Mentice AB

STO:MNTC

Earnings Call Transcript 2021-Q2

[Martin Harris, Global Vice President of Marketing]

Hello, and welcome to the Q2 2021 report for Mentice. My name is Martin Harris, I'm the VP of Marketing. And with me, we have Göran Malmberg, CEO and Group President for Mentice and will be joined by Elisabet Lund, CFO, for the Q&A session at the end as well.So Göran, just hand over session to you.

[Göran Malmberg, Group CEO & President]

Thank you, Martin. So good morning, everyone. So -- and it's nice to be able to present the second quarter of 2021. So I direct in here disclaimer. You'll need to spend a little time on. That's me, seen that enough. So really going in directly into the details, I have some comments on the side. I mean, obviously, it's really nice to see -- for me to see that we have been able to execute in the way we have in the second quarter, but also for the first half year. And we have addressed some of the issues that I've had in the end of last year but also going into the first quarter. So really, really nice to be able to present this. And I think we are on a good path to where we want to be.So first, a couple of comments on the business status. We see a continued very strong medical device demand. Really globally, we have had strong order intake from all regions. We are up almost 60% for the first 6 months compared to last year. This is really, really nice. We also see that the Americas region that had a really, really good year last year, kind of the best ever last year, but we're still continuing to grow there, which is nice since that's the market we invest mostly. So we are up almost 50% year-over-year for the first half year on order status. And we see that America for the full first 6 months carry about 50% of our total business, which is where we want to be.We also see that APAC continues to develop in a good way. We had a very strong first quarter, but we're also continuing with a good second quarter. So we are about 2x the same period for last year for the first 6 months. Obviously, on lower demand compared to America, so it doesn't affect the total business as much, but it's about 25%, which is where it should be.We can see that APAC is mostly carried by China and Japan, where we have other parties -- parts of APAC that still is very much impacted by the pandemic, like kind of India, that's one example. So we hope we have some further upside there.In EMEA, we see both in Central Europe and the Middle East. It's really the market that we -- that is most affected by the pandemic and that's still the case. And we have had a decent business in Q1 and Q2, but not to the level that we have expected. So that's also an upside, we will say, for the second part of the year here and going into next year.Generally, we see -- I mean, again, we see a delay from the health care segment, which also impact the strategic alliances part of our business related to the pandemic. And even if you see the Americas region is coming back to almost normal in terms of traveling and possibility of meetings and things like that. It's still affected from the financial implication from the pandemic. And we see in Europe, obviously, we still have a difficulty in getting meetings, especially when we don't have staffing in the local countries. So that's clearly an upside for the coming quarters. And it's always very nice to see that we've been able to carry our growth here with medical devices. We will also give further upside when we see rebound when the hospital market is coming back.We see very good activities from the Vascular Simulations unit, the business we acquired end of last year. We have started off the year in a very good way, and we really managed to leverage our sales and distribution in a nice way. So we see business coming from all parts of the world really. And so that's clearly going to be a good addition to what we do for the full year as well.So on the financial stand, order intake for the quarter up to 40 from 28 and change last -- in the second quarter. And for the first half year, we are 80.1 compared to 60.9, which is a 31.5% increase for the first half year compared to last year, also represent the highest ever, both the quarter and first half year for Mentice -- in the Mentice history.Order book, as well, significantly higher, 65% higher compared to end of last -- end of second quarter of last year, which also is important for the year since large part of this is something we will render for the year 2021. So about half of this amount is revenue already planned for 2021.Net sales significantly up for the quarter, 91%, almost double compared to the second quarter last year and 78.7% compared to 58.1% to 35.5% (sic) [ 34.5% ] up for the first half year, which is really nice. I mean, I think the -- obviously, the 91% here is due to some delays we had on deliveries from both Q4 and Q1. But I think if you see the consistency here for the first half year, that's really where I would want to be with the business. So it's a nice execution from the entire organization here, and the ability for us to really ship and run the revenue is really nice to see. That's been one of the issues that I and we have dealt with during the COVID here.We can also see that the gross margin is back to about 80%. And if we look at the currency effect, it will be at the same level as last year. This is also something that I commented back in Q4 and beginning Q1, which we have been working on for the quarter. I mean, some of this is related to the introduction of our new hardware device G7 and G7+, so we're dealing with that. And I'm super pleased with the ability to get back to the levels where we want to be. We might even have more upside here on the margin. But this is really where a good achievement by the group here -- or by the team, sorry.Cost levels. We are -- we have increased operating expenses. We're about 17.5% for the first half year. And in that, we have Vascular Simulation for about SEK 4.2 million -- about SEK 2 million for the second quarter, SEK 2.2 million for the first. So that's fully according to plan. And yes, I would actually talk more about that later on.Cash flow in the quarter was positive 6.7, slightly less than last year. But then again, last year, we were extremely lean in the second and third quarter, given the pandemic, we basically stopped all activities and cut down on consultants and stuff. So that's understandable. So this is in line with what we want to see. And the negative for the first half year is only due to the start of the year in the first quarter. But we also have some activities here to -- where we had payment from a client that also fit into the third quarter.But yes, operating income, we had almost [indiscernible] on EBITDA for the quarter. We are still carrying the loss we had in the first quarter. But we are obviously much better than for the first half year compared to last year.Key observations. Yes, I sort of mentioned it already, but the pandemic last year had really no effect on cost in Q1. But in Q2 and Q3, we're extremely lean where we cut down on consultants. We had no travel. And we did everything to really be -- we also have some subsidies to help us. So now when we obviously are start to travel again, we are ramping up, we're hiring. There will be a larger delta in expenses that's what we see or -- in cost levels. So in organization, we have moved from just over 90, 93 by the beginning of January up to 101 by the end of the quarter. But if you look at full time equivalents, including consultants, we are about 120 people now, where we were just over 100 at the -- in the year.And as I said, we had still an expectation to improve the cash level for the quarter, but we've seen some delays, especially in U.S. related to larger clients. But that's something that we will deal with. We will have a special focus on this for the third quarter going forward. So it's something we expect to build. Close to breakeven EBITDA is also good. I mean looking at that historically, I think we are better positioned for the year than we have been in a kind of a couple of years now.Yes, I talked about this already. We're really pleased with the execution on deliveries, both from the order book, so already booked orders, but also new orders in the quarter. So that's really nice to see. So what we are saying here really is that we are investing in the future. So we are growing the organization, preparing for -- where we need to be for 2021, but even more so for 2022 and 2023. So that's a positive sign we're really looking at where we want to be in the next couple of years. So we are increasing costs, but we are increasing costs in a controlled way, and we need to make sure that the cost level increases are at a lower level than the increase in top line.Some market observations. We've seen over the year -- last year here for pandemic increased interest for online and remote services, i.e., when clients can log into cloud server or similar and participate in a training session or simulation session online, distributor where you might have a presenter or a physician in 1 location, you have people signing in to a meeting just as we do now, but really providing them with the relevant experience even if they are not in the same location as the doctor. That's something that we see a lot of demand for, especially from the medical device side. But I think that also we will come with hospitals, with needs defined by -- from the companies like Siemens and Philips as well. It's a really interesting development here, which is a direct consequence of the situation we had in the pandemic last year.But in simulation, really, really interesting how the combination of our physical and virtual makes sense for the market and the client and the ability for us to provide both, it's really a unique ability. So I'm really pleased with the acquisition we did in the end of last year. And we see a lot of good feedback from the market on the ability to really provide a much broader set of solutions and really address more kind of situations where in some situations where physical modeling is more relevant, while addressing virtual are the most effective one.So we see our approach with imaging vendors and the robotic solutions, how we integrate ourselves into their solution is really unique. And I really see that as -- I've talked about that in the past, maybe not recently, but I really see the development in the work with you that day-after-day is really building something for the kind of future here.We also see a change of attitude generally. And I think to some extent, this is driven by the pandemic, where we'll see, I mean, complete different interest and a lot of discussions. We see a lot of posts on social media similar where leading physicians and hospital really are allocating use of solutions like Mentice in a different way than before. I mean, before it's more unique situation for training and in many cases related to basic training and so. But here, we see an attitude -- change of attitude what people see that what we do is relevant in the daily practice. And by practicing and experienced physician in a much different way than we've seen earlier. So I think that's -- there as well, actually, the situation in the pandemic has made that clear for many people. So I would say as a summary, we are expanding our footprint in image-guided therapy area, which is really our intention. We don't want to be seen just as a simulation company or just as a training company, we want to do much more. And I think what we're doing here is really expanding that footprint and expanding the perception of Mentice, which is really nice.A little bit about Q2 and beyond -- or beyond Q2 rather. Really good outlook for the year, with a strong position we have now for the second quarter. And we hope we can really provide growth within the frame of the financial targets for growth. Medical device will continue to be the driver of the growth, but we obviously hope that we will get support from the hospital market, both direct but also to our partners like Siemens and Philips for the remainder of the year and definitely going into next year.As I said, in strategic alliances, we've seen Philips are still negatively impacted by the hospital market, but we have a lot of activities there. I'll talk a little bit more about that later.Yes, we can see that what we have done in the net sales for the first 6 months and combining that with the active order book for the year really provide a really good base for us to say that we will exceed the 2020 full year's performance on sales, so that we can say with confidence. So we really were looking at a decent year.Key drivers. I mean, we're leveraging our unique technologies with new G7, G7+ platform. This has gained a lot of interest. We see a lot of upgrades, both from hospital and industry. The ability to use a haptic realism functionality on the platform is really relevant. Our ability to structural heart, the heart valve Arena combined with ultrasound is really unique solution for the market. The online solutions, the cloud solutions, with remote services, all of this really is expanding our footprint, as I said earlier.Vascular Simulation, we talked about a really important addition, given us a broader footprint as well. The large clients and the work with you, with the mega medical device clients is really, really important, and we are expanding our thought footprint there clearly.Neurovascular has been a focus for us for some time. The Vascular Simulation piece is really neurovascular focused or the -- and you all see in the virtual side, the relationship we have there with key physicians in the world and the program we're bringing out there. We really believe that that's going to pave the way for precision medicine and others. We have more to talk about that in -- very in the next coming quarters.Strategic alliances. I mean we talked about that before, but the integration and embedding and bundling really what we're working on behind the scenes. You haven't seen a lot of that from the result in the business yet, but that's clearly going on.AI/machine learning. It's really going to be important for us going forward, combined that with use of data is a focus and going to be focus in Mentice, and that will be a critical part for our future, clearly. And linking that together with the robotic solutions where we work with Siemens, but also some other players in the market. We believe we have a really strong position there, and that's clearly going to be a sweet spot for Mentice going forward.So really strong start, a really positive view on the full year. I believe we have a very strong market position and we see good demand for our solutions in all markets and segments. So really nice to be representatives. Maybe this is too short, but really, really positive view of where we are and what we've done in the first half year.

[Martin Harris, Global Vice President of Marketing]

Thank you, Göran. We actually have a few questions that have come through. So if I could just start with questions and just make sure that Elisabet is with us as well. The first question, it seems to be a good position after Q2. Do you believe this can continue the growth levels through the entire year?

[Göran Malmberg, Group CEO & President]

I need to be careful about answering that question, obviously, but that's our ambition. There is no guarantee, and we're not providing any forward-looking guidance. But that's the ambition to be able to continue that. So we believe we have a strong pipeline for both Q3 and Q4. So that's the ambition clearly.

[Martin Harris, Global Vice President of Marketing]

Okay. The next question is we have not heard much about the development with respect to Philips and Siemens. How do you think they would impact your business for this year?

[Göran Malmberg, Group CEO & President]

Well, we don't see that, that will be a main driver for this year. And obviously, we probably lost a year or 1.5 years due to the pandemic in the development there on the actual business, but we have obviously not been standing still here in this period of time, and we have been developing the relationship with both Siemens and Philips. And we're actually seeing Philips has moved quite a bit over the last 6 or 9 months, where we have installed systems in their U.S. training center. We have installed systems in the Chinese center.And the relationship with Siemens, we are really expanding into further solutions and more technology to provide more value to the end clients. So -- and the discussion on bundling has clearly go on. So we have multiple discussion on -- in several regions, but also on global levels. And we hope they would present tangible result here in the next couple of quarters. But that's clearly really linked to the hospital market is still re-coping or scrolling up against the pandemic, so yes.

[Martin Harris, Global Vice President of Marketing]

Okay. And the final question we have is you are increasing your cost levels. What is the rationale for that?

[Göran Malmberg, Group CEO & President]

No. I mean -- yes, it's a good question. I mean, we are obviously looking at our 5-year plan -- 3- and 5-year plan, and we have ambitious growth plan for the coming year. We obviously have articulated our financial targets for growth and EBITDA, but the growth level really require us to build the organization for the need we will have in 2022 and 2023 and further. So that's why we are growing in sales. We are -- I've talked about this before, we are growing the market organization, which [indiscernible], obviously, where we understand if we're going to double or triple our sales conversion in the next 5 years, we need to have a different infrastructure for marketing.We have further demand from development to really build a broader set of solutions. We have discussions on AI/machine learning. So yes, so we are really investing in where we believe we need to be in a couple of years. And as you know, I mean, if you invest today, you will see the effect of that in 9 or 12 or 15 or even 18 months based on what resources you are adding. But we are doing that in a controlled way and the Board and owners understand that we also need to invest to get somewhere. That will have a short-term impact on our profitability, but you need to invest to really get where you want.

[Martin Harris, Global Vice President of Marketing]

Okay. Thanks. So that's all the questions we received. So I'd like to thank everyone for attending, and you'll be able to find the recording of this session on Mentice's website.

[Göran Malmberg, Group CEO & President]

Thank you, everyone. So thanks again for joining, and thanks for being part of the inspiring journey we have here already, interesting journey we have here at Mentice. Thank you.

[Martin Harris, Global Vice President of Marketing]

Thanks.