporting terms and plus 7.6% on a comparable basis. In the second half of 2019, the division's revenue was EUR 23.6 million, up plus 5.2%. This performance reflects contrasting situations within the division. Historical businesses, in particular MOVINGLight positioned itself in the orthodontic clean aligner market, and commercial successes were achieved with leading chemistry groups and in Rapid Additive Forging, whereas Solidscape jewelry business was slow to recover with the launch of new machines. The Materials business continued to record double-digit growth, and the Software business maintained a good level of performance throughout the year. The division's EBITDA continued to improve and stood at EUR 3.3 million, up with EUR 2.2 million in 2019, driven by the second half which contributed EUR 2 million to this growth. The EBITDA margin was 7.4% in 2019 versus 2.9% in 2018. The division benefited from the remarkable performance of the sales of Materials business, which enjoyed a margin of more than 20% and offset the impact of constantly significant expenses related to the development of the machine business. The division's operating income improved plus -- by plus EUR 1.2 million and stood at minus EUR 1.7 million in 2019. It came close to breakeven in the second half of 2019 at minus EUR 0.5 million compared with minus EUR 1.2 million in the second half of 2018. On Slide 12. The Products division, which comprises the design and manufacturing of parts on demand and medical applications, recorded revenue of EUR 27 million for 2019, up plus roughly 18%, plus 3.1% on a like-for-like basis. In the second half of 2019, the division's revenue was EUR 12.8 million, up plus 16%. The division benefited from the contribution of Surdifuse L'Embout Français acquired in the first quarter of 2019 and from the double-digit growth of our historical businesses in hearing protection and podiatry as well the strong performance of parts production. The recovery in the Dental business continued, although the business was still down year-on-year. The division's EBITDA was up sharply at EUR 3.1 million for the year, an increase of EUR 2.6 million compared to last year. Profitability increased by EUR 1.3 million in the second half to EUR 1.4 million despite seasonality affecting the parts on demand design business. The audiology business recorded remarkable growth, and podiatry benefited from the measures implemented to improve operational efficiency. Operating income was close to breakeven at minus EUR 0.2 million for the year compared with minus EUR 1.4 million in 2018. Moving to Slide 13. The notable improvement in the group's profitability was reflected in a EUR 6 million increase in operating cash flow, boosted by IFRS 16 lease standard by EUR 2.8 million and the improvement in working capital requirements by EUR 2.7 million. During the year, the group maintained a high level of investments at EUR 13.2 million, of which EUR 6.2 million related to acquisition of Surdifuse L'Embout Français, the AvenAo earnout payments and the acquisition of Interson Protac minority shareholders as well as investments in printers activity [ and initial new ] showroom. As of December 2019, net cash excluding IFRS 16 and with treasury shares totaled EUR 9.6 million versus 29 -- versus EUR 20.9 million as of January 1, 2019. I will now leave the floor to Raphaël Gorgé for the 2020 perspectives.

Laurent, thank you very much. Before moving to our 2020 perspective, we want to provide you with an update of the COVID-19 situation. Obviously, like most of the company, our highest priority is to ensure the safety of all our 500 employee all over the world, and Prodways Group has organized itself in each country. Business continuity plan have been activated and the remote work of the team have been set up. What is important is that, as you know, most of our activity are digitalized, which mean that in a normal situation, the contact with employee with customers are, we think, relatively reduced compared to traditional activities. So it was a significant advantage that enable us to maintain a certain level of activity. Obviously, there is and will -- there will be some significant impact of COVID [ business ] even if it's a little bit too early to give you precise figures about that, and we will comment on that later on as soon as we will be able to do. Another important comment is that Prodways Group has started 2020 with a very strong financial position. And we took the decision with Olivier in the beginning of last week to draw our credit line facility, which puts the cash position of Prodways Group at -- today of -- at the level of EUR 21 million cash, which makes us in a very strong position to go through this crisis. So in this current uncertain context, it's too early to comment on our 2020 revenue objective. And now Olivier will comment on the 2020 trends in the industrial application, materials and parts.

Thank you, Raphaël. Indeed 2020 focus is currently and will be on industrial application. On Slide 16, you can see one of our key 2020 initiative regarding industrial application for our printers' activities. Last month, at lab days in Chicago, we unveiled our end-to-end clear aligners manufacturing ecosystem. Indeed, clear aligners are experiencing significant growth as they are gaining market shares for orthodontics treatments and as a new market for cosmetic kit realigner -- realignment is opening up. Our clients now want solutions to design and manufacture clear aligners, where 3D printing plays a cornerstone role. This is why Prodways has developed in close collaboration with the top leaders in digital dentistry, 3Shape and FullContour on 3D scanning, data preparation, treatment design; Dreve on thermoforming; and imes-icore on laser marking and trimming, the Clear Aligners Manufacturing Ecosystem. This ecosystem provides a seamless hardware-software integration between each of these steps with a high level of automatization to manufacture up to 1,200 aligners per day at a low cost per part, corresponding to 1 to 2 machines and 2 tons of material per year. Still on the printers' activities. We are having great momentum in the first months of 2020 with 4 3D printing industrial clients who could lead to multi-machine deals from 2020 and onwards. So 2 in the clear aligners field in the U.S. and 1 fast-growing leading clear aligner player in Europe. On top of that, we are as well moving to preproduction phase at a leading global aerospace player where we already have 5 of our printers. Moving to Slide 18. Focusing on industrial applications is also having an impact on our materials activity. The share of Prodways printers installed base of more than 5,000 printers focusing on large-scale industrial application is increasing. Our 2019 technical and commercial successes in dental and clear aligners application will have a positive impact on our material activities in 2020 and profitability. This trend confirms Prodways Group positioning on industrial applications of 3D printing, and an integrated offering with parts, printers, material, with 70% to 80% of [ 5 years ] revenues which are driven by recurring material. Moving on to Slide 19. Focusing on industrial application is having as well a strong impact on our Products division activities. We have launched and developed already 2 industrial application of [ thousands ] parts per year in the field of health at Prodways, growing at more than 20% per year. Launched in 2016, Scientifeet by Prodways sells 3D-printed orthodontics -- orthotics insoles to podiatrists. We provide the scan system and software to podiatrists and print at our service bureau INITIAL the insoles that we will send to podiatrists. As of today, we've sold around 150,000 insoles, mainly in France. This activity has been growing fast over the past years and grew again by more than 20% last year. The second example is our hearing protection activity at Interson Protac by Prodways. This application has been as well growing at more than 20% last year to address the field of hear protection in industrial companies, where we have been selling more than 25,000 hear protection last year. These 2 examples are pure examples of mass production of unique parts made possible by 3D printing. We expect to expand to other domains such as the defense market, where we are seeing strong interest for service production. To conclude this perspectives session. In 2020, we will continue to build on our broad portfolio of solutions to catch major opportunities, with a very strong focus on industrial application, powering innovative manufacturing, designing and producing innovation and providing solutions for improving lives. Operator, we can now open up to questions.

[Operator Instructions] We have a first question from Anthony Dick from Portzamparc.

I had 4. And so my first question is in terms the margin improvements over 2019. A lot of that improvement came from gross margin improvement in H1. Is that also the case in H2? And is that purely a mix effect, or are there other effects at work here like synergies or others? And second question, on the margin. You mentioned that the investment in machines has impacted margins last year. Would that also be the case in 2020, or are you going to scale down or stabilize these investments this year? Third question was on the new metal 3D printing, Rapid Additive Forging technology. Could you maybe give us an update to what's going on? How is that -- how that technology is developing and when you expect to commercialize, fully commercialize that technology? And finally, last question, on the impact of the COVID-19 situation. Could you give us an indication of what -- as to the -- what kind of level of activity are you currently operating on? And if we were, for example, to extrapolate that for a couple of months, what kind of impact would that give?

Okay. Thank you very much. Let me take the first question, on margin improvement. So we did had a great H1. We continue to have the -- a great momentum in term of margin improvements in H2, although typically in H2, during Q3, we are impacted on our Products division by the summer break. But the improvement on margin continued as well during H2. And overall, this is the improvement that we've seen last year are not only a mix effect. It's as well, as I was mentioning, the impact of the synergies that we are currently putting in place and the consolidation that is happening at Prodways Group, both on the costs and then the revenues elements.

Okay. This is Raphaël Gorgé. We'll come back on the 3 other question. First, about the investment in the machine division. As you know, the development of Prodways has to balance between the target we have to improve profitability and also the challenge to be always at the top in term of technology and machine and technology development. So as I mentioned, as the turnover is growing in term of percentage, the investment we put in machine will decrease over the year. And even with the level we have now, it enable us to stay at the highest level of the technology. And as you know, we are competing with other competitor who don't have the same strategy. They are focused on machine and only machine. Some of them started. Some other are big group. And as far as I know, they are making huge losses. And we think, we are convinced that it's not the right strategy; and the balance between being present on the product side and also on the machine side is for us the best approach. And also focusing on plastic is also the right market to target. And we will continue this strategy. About the Rapid Additive Forging and -- or big metal machine application: We have encountered nice success last year with the industrial partnership. We think that this project by itself has a huge potential. And over 2020, we might consider why not opening this project to other partners. It could be financial or industrial, but this could be a good strategy to share this project with other because the potential by itself is huge. And also, about COVID-19, I will leave the floor to Olivier Strebelle.

Yes, COVID-19. At the beginning of this week, we are currently running at more than 50% of our level of activity.

Sorry. Was that 50% or 60%?

50%.

50%, okay...

And the idea is that we are just [ days after day ] and obviously using all the governmental possibility of partial unemployment.

Okay. So you expect the margin also to be somewhat limited.

It's a little bit too early because it's hard to balance between the positive effect of partial unemployment and the level of activity that we are able to maintain. Because as I mentioned, in all the activities, like software, even machine and products, most of them are digitalized. So we are continuing to have an significant level of activity.