Nano Dimension - Q3 2023

Transcript

Operator (participant)

Good day, ladies and gentlemen. Welcome to Nano Dimension's third quarter 2023 earnings conference call. My name is Betsy, and I'm your operator for today's event. On the call with us today are Yoav Stern, CEO and member of the Board of Directors, Tomer Pinchas, COO and acting CFO, and Julien Lederman, VP of Corporate Development. Before we begin, may I remind our listeners that certain information provided on this call may contain forward-looking statements, and the safe harbor statement outlined in today's earnings press release also pertains to statements made on this call. If you have not yet received a copy of the press release, please view it in the investor relations section of the company's website. A replay of today's call will also be available on the investor relations section of the company's website.

Yoav will begin the call with a business update, followed by a question and answer session, at which time the management team will answer your questions. I would now like to turn the call over to Nano Dimension's CEO and member of the Board of Directors, Yoav Stern. Please go ahead.

Yoav Stern (CEO)

Thank you very much. Good day to everybody. This is the third quarter results for 2023. It's the best third quarter in our history. It's the best nine months in our history. We completed in the third quarter about around the same revenue we had in four quarters last year. And fourth quarter, if proceeds as planned, will take us either close or on budget as we planned earlier this year. So very good, very happy, but we're starting a new stage, which I'll speak about. The organic growth was 22%. The organic growth for nine months was 33%. I'm emphasizing organic growth because historically, you've been asking me many, many times, "These acquisitions, that's great.

The acquisitions were small, but what about organic growth?" So in the last 12 months, it's organic growth because we didn't do acquisitions, which we are now, and we'll speak about it separately, are getting into the larger play on M&A. But meanwhile, we're growing organically. We expect the end of the year to be close to 50% growth. We increased the gross profit. I would say that's even more important. You don't see this a lot if you look at companies in our industry or in general. Our gross profits were 200% higher than similar quarter last year, and same for the nine months. But more interesting in the numbers themselves, the gross margin grew from 18% to 44% on a quarterly basis, IFRS, and from 28% to 48% on a non-IFRS.

So we are practically at close to 50% gross margin, and we believe it will continue to grow, and I want to tell you something, it just didn't happen by itself. It happened with a lot of focus on changing our infrastructure of the, and the cost of goods sold and manufacturing, and we'll talk about it if you have questions. Second thing that happened over the last few months is a major change in the corporate governance and management. Reason is, some of the shareholders spoke with us and thought that it would be a good thing to do. ISS and Glass Lewis, they send the two reputable advisory firms, spoke with us, and we basically did what they recommended. We reduced the board size by two members, which stepped out.

We added a very, very serious 4-star General Mike Garrett to our board, so sitting on Textron. We have made changes in roles where I don't know if you know, but I initially, when I joined just two years ago, I was not even on the board. I joined because of changes on the board and I didn't have a choice. So I stepped, continued to do my CEO role as director, and Dr. Yoav Nissan-Cohen is now the chairman of the board. We work together. It's beautiful. I'm very, very happy.

On the side of the business, beyond the numbers and the corporate governance, we have successes in the defense, we have successes in space, leading space technology companies, and we probably sold the biggest amount of machines to, now one of the largest, computer company in the world. No less important, because this is a major investment, is the product and R&D development. Software, biocompatible materials, and I'll take you here back two years ago when I told you, and some of you remember that, the development of additive manufacturing and the network we're building of cloud manufacturing, while it sounds a lot to do with automation, robotics, software, of course, at the end of the day, there's one thing that's important: materials and process.... As I told you in the past, when we reach a real milestone, it'll be material milestone.

So the first one is, has been reached. We came, we announced a new material called Insu, for insulation, Insu 200. It's a revolutionary material for electronics. It was announced in the trade show, but last, actually in November, and it's going to be out in the market in the beginning of the year and beginning in, in January, and we're very excited about it. This is not the final move here. Very soon, we're coming with a totally different material, which is much better than this one, and that one will take us into, we believe, into production and mass production on the electronic side. We have a lot of other materials that we added on the additive manufacturing side, but I'm not going to get too deep into that, unless there'll be questions. Next, let's talk a little bit about financials.

I highlighted the gross margin, the gross profit. Interestingly here is to see that the adjusted EBITDA of $30 million, and I'll show you in a second what is adjusted comparing to regular EBITDA. A third of it... Sorry, more than half of it for the quarter is in R&D expenses. Sorry, actually, it's less. It's a third in R&D expenses. It was more than half in Q3 2022. The reason is it, it's very, very intended. We reduced $3.5 million, which is 20%, almost 25% of our R&D expenses this quarter comparing to last quarter, the same quarter last year.

It was the first move earlier this year in an initiative which I described in the news release, and I'll talk about, of moving Nano Dimension to the next business model phase, and I'll speak about it. Another thing that you'll see here, activist damages. We have activist investors that are busy damaging the company. We have spent until now, since the beginning of the year, close to $17 million, paying lawyers, accountants, experts, advisors, for what we believe is a waste of $17 million. Be that as it may, our shareholders voted for us, and we're moving forward. On the gross margins, I spoke, but if you now go to the bottom line on this table, look at the number at the bottom.

We only burned $7.7 million, comparing to $20 million in the same quarter last year. This is where we are going. We are hoping next year, actually already this quarter, to cut another $30 million in our expenses and to reach profitability at the end of the year, next year. That's even if we are just growing from where we are today, a run rate of 60 organically. If we do an acquisition, it will obviously change the whole formula, which is very, very exciting for us. Next slide, you will be able to see the reconciliation to understand exactly what is this large number, $66 million of net loss, and why is it ending up just $7 million of cash burn. So if you start from the top, you'll see what I colored in green is $11 million.

11008 is interest income. We have about $45 million a year, maybe more, right?

Tomer Pinchas (COO and Acting CFO)

Yeah. This year we are going to reach approximately $48 million of interest income. It's about four million dollars a month. It's more than 5% interest on an annual basis.

Yoav Stern (CEO)

So obviously, it's a nice and effective way to grow our capital, and we are working on it. We have weekly management meetings for cash management. We do not invest other than, of course, our investment in the industry, in the services. We do not invest in any risky investment, and that's not our charter, but we get returns of between 5%-7% on our capital cash. Then you have a yellow, yellow fever. You have a yellow color. This is $40 million that in this quarter, third quarter, is a negative number. All the numbers here are reversed. Negative is positive, positive is negative, because it's an adjustment back. Because Stratasys share price went down from $20 million to, sorry, from $20 to $11 or so.

We can speak about it afterwards, what's the strategic meaning for that, but the way it affects our balance sheet is by reducing $40 million. It's of course, non-cash, and funnily enough, the way the accounting rule force us to do it is we take the price of the share at the last day of the quarter. It doesn't matter if the whole quarter or a month before, the average was 20% higher. We take it, take it from the last day. That's the reason the swings are not something you should relate to, because they're not necessarily representing anything. So that leads us to the Adjusted EBITDA of $30 million, minus $30 million. And then you go for the cash flow, and you start on the gross profit.

In a comparison between the quarters last year and this year, look at the gross profit that went up from $1.8 million to $5.4 million. It's amazing! And net cash used in operations went down from $23.5 million to $19.5 million. And all the way down to net cash, including after bringing back in the interest, we only spent $7.7 million this quarter, and we're moving ahead in the right direction. And again, that's without acquisitions. This is just from the fact that we're getting, by now, to be a company of $60 million in 2.5 years, from $5 million to $60 million, with gross margin of 50%. Next slide actually speaks about exactly about this last point. How did we scale up?

This gives you a slide I like very much because it's not a slide per quarter. It's a slide per quarter that shows the last 12 months at that quarter. So you see that in the Q3 of 2021, it's just two years ago, we were a $5 million company. If you look at Q, Q3 now, two years later, we are a $55 million company, a $54 million company. And over the last three quarters, four quarters, it's without acquisition. So if you look at Q4 2022, it's from $44 million to $54 million. Next slide shows you,

You know, all my compatriots, I'm listening to them in industry, are talking about headwinds, and the last quarter of everybody was not good comparing to projections and in general, and if you guys are following other companies in this business, the public companies, and hear or see their results, why don't we see it? I'll tell you why not. Because we are diversified. Because we structured the company to sell both to the electronic industry and to other metal ceramics industries and electronic manufacturing, additive manufacturing, electronics and additive electronics, and, of course, electronics goes into many other industries. A lot of it is in defense, 35%. So this diversification leads us to this third quarter being where it is, and the fourth quarter, which we are in right now, looks pretty good.

The revenue in the left side, you see it, and on the right side, you see two colors. One is the adjusted gross margin, non-IFRS, and one is IFRS. So it's numbers we saw before. I mentioned the peers in the industry. The growth outpaced the peers. We have here 3D, Desktop Metal, Stratasys, Markforged, and the average for the whole peer group, it's an average of percentages. It's not necessarily percentages as it relates to the size of the company, because obviously, 6% in 3D Systems is a much, much bigger drop than 20% in Markforged. But the average of all those is 10%, and we are 20% above some of what I mean, growing. Last but not least, where are we going? We call it reshaping Nano.

The business model, it's time for our business model to grow up and leave the kindergarten into elementary school, or if you wish, leave elementary school into middle school, which means we grew, we focused on acquisitions to build a coherent and integrated business. We are leading with a vision toward cloud manufacturing, so more acquisitions will multiply. But at $60 million or close of revenue and close to 50%, 50% gross margin, it's time to think and to adjust the growth, the business model towards profitability. That's what we are calling by reshaping Nano. We decide about how to allocate capital. We decide about how to allocate expenses. We have purchased about close to $100 million of our shares because we thought it the right thing, the right thing to do.

We may continue to do it because we have approval to do another $200 million, and we'll decide about it during the year. We, in the last week, reduced 130 people out of 530. This is a very, very serious cut in expenses. Think about it, it's about 23% or something like that. We did it worldwide, most of them in Israel, with all the difficulties of the war. Of course, we gave them the right time, we, we didn't say goodbye and just left them alone with full support. But we have to do it because we are leading ourselves toward improved profitability. We'll save close to $30 million annually, and we're not waiting for next year to start it. It's done already this year.

The second step will be to cut major expenses in overhead through consolidating facilities with acquisitions that we will do, and that will take us to the right place. I just mentioned here the governance of the board. I spoke about it before, so I'm not going to repeat it. I can tell you, before closing that first and foremost, I wanna thank you, the shareholders, for supporting us. I specifically wanna thank the shareholders for supporting the Israeli division through a very difficult time that Israel has been and is going through, and we got a lot of support. We're going through this war here with 12%-15% of our employees in the reserve service and fighting in Gaza.

But we perform, and in parallel to that, we have another fight with some dissident shareholders that are wasting our time and our money, and their time and their money. But it's not as serious as in Gaza, so that one we get over with. So I'll just summarize, opening up for questions, by thanking you again for the support, and we're ready to answer questions.

Operator (participant)

We will now begin the question and answer session. To ask a question, you may press star, then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question today comes from Ron Rosenberg with Recovered Innovation. Please go ahead.

Ron Rosenberg (CEO)

Hi. Thank you for your time today. Appreciate it.

Yoav Stern (CEO)

Thank you.

Ron Rosenberg (CEO)

I'm in the tactical defense sector, and I'm curious, how do you see the impact of the various conflicts globally and the significant increase in the defense budget spending on the additive manufacturing, 3D business? I'm asking about Nano as well as the industry at large.

Yoav Stern (CEO)

Let me put it this way. First of all, the general political and other situation, both in Europe with Ukraine, in Israel, and I don't think it's Israel by now, the fact that there's still aircraft carrier here and atomic submarine of the United States, and the fact that all the European and other visitors were visiting here over the last month, it's a serious situation, defense-wise, that affects the defense spending, especially of the European countries, but it will affect the United States. We see it in defense in general. I'm not talking about AM, with companies in defense that are having a very, very successful year. We have a director from Lockheed, so we're very, very close to what's happening there.

Now, specifically to what you ask about additive manufacturing, look, additive manufacturing is an industry that got ahead of itself, spoke big and high, and didn't deliver. So the additive industry, I would divide it now to two types of products, and we do sell to defense, as you understand, it's our largest section. The products that can actually get into the production line, not only for prototyping or not only for proof of concept, and the products that cannot, or whatever they do in the production, the cost, the unit economics is still too high. So for products that are for the first kind, it definitely fill it, and we fill it. That's the reason we're so successful. So you ask us, so why is Desktop Metal and Stratasys and 3D and the rest of them not so successful this quarter?

They're all claiming headwinds, headwinds, headwinds. Frankly, I don't know. I guess they feel headwinds. I don't feel headwinds, and I think part of the tailwinds is the defense industry. I hope I answered your question.

Ron Rosenberg (CEO)

Yes, thank you very much.

Operator (participant)

I'll now hand the Q&A session over to Julien Lederman.

Julien Lederman (VP of Corporate Development)

Hi, everyone. We were sent a question by an Analyst, Katherine Thompson, who's the Director of Technology Research at Edison Group. She's been having trouble answering questions, so I'll read it exactly as she has written it to me to ask on behalf of her, given the technological difficulties. So I will read verbatim. Yoav, the question's for you. One, adjusted gross margin is now at 48%. The program to reduce the cost base, will this help grow the gross margin from this level, or is the program more about reducing operating expenses? What do you think is the optimal gross margin you could achieve? She has other questions, but I'll pause there.

Yoav Stern (CEO)

Okay. First, the cost reduction goes on both sides. It's exactly, you defined it. We have a group that's focusing on reduction of COGS by reduction of the manufacturing, the assembly costs, by better buying, better supply chain. Everything goes into the COGS, and we have a whole effort that deals with the general overhead, which includes marketing, sales, go-to-market, support, and especially what I don't like, but unfortunately, it including myself, is the overhead that includes just general management, finance, including myself, and including others, where we need to squeeze it, or if we do an acquisition as we're planning, we need to squeeze it based on merger and cutting debt. So that's two things. The other question you asked is, what do you think our gross margin should be? Well, we have different kind of products.

Our product lines should deliver gross margins between 42%-65%, 68%. It, it depends on what product line and what stage in the life cycle of the product it is. Most of our products are above 56%-58%.

Julien Lederman (VP of Corporate Development)

I'll ask just two more questions, and I'll just repeat them as they're written. Second question: How does your order backlog look going into Q4 2023? Are you able to give an indication of what you are targeting for organic revenue go, growth in the fiscal year 2024?

Yoav Stern (CEO)

I don't know. I don't have any visibility into 2024 yet. I will have it once we finish this year and once we have indications from the market. Obviously, for Q4, we have visibility. We expect to be between $55-$60 million, with a little bit of luck, we'll be 60 if we want. It's not going to be because we didn't reach it, it's because, you know, at the end of the year, certain sales are being rolled into the January, but I hope we'll get close enough. That's our projection. And the growth for 2023, obviously, is from 43 to around 60. It's about almost 50%. 2024, we'll know after the end of this quarter into the beginning of the quarter next year.

Julien Lederman (VP of Corporate Development)

The third and final question from Katherine Thompson, an analyst at Edison, is M&A, are you able to say what types of companies you are considering, any particular technology areas? And Operator, we'll hand it back to you after, Yoav answers this.

Yoav Stern (CEO)

Yeah. We're looking at companies with the following profile: above $100 million of revenue in the area of either electronics and additive electronics and additive manufacturing that is not electronics, and the market over the next 12 months is right ahead of us. Prices went down on average from 6x revenue for companies that have never made money, to 2x revenue for the same companies that have never made money either. But the major difference between that valuation and the present valuation, so we're seeing it all across the board, both for public companies, I'm sorry, and for private companies. There's not a lot of large private companies. There's about three, and there's more public companies that are large. We're talking, as we speak, probably with 25 companies.

Julien Lederman (VP of Corporate Development)

Operator, you can see if there are any other questions from the wider group.

Operator (participant)

Thank you. To ask a question, you may press star, then one on your telephone keypad. The next question comes from Sol Zelman with Gericare. Please go ahead.

Sol Zelman (President Teelah Nutraceutical Division)

Good morning. Thank you, operator, and good morning everyone on the call. Yoav,

Yoav Stern (CEO)

Hi.

Sol Zelman (President Teelah Nutraceutical Division)

I would like to start by saying, I hope you, your family, your colleagues, everyone's safe in Israel. A lot has gone on since our last call, so I would like to start with that, recognizing that and making sure that hopefully everybody's okay and hopefully everybody comes out of this in the long term, safe and sound.

Yoav Stern (CEO)

Yeah. Thank you very much. Israel is a small place, so I don't... While my family and our family is okay, it's very difficult for me to say everybody is okay when we have still 170 people in captivity, but we're moving in the right direction. Thank you very much.

Sol Zelman (President Teelah Nutraceutical Division)

Well, you have our prayers, and I'm sure that's globally. I would like to go. I just—I didn't know where I'd fall in the queue and if you'd have time for my question. So just the way the question just happened to work out, you mentioned it in your preface, and then I heard it from, I believe it was from Karen's question, where you answered that you would potentially be looking at companies with a falling profile. I previously asked a question about during the Stratasys tender offer. During that tender offer, you had made mention of the fact that, if they, if you end up pulling the offer, Stratasys will end up falling to the low tens or single digits. I took the numbers here.

Fast forward, we're there now. Do you see an opportunity to reengage due to their lower enterprise value of Stratasys, where it is right now? Or... Is there concern based on what you see in the market, their potential broken business model and weak cash position, that we can, we continue to see as they reduce quarter after quarter at an alarming rate?

Yoav Stern (CEO)

Excellent question. Let me answer you. Start by the second thought. One of the most deceiving way of reporting cash is the way Stratasys is doing it. Bottom line, you called it right, and obviously, you're sophisticated. They went in their cash from 300-

Tomer Pinchas (COO and Acting CFO)

27.

Yoav Stern (CEO)

To,

Tomer Pinchas (COO and Acting CFO)

184.

Yoav Stern (CEO)

To 184 in about,

Tomer Pinchas (COO and Acting CFO)

Nine months.

Yoav Stern (CEO)

In nine months. I'm repeating, 327-184 in nine months. That is, let's say, 140 divided by 9, about $15 million a month.

Tomer Pinchas (COO and Acting CFO)

About $40 million a quarter.

Yoav Stern (CEO)

$40 million a quarter. That means they have about three, four quarters to go. There's no surprise the share is where it is, and as you said, I've mentioned it. Is there an opportunity? Absolutely. First of all, the price now will be much lower, and the problems that Stratasys had in the past are still there, but I thought in the past that we can fix it. Sorry, we can fix it, and I still think because they did not make a major changes other than some minor ones, so it's an opportunity. But now I want to tell you the last thing. Maybe it's not so logical, but I'll say it anyhow. I'm a little bit tired from non-friendly transactions, hostile transactions.

I offered Stratasys, I think it was almost half a year ago, prices that were much higher than what I would offer now, on a friendly basis. They never met with me. It turned out to be hostile with all kind of bad media. And, you know, I'm thinking we are the largest shareholder. We know a lot about other sentiments in their shareholders group, and if they were to do a friendly transaction with me today, I would do it tomorrow morning. If they want to fight again, I'm not sure. There's other opportunities in the market are very friendly to us, and it's part of the—I don't want to speak about quality of life, which is part of it, but it's the quality of business when it's not friendly, that is being totally demolished.

I hope I answered your question.

Sol Zelman (President Teelah Nutraceutical Division)

You did. I'd like to see how that pans out. Thank you very much.

Yoav Stern (CEO)

Thank you.

Operator (participant)

This concludes our question and answer session. I would like to turn the conference back over to the company for any closing remarks.

Yoav Stern (CEO)

Okay, thank you very much. Everybody on the call, have a good day. Have a good trading day. We thank you for your interest, and please, since the last year, I'm in touch a lot with our retail shareholders in over the internet and over emails. You all know I did a lot of videos, and once we have some interesting news, I may continue to do it because it's a good way to reach non-institutional shareholders, and I look forward to connect with everybody. Thank you very much.

Operator (participant)

The conference has now concluded. Thank you for attending Nano Dimension's quarterly earnings conference call. You may now disconnect.