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Earnings Call: Q2 2022

Jul 21, 2022

Göran Malmberg
CEO and President, Mentice

Our presentation of the second quarter result for Mentice and as well, obviously the first half year. With me today, I have Gunilla Andersson, our Chief Financial Officer. My name is Göran Malmberg. I'm the CEO, Chief Executive Officer and President for Mentice. We will dive directly into the results. First some highlights from the quarter. Gunilla, please.

Gunilla Andersson
CFO, Mentice

Yes. Let's start with order intake, which we came in at SEK 57.3 million, which is a growth of 42.8% year-on-year. This includes the order that we will talk about a bit later. Order book increased to SEK 108.9 million. This is a 60.4% year-on-year growth. It's also really pleasing to see that we have SEK 56 million of this scheduled for delivery already in 2022, so in the second half. We have really strong order intake in the healthcare systems, and this is 81% in the quarter. We had triple digit growth in the first quarter, so this is really good to see.

The large MDI order from a large client in the U.S. of $1.93 million, of course, improved order intake as well as order book for the quarter. Our net sales came in at SEK 41.51 million, which is just below last year numbers. We see that net sales in the quarter is not necessarily the orders we receive in the same quarter. We had a little bit slower orders in Q1 from the US, which is the main impact on this net sales. EBITDA, disappointing -12.2. Disappointing in the sense that we had very high costs in this quarter, so that's what's driving this negative EBITDA.

If we look for the same, but first half year, we came in in total of a net sales of SEK 98.2 million, and this is 24.8% growth, which is well in line with the performance measurements that we have. Also the same when it comes to order intake, which is now close to 112 million after the first half. I think, Göran, this is a record for Mentice, which is the growth of 39.5% year-on-year. As we see, it's a really strong order intake in healthcare systems, which is 119% year-on-year so far. Of course, 2021, sorry, is a very strange year to compare with because of the pandemic, but we can see that we are now well in line with the levels we had in 2019 before the pandemic. We have strong order intake from strategic alliances.

Of course, this is then helped by the Corindus order that we talked about in the last quarterly report. We did the Ankyras assets deal. We acquired the assets from Vigo in Spain, and Göran will talk more about that. All in all, this become a result for the first half of SEK -7.5, which then is a little bit worse than last year of SEK -9, and we will also talk a bit more about those costs that was the main driver of that.

Göran Malmberg
CEO and President, Mentice

Generally, just as a summary, I mean, it's again a strong first half year. I mean, compared to previous, obviously, 40% growth on orders and 25% on net sales. As Gunilla said, we had a little slower start in the second quarter, which pushing net sales into Q3 and Q4, which then have a direct effect on our results in the second quarter. Overall, very pleased with what we have done, and we will dive into some more details here. We're moving over to some breakdowns on the order intake. This shows both the quarter and the first half year.

You can see here that we talked about the overall number of 112, almost 111.7 in orders compared to 80 last year, so 4% growth on that. We can see that healthcare is growing, but not at the highest level, which I mean, but we are really pleased with the demand on the device side. As you might recall, we had a fantastic 2021 with over 60% growth. That was during a time when the hospital market still was in effect from the pandemic. We can see here that the healthcare system side is back, actually matched the full 2021 after the first half year.

The SEK 25 million in orders are equivalent to what we did for entire last year. This is well in line with what we wanted to see for this year and it makes us very confident for what we can go moving forward. If you see in the region, in the bottom part of the slide here, you can see that we have 100% growth in EMEA, close to 50% growth in APAC. It's really Americas that lagging a bit, but that's not an abnormal or normal situation. I mean, we have typically a larger seasonal effect in the Americas compared to the rest of the world.

Very nice to see the healthcare market coming back. Continued strong demand from the medical device side. Strategic alliances is piggybacking on the healthcare side, also looking very promising for the year. APAC and EMEA, especially, very strong, really based on the healthcare growth here. Americas lagging a bit, but we see a lot of opportunities for the later part of the year. All right. The order book here breaks down. As I said, this is really an effect of late orders in the quarter. Massive growth of the order book, 60% up from last year, SEK 55 million , SEK 56 million scheduled for the remainder of the year, which, adding up with what we have, makes us position at the level of almost 80% or over 80% of what we did for the full last year.

Really good breakdown of that. We see that the rental and recurring revenue is increasing nicely. I'll talk a little bit more about that. Gunilla, maybe some comments on the recurring side.

Gunilla Andersson
CFO, Mentice

Yes. The graph on the right-hand side is showing the rolling four quarters revenue. It's divided then into what we refer to as the system stage recurring, which is all rentals, and then the software licenses recurring, where we sell those licenses on subscription. We see that the rentals, they are up to SEK 12 million now then in the Q2 2022. This is then another SEK 2 million since 2022 Q1. The software licenses is up at SEK 25 million, and then this is then SEK 3 million more than we had in the Q1 2022. All in all, we are now at SEK 26 million. Or sorry, we are up to SEK 37 million from SEK 26 million on year-end, and this is then a growth of 42%.

We see this very strongly in our order book as well, that we get orders on the subscription recurring to 39.2 level at this juncture, which means that this is continuing as well going forward.

Göran Malmberg
CEO and President, Mentice

Yeah. Good. Thank you. This is a chart we have shown before, but and I'm not gonna delve into details, but you can see that we continue the trend, two really strong quarters, and continuing with a positive trend, where obviously the medical device industry have been the driver during the pandemic, but we see now that the hospital side is coming back in a nice way. This drilling down.

Gunilla Andersson
CFO, Mentice

Yeah.

Göran Malmberg
CEO and President, Mentice

The business segment, Gunilla, yeah.

Gunilla Andersson
CFO, Mentice

Yes. Yes. The business segment, this is then the net sales split that we do into the business segments of IFRS 8. As shown before, we are then looking at our products, so systems, accessories, spare parts, software and support. I think we can all find the number in the middle in the last row there, the yellow one, which is -2.7, which of course then is the same 2.7 we've been talking about a lot, meaning net sales is down 2.7%. We can see that it's mainly coming from software licenses CapEx and system sales CapEx. We are still continuing to drive a lot of the recurring revenue upwards.

If we look at the bottom line where we have the recurring share of the total sales, you see that we are close to 12, 11.965%. Again, 6.8% last year, which is a good 77% growth. This is even up 90% compared to last year in the first half. We are driving the shift that we want, taking revenue from capital expenditure into the operational expenditures.

Göran Malmberg
CEO and President, Mentice

Good. Thank you. That's really getting to the end of the financial part. As a summary conclusion here, I mean, really good start of the year. We obviously have a high target to generate growth in the first half year, and we have managed to do that in a good way. The gross margin is maintained on a very high level, close to 82%, also really good. We can see that the EBITDA level for the quarter is negative due to high cost levels, but also due to us having pushing orders into the order book. We are pushing revenue into Q3 and Q4.

That's also a reason for the slightly lower result in the quarter. Cash flow as well, connected to the same thing, late orders in the quarter, pushing payments into Q3 and Q4. That's impacting cash flow. That's something we are continuing to work on. Again, very pleased with what we're doing. We are clearly moving in the right direction. I think the large medical device order we talked about really gives a lot of promises for what's gonna come. The fact that the hospital market is back to 2019 levels and above is also very, very nice to see. That's what we hoped for, but it's obviously hard to plan for those things.

Gonna go into a bit of a strategic update. We have talked about before of our ambition getting vertical into the therapy areas that we're dealing with. That's the continued effort. I'm gonna dwell into that a bit in the next couple of slides. The first one is to just, I mean, talk a bit about Ankyras, the Spanish software business that we acquired in the second quarter, which is a analysis tool helping physician to decide for the right approach and device for an aneurysm treatment in the brain. A really strong technology, small technology team, very early in the commercialization. But there is a regulatory approval here in Europe.

It's scheduled for regulatory approval in the U.S., really strong patent protection and IP protection and a software that is validated by the market since over the last multiple years. We really feel strong about bringing this into the Mentice family and having these products really complement what we do, and what we can offer to our clients. I'm gonna talk a bit about that as well. This is just to try to explain what we're trying to do. We have talked about for many years about the virtual simulation market, initially training, also talking about planning, but that's our core business that the 20-year-old Mentice business that we have developed, where we have a very strong market share.

I mean, this is a $35 million -$40 million marketplace where we have 50% or more of that share. We're taking and gaining market share continuously from the device side, the device market, but also from the hospital side. This is a core of what we do, a core of technology, a core of the physics we use. You might recall we added one and a half years ago in October of 2020, we acquired a New York or Long Island-based company called Vascular Simulations, now referred to as Physical Sim, which really complement the virtual solutions we have with a solution where you 3D print anatomies and you deploy real clinical devices under X-ray.

That's been growing very nicely over the last one and a half years. I think we have double or close to triple the sales over the first year or so, at least more than double, and we will continue that in this year. This is a very nice market for us because it clearly complements what we do on the virtual side. It helps us to move upstream, so up in product development, conceptual development, regulatory approval, and so with our medical device clients. It's also used for advanced planning and advanced cases for hospitals. That's in our mind right now, probably a $10 million market, and we think that could grow up fairly rapidly to maybe a $20 million market.

With the Ankyras business we just added in the precision medicine side for neurovascular solutions. The Ankyras business can also be used for peripheral and other similar areas. That's probably right now about a $10 million market, and we believe we can rapidly take market share into that space. This is the way we build a market. Here we say we started off with a $35 million -$40 million market, and here from potentially now we're talking about upwards to $80 million, $60 million -$80 million market. We obviously have the ambition to continue to add more specialty areas and more vertical solutions like this to continue to redefine what we call our market.

That could be done organically or by further acquisitions, obviously. If we look at the synergy here, we refer to both the Ankyras and the Physical Sim. Here you can see that we already have a very strong position in this in the neurovascular space, but that would be true in other clinical area. Here we are dealing with a minority, if not all, of the large manufacturers in this space. We have a very strong key opinion leader panel in the vascular space. We are dealing with the best and recognized hospitals in all regions in the world. We adding the Physical Sim, which is as well used by these medical device companies, as well used by these key opinion leaders and main hospitals. This is really for us to use our sales and distribution.

We can talk to the same people, we can offer them both products. Now we adding the Ankyras piece that will help physicians and device companies to really position the devices and to make the right decision for a specific treatment. All of this could be sold and distributed and supported with the same sales organization approaching this same Mentice client network, really. This is really what we are trying to do, and it's been working out very nicely with the Physical Sim, and we expect to move the same way with Ankyras. A brief repetition of some main events in the three business areas. On the medical device side, we also have this large order in the end of July which is really part of an intention for that client to move up to 150 systems or more over the next year.

That that's gonna be a significant part of our revenue for the next couple of years. In the healthcare system, we talked about the fact that we have close to 200% growth here compared to last year. Very strong growth on the healthcare side. We also saw a nice order from Hungary of SEK 3 million. This is something really that is completely in line with what we have planned for the year. Obviously, Alliances side, we are as well up here on a high level compared to last year, partly depending on the Corindus order in the beginning of the year, but also for increased rebound activity towards the end client, the hospitals. Obviously, still we have some uncertainty in the market. We see the political impact.

I mean, we don't deal with Russia directly, we don't deal with Ukraine, we don't have supplies from Ukraine or Russia, but still, it's more costly with travel, it's more costly with transports and things like that. Generally, we see the inflations and the supply-related issues impact both us and the clients. That's something we need to deal with. We have dealt with it in a good way, but we need to continue to manage that very closely. We also still see some pandemic impacts mainly in the APAC region, where we have some shutdowns in several occasions in China. There are also some other areas of the Asian region where you still cannot access after almost three years. So that's really a quick summary. Since this is a recording, we're not gonna offer any Q&A. Thanks everyone for listening and.

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