Mentice AB

STO:MNTC

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Christian Binder, analyst]

Hi, and welcome, everyone. Mentice recently released their Q2 2024 report. And today, I have the pleasure of introducing the company's CEO, Göran Malmberg; and CFO, Ulrika Voksepp, who will present the report before we go on to a Q&A session. Before we start, I want to remind everyone that you can ask questions in the form below the video player. And without further ado, Göran and Ulrika, please take it away.

[Göran Malmberg, executive]

Thank you, Christian. So I will jump right to the presentation. So I'm going to start with some remarks and then Ulrika, can go into the details and then we will -- after my concluding remarks, we will have some questions from Christian.

So first, I mean, it's a pleasure to present the second quarter, really strong top line sales, net sales, 36% above last year. And as you know that are following us that we had a slower start in the year. So it's a good recovery for the first half year. And consequently, with the high net sales in the quarter, we also generated the highest EBITDA amount in a single quarter with SEK 24 million, SEK 24.5 million, it's a 129% increase from last year.

And we should remind ourselves that last year's first half was a really strong one and unusually strong second quarter as well. All of this also down to positive operational cash flow, and positive net income for the quarter of SEK 17 million, which is also extraordinary. So really looking at this from a distance, I mean, we started off slow in January and February, but I would say that looking at the period from March to June, we're really operating in a consistent and normal way.

So looking more from a business side, we have continued to enforce and enhance and strengthening our organization, mainly looking at sales and support U.S. but also in Europe. Obviously, other functions as well. We have people, so we have added from 113 million to about 130 people by the end of the quarter. We're talking more about that in the details. We see largely very positive development with industry, obviously, with our focus on key industry clients, but we still have some variability. Some of the large clients are on par or above while some of them are slightly behind. And it should be known that you need to look at this again from a longer perspective and variability in the quarter or even in a half year, is just related to these clients planning.

We started off really strong in APAC and quite significantly above first half year last year. And from a net sale point of view, that's mainly related to one or a couple of but really one large order in Q4 that we have delivered in the second quarter, partly in first quarter, but mainly in the second quarter.

Looking at Americas and EMEA, we are still slightly behind, but I would say that the large effect reflecting the unusual seasonal structure we had for 2023. Really, really good feedback, we've been participating in a couple of the world's most significant congresses over the last couple of months here, both in the Neurovascular, Structural Heart, and Cardiac Rhythm Management specialty and really, really good feedback from the industry. So there's really no change and your just continuing that enforcement in terms of our market leadership.

So on the summary from a quarter point of view, again we are little bit behind in the quarter for orders. Again second quarter for last year was significantly or was unusually strong I would say. And looking at the first half year we're also slightly behind last year. Net sales significantly above for the quarter. But looking at the first half year, we are 5% above last year.

The order book consequently has decreased a bit, not giving -- nothing strange about that. I mean it's just a consequence of order intake in line with strong net sales. As I said, some sales from, let's say, some APAC. EBITDA fantastic number, SEK 24 million, and we really had some improvement from last year, which also was a good year from a profitability point of view.

Positive cash flow for both quarters for first and second quarter, which is important and positive net income and positive earnings per share for the second quarter. So that's really from a 30,000 feet or 10,000 meter perspective. I'm handing over to Ulrika.

[Ulrika Voksepp, executive]

Thank you, Goran, and as Goran has mentioned, we need to remind ourselves that we have changing patterns of seasonality during years and in the year. So there is a variance and a variability between quarters on order intake. So the somewhat slower order intake during the quarter is mostly related to the product area Mentice VIST and as Goran mentioned, associated to a few larger customers within the Medical Device Industry in the U.S. market.

And you can clearly see that on the graph on the right-hand side. So the order intake for the quarter of SEK 71 million, so that means a decrease compared to last year's quarter with 8%. And moving from order intake to net sales. We have the strongest quarter ever so far with SEK 101 million of net sales. And it's a very strong performance, as Goran mentioned, in the APAC region and in the Americas.

So an increase of 36% compared to last year, which was a very strong quarter. The Americas represents the largest region for Mentice, this quarter and has done so previous quarters as well. And the increase in net sales is almost 20% in the second quarter and most of it related to the Medical Device Industry. And really good to see is the APAC region with a very strong quarter, almost SEK 26 million. That's an increase of 274% versus Q2 2023. And the majority of this is related to the MDI segment and the order that we announced end of last year.

And looking at the sales from a product area perspective, I mean, the Mentice VIST being our main product and system. This is where we see the increase, both in the U.S. and the APAC market and also good to see the strong sales of Physical Sim. So this has been a quarter of high execution of orders, as Goran mentioned.

So therefore, when we look at the order book, this is the consequence of the very high execution of orders and a somewhat lower order intake. That means that the order book as of end of June is 9% lower than it was end of Q2 last year. It's SEK 140 million, where of SEK 47 million is related to revenues that we anticipate to be recognized in 2024, where of the majority is related to Mentice VIST.

And just a very short comment on the annual recurring revenue is more or less at the same level as the same quarter last year. So this really is the strongest performance in the quarter with the SEK 101 million in net sales. And we had a good level of gross margin, in line with our expectations, almost 85%. And with the very strong EBITDA result for the second quarter, SEK 24.5 million, we have managed for the full year to be on a positive EBITDA level with SEK 6.1 million.

A brief comment about the cost levels. Other external costs have increased with SEK 4 million compared to the second quarter last year. SEK 1.5 million of these costs are related to cost specific for the quarter. And the majority of the remaining increase is related to consultants having -- being in employee positions where we're making recruitment. And the personnel costs amounted to SEK 41.9 million. And just to clarify, the cost for the consultants having positions for vacant recruitment is included in other external costs and not in personnel costs.

A comment on cash flow. We had a strong position at the end of the quarter with SEK 57 million. The cash flow is positive. And despite the fact that we have grown and increased net sales during Q2 and therefore, also increasing account receivables. We still have the positive cash flow from operations.

[Göran Malmberg, executive]

Okay. Thank you, Ulrika. So some quick concluding remarks. I mean, on the market here, this is actually the same comments I had last quarter, and maybe I shouldn't say that, but it is. I mean, I think it's very nice to see the direction we're taking and the confirmation we get from both from [indiscernible] decisions and device industry companies, what we are doing is really getting a lot of traction.

We can also see that we have less and less direct competition on what we do on our main products at least from the basis on the simulation side. So I mean, I've said before that we are the market leader and then the fact the market lead in the space, and there's nothing changing there. So from a business point of view, quarterly point of view, really encouraging that we have demonstrated the ability to recover in the second quarter. And really -- I mean, we give it to our organization and entire company, the ability to execute in the second quarter and really get SEK 100 million worth of products out in the market about clients.

I think that's really, really nicely done, and I'm really proud of that. And that makes a position here after the second half, much, much more pleasant than obviously we had for the first quarter. We can see the development of our pipeline and the opportunities really moving on nicely, both on the hospital side and the industry side, I mean we've seen quite a bit of progress on the U.S. hospital market over the last 2 quarters, which is really nice to see still not really converted that to a financial result, but that's something that I really see very, very positive one.

And we should, again, I mean, remind ourselves that we had a bit unusual seasonality last year with a higher degree of sales in the first 2 quarters and a more balanced second -- first half and second half. So I think you should remember that when we looked at the 2024 numbers.

So that's really, really what we had. And again, really, really nice quarter and nice to be able to present this to you today. Thank you for that.

[Christian Binder, analyst]

Let's kick off the Q&A with, I think a lot of people expected you to bounce back after the soft first quarter. But I think given the strong figures in Q2 last year, most people may have expected you to approximately have the same net sales. Can you elaborate a little bit more on what exactly drove the very strong sales this quarter? Was it just coincidental in terms of you happen to deliver orders during the quarter?

[Göran Malmberg, executive]

No. I mean, as I said, I mean, I think we really put a good structure in place, and we sort of set out -- I mean you have a clear ambition in the first part of the second quarter that we should reach this number. I mean we joke at this yesterday, me and Ulrika, that we really said, I mean Ulrika, beginning our second quarter that we should reach SEK 100 million this quarter.

And we really sell out to do that. And I think it's merely an execution and an ability to get all of these products out the door in the month of June, I mean, around mid-summer and so on. So I think it's execution really. And then obviously, partly is also lag and delays from Q1 and even from Q4. So it's a combination of that, but I will contribute this mostly to the -- to our ability to execute, really.

[Christian Binder, analyst]

Got it. And as you already mentioned, a strong Q2 kind of is not in line with the historical pattern in terms of a lot of sales coming in Q4. Should we interpret this as the first half being approximately in line with the historical pattern and the second half being even stronger? Or do you expect that this year, at least Q2 will once again be unusually high, so to speak?

[Göran Malmberg, executive]

I'm hesitating because I'm not sure what I can say, not to be very forward looking here. But I mean, I think what you said is fair. I mean we had a strong first half year, and usual strong first half year last year. And I would assume that we would have a more normal seasonality this year, has a slightly stronger second half than the first half, but I can't do the same one.

[Christian Binder, analyst]

Got it. And when it comes to your financial targets, one of them is 20% to 30% annual top line growth. As you already mentioned, in the first half, you grew around 5%. Do you still expect or hope that you can reach your annual target this year?

[Göran Malmberg, executive]

I mean we communicated this updated financial target in March where we obviously have a visibility of the first quarter. And I think that we have improved that position from March. So I mean, definitely, it's my absolute ambition to maintain and reach our financial targets. So from an annual point of view, not providing any forward guidance for the second half also.

[Christian Binder, analyst]

Perfect. You already discussed especially sales in different geographies. Previously, we also talked about APAC having been a little bit weaker for a while. Could you elaborate a little bit more on how the situations in different geographies have evolved since Q1? And whether you expect recent trends to persist in the near to medium term?

[Göran Malmberg, executive]

Yes. I mean generally, as a same report, generally, the business climate is good in all 3 regions. I mean the -- we see that the wheels start moving in China, that was the biggest issue last year, we have a lot of positive discussions there while the rest of the region is also moving in a good way, a lot of activities in India. I mean Japan is starting to move again in a decent way, and we have a lot of activities in the rest of the region.

So I think from an APAC point of view, I clearly see our ability to move on. I mean we have had -- the last couple of years, we had APAC and EMEA being very similar to each other. I mean I think that EMEA obviously will be slightly larger than APAC. But APAC still I mean, my expectation there is -- I mean, I have an optimistic view of what we can do there. If you look at -- to finish up on APAC, as we said in the slides here, the really strong net sales here in the first half year for APAC is mainly contributed to the large single order we took in December.

And we announced in December that we have delivered partly in Q1 that we finished deliver on that order in the second quarter. So that's really the largest reason for that, really strong performance there. From a European point of view, we are slightly behind, as I said, after first half year, both on orders and net sales but nothing really stands out. We have -- which is related to U.S. as well.

We have some really promising legal discussions on master agreement and things like that and a couple of large clients that have delayed some business in the second quarter, both for U.S. and for Europe, and we expect that to open up for the third quarter and fourth quarter. But really nothing that jumps out or is worrying, U.S. as well, and we had a really strong first year. We had a couple of the large clients here that had significant orders in the first half of last year, a little bit to that.

And I think that's the major reason for U.S. to -- when you look at the numbers, it seem to lag behind last year, which is not worrying to me either. I mean, I think we have a consistent development of our opportunities in U.S. as well. So that's sort of where we are. It's slightly behind on orders mainly from U.S., but to some extent from Europe. And net sales, obviously, we are on par, slightly above par.

[Christian Binder, analyst]

Perfect. So if you interpret that correctly, if everything goes according to plan, order intake will have an uptick in the second half of the year?

[Göran Malmberg, executive]

Yes. That's what we assume.

[Christian Binder, analyst]

Perfect. Now let's talk about operating cash flow. As you presented, it's roughly flat for the second quarter at SEK 5 million, and that was mainly related to net working capital. Can you elaborate a little bit more on what's the rather large working capital build just a result of you growing considerably this quarter?

[Ulrika Voksepp, executive]

Yes, mostly. And I mean, at the end of the year, we had accounts receivables almost in the level of what we have today. And as we mentioned on that report, it was due to some customers paying late. And with the effect of lower sales in Q1 and the catching up of customers paying the accounts receivables for the second quarter is an effect of the sales that has been so high for the quarter. So that is the reason for it.

[Christian Binder, analyst]

Got it. Now let's get to CapEx. It's relatively low levels, but I believe that your capital expenditures have roughly tripled both in Q1 and H1 compared to the same periods last year. Can you elaborate a little bit on which investments have led to the increase in CapEx?

[Ulrika Voksepp, executive]

Yes. Our CapEx is mainly related to the work that we're doing on our platforms and building our products. And that varies over the year as well depending on how much time we have for developing those parts or focusing on development for customers.

[Christian Binder, analyst]

Perfect. Now you already discussed recent business development initiatives a little bit. And in your CEO letter, you also mentioned that they haven't shown that much in reported figures yet, but can you give any sort of indication on when you expect these recent initiatives to materialize in reported figures?

[Göran Malmberg, executive]

Well, I mean, I can't really, I mean we are getting to, at first, release for one of the products, I think I mentioned in the report for Neurovascular portfolio. So we are getting, that we're doing a soft release here in that congress this week in the U.S. So that's really the first result of those initiatives.

On the business development side, we are working quite diligently on the strategic account structure where we have appointed 3 account executives, and we're focusing on those 3 accounts primarily. We might add 1 or 2 accounts going into next year. But really, that is also moving in a nice direction while it's really hard to say when that actually -- it's delivering actual financial results, thinking with the product launch that we have. I mean, it's hard to say exactly when that is. But from a principle point of view, given we have a product, we'll have a product in the market in -- later on in this quarter that should start to generate some positive benefits.

[Christian Binder, analyst]

Understood. Now, let's go over to hiring. As we already discussed, you've recently started to make some selective hires again. And some of the costs ended up in personnel costs, some of the consultants ended up in other external expenses. But in general, can we assume that all the costs for the recent hires are reflected in the current quarterly figures? Or do you expect personnel costs or the external costs to increase further as you start -- as you continue expanding the organization?

[Ulrika Voksepp, executive]

I mean the employee costs are going to increase when we recruit the positions that are currently hold by consultants. And we have, as you say, started very slow to recruit this year, and we will continue to recruit during the second half year, probably not at a too high pace, but there will be an increase.

[Christian Binder, analyst]

Perfect. Now as always, one interesting aspect of Mentice strategy is selective acquisitions. And as we've discussed before, the climate and M&A markets can vary over time. But looking at the general businesses recently, there's been an increasing number of M&A transactions for the companies that you usually would consider acquiring? Has there been any change since the beginning of this year? Or would you say it's relatively unchanged?

[Göran Malmberg, executive]

I mean clearly, we climb up top to change to the better. I mean, we climb up to raise capital in the market also significantly better. You should obviously understand that many of our objects are smaller, objects and privately held where, as we talked about before, lower cases, the chief value is sort of isolated a little bit from the market if you may, if I put it nicely.

So we haven't really moved in a point where a significant change for Mentice right now. We obviously have a situation with a historical low market cap for Mentice, which also, to some extent, prevent action on this space. But I mean clearly, we see the future here moving in the right direction and hopefully, we will be in a better position here in the near future. But right now, really no significant change.

[Christian Binder, analyst]

Perfect. Understood. That concludes all the questions that we've received. So Goran and Ulrika, thank you so much.

[Ulrika Voksepp, executive]

Thank you.

[Göran Malmberg, executive]

Thank you so much.