Nano Dimension Ltd. Q2 FY2022 Earnings Call

Ladies and gentlemen, thank you for standing by. All participants are at present in listen-only mode. Welcome to today's conference call to discuss Nano Dimension's 2022 Second Quarter Results. On the call with us today are Yoav Stern, CEO; and Yael Sandler, CFO. 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 this call. If you have not received a copy of the press release, please view it in 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 Yael will answer questions regarding the second quarter 2022 financial results. As a reminder, this conference is being recorded, September 1, 2022. I would now like to hand the call to Mr. Yoav Stern. Mr. Stern, would you like to begin?

Thank you, Johnny, and good day to everyone. We also have Julien Lederman with us today, who is our Head of Corporate Development and oversees our recently established Financial Marketing Department aimed at enhancing our connection with shareholders. Welcome, Julien. We had a very strong quarter despite market challenges, particularly in Europe due to the war in Ukraine, which impacted purchasing rates in Central Europe, especially Germany and neighboring countries. Nevertheless, our acquisitions, internal growth, and organic growth performed well. The go-to-market strategies we implemented are effective, and I won't reiterate the entire report, assuming you’ve reviewed it and have questions for me. Highlights include $11.1 million in revenue, which is twelve times the revenue from the same quarter last year. We anticipate that as supply chain issues ease, our organic growth will accelerate. Additionally, while we are prioritizing R&D and spending more money, we managed to achieve a lower cash burn rate than initially planned. We are maintaining around $40 million in cash burn per half year, slightly over our annual debt. Hopefully, this will allow us to accelerate, as our cash burn primarily speeds up R&D to bring new products to market. This is positive. The gross margins, which we discussed previously, include high margins of 65% in new manufacturing machines and lower margins of 32% in additive surface-mount technology, affecting our overall average. We don’t have a service business like others that could further reduce our gross margins. This outlines our revenue sources and cash flow related to our gross margins. This quarter, we allocated $12.9 million to R&D, which is an expense by GAAP and IFRS standards but seen as an investment by us. The advancements in R&D are promising, with new products set to enter beta testing by the end of this year and launch next year. While it's not ideal to rely on an unstable market, we notice that multiples and valuations are down, with increased M&A activity, which is encouraging. Companies that I had previously avoided are now reaching out as multiples seem more justifiable. We expect to achieve results with growth projections more attainable now that we aren't overpaying for acquisitions as we once did. We completed an acquisition this quarter, closing a deal in Poland with a leading tech company in metal and ceramic printing that was previously under the radar due to its status as a subsidiary of a struggling American company. We discovered them, and we believe they will play a vital role in our rapidly growing additive manufacturing business. Overall, as we grow and expand, our initial focus was on additive manufacturing in electronics. Our growth strategy consists of organic development through R&D and acquisitions as we branch out into various forms of additive manufacturing. We strive to own a company capable of thriving alongside its capacity for machine manufacturing in additive manufacturing. This initiative is underway, along with digital machines for electronics that enhance value as they integrate into the network of machines we are establishing, driven by artificial intelligence, deep learning, and machine learning software. In this area, based on extensive interviews and due diligence, I assure you that we are ahead of the curve, and it’s only a matter of time before this robotic technology is incorporated into most of our machines and their networking. This summarizes our progress this quarter, linking back to our past achievements and future objectives. I’m looking forward to your questions and any topics of interest you’d like to discuss.

Thank you. Ladies and gentlemen, we will now start the question-and-answer session. The first question comes from Yoram Foreman. Please go ahead.

Good morning or good evening, Yoav.

Good morning.

I have a very simple question. We are probably going into recession if we are not in a recession. At some point in the near, I hope in the near future, AI will be integrated into the machine. My question is, do you consider opening factories in maybe one in Europe, one in the U.S., maybe even in Asia, that will supply the final product to the end customer rather than just doing prototypes? Now it seems that capital is not a very desirable expense in the time of a recession?

The answer is no.

Do you want to explain why?

Because I believe it's not the right strategy. I believe that the service business is one where you subcontract manufacturing, whether it be AM or others, and your gross margins are significantly lower. You cannot afford to conduct R&D and develop the technologies you possess because your business model is based on servicing, which caps gross margins at between 28% to 35% and a high of 38%. This will not allow you to sustain R&D efforts and maintain your competitive edge. Your competitive edge must be based on entirely different variables than a technology business that is grounded in innovation and effective R&D.

But don't you consider that you have a lot of cash in the company? So you can still continue R&D with the cash you have, but don't you consider the fact that you may not be able to sell the final products you have now?

I am able to sell the product. As you can see, our revenue is growing from $5 million a year to a range of $40 million to $50 million. We don't see a problem selling our products, absolutely not. Also, we aren’t spending all the money we have on R&D; far from that. I'm going to spend part of it, and we are investing in acquisitions as well. So, the answer is no, we're not going to do it. It's not part of the plan right now.

Okay. Thank you.

Thank you.

The next question is from David Shapiro. Please go ahead.

Good morning. I have a question for you specifically about the stock price, buybacks, and the investment made in SSYS, if you could please speak to those issues?

What do you want to know about it? What's the question?

Why are we not doing a buyback?

Who says we're not doing a buyback?

Are we doing a buyback?

We just got the approval for a buyback a few days ago. So, we received approval for a buyback for the next 12 months. During these next 12 months, we will consider a buyback, absolutely.

So when we say we're going to consider it, the concern is that the market is not anticipating that, leading to a situation where the stock price would not be at the level it is today.

Did you check the stock price of the 13 other LED manufacturing companies since the beginning of this year?

I'm specifically looking at our company.

Okay. So if you look at our company relative to others, you need to compare it to the market and its behavior. Our stock has performed better than 9 to 10 other stocks in energy manufacturing. The short answer to your question is, we will consider buying stocks now that we have the approval; we will deliberate on that. The Board will make a decision in the next 12 months on an ongoing basis.

The investment made in SSYS raises questions. Why are we spending money on another company rather than buying our own shares?

This is not one against the other, first of all. We invest in other companies, not only in SSYS; we have bought five other companies. The investment in SSYS was a strategic move explained in the news release. If you've read the news release, I don’t want to repeat it and take time from other people. It consists of why a strategic investment is essential, why shareholders like you and me will benefit from it, and what we intend to do moving forward. So, I don’t want to repeat it; it would take more time from everyone else. What was your third question?

Do you anticipate additional investments in SSYS?

As I mentioned in the news release, the last sentence in the release directly addresses this matter. During the next short and medium term, we will purchase wholesale shares based on the market situation and other considerations. I'm referencing strategy.

The next question is from Rich Brun. Please go ahead.

Hello. Good morning, Yoav.

Good morning.

Thank you for taking my call. Just a few questions. Are we still in negotiations with the Austrian acquisition?

Which one, sorry?

I know we were discussing in the previous conference call about an acquisition in Austria. Are we still in negotiations or no?

I did not speak in the last conference call about an acquisition in Austria.

Not the last one, a previous conference call.

I did not mention any specific acquisition during any conference call. We've been looking at companies in Germany, Austria, the UK, Switzerland, the Netherlands, and the United States. So I don’t really know what you're referencing.

Okay. So we're not in negotiations regarding any company in Austria?

I just said that we are looking at companies in United States, Netherlands, UK, Germany, Austria, Switzerland, and actually in Italy as well.

Okay. Can you elaborate a little bit on the modification to the GIS deal?

I'm sorry, what do you mean by modifications?

I don't know. There was a press release sent out regarding GIS, but I'm not sure if there was any performance metric related information.

We always see what you're saying. No, I know I'm saying. What happened is the ex-CEO of GIS, who joined us, took a very senior position in our management, Mr. Nick Geddes. Since we wanted him to dedicate time not only to an earnout agreement we had, we basically purchased him out of the earnout, and he had a certain target he could reach over the coming year, which he relinquished; we compensated him at a discounted price, so the earnout is no longer in existence, and he is now running GIS and is a senior part of our management team, taking on the position of Senior Chief Technology Officer.

Okay. So this adjustment turned out to be more favorable for NNDM shareholders?

Yes, because we paid less.

Okay. I just want to clarify that. Are you still encountering any challenges hiring high-quality engineers or deep learning personnel?

It's a little bit better than it was before because of the market situation and due to recent layoffs in high-tech companies in both the U.S., Israel, and even Europe. So the situation is a bit improved, but it’s not a total shift.

Are we looking to resolve that through an acquisition maybe?

Yes. Part of our acquisition strategy involves people and the quality of personnel in the companies we are looking at, and this is definitely a significant advantage. Until now, all the companies we acquired retained their management and R&D personnel; perhaps one or two exceptions with a few non-R&D engineers. I am very pleased with the quality of the personnel we now have, currently numbering about 500. To remind you, two years ago we were just 95. So, in summary, yes.

Would it be unreasonable to suggest that a potential acquisition might target deep learning to support what DeepCube is doing?

No. Regarding DeepCube, we have a very, very good world-class team in-house. We managed to grow it from 24 upon acquisition to above 30, right, Yael?

Yes, in the DeepCube, yes.

And while we are looking to hire more, we do not plan to spend on acquisition premiums for that. We have in-house capabilities, and the technology is functional. We do not intend to pursue it.

So you believe the product we currently possess is superior to whatever is available in the market?

Yes. The product or technology was effective at the time of acquisition. It is currently being adapted to additive manufacturing in both manufacturing and electronics, and we believe we are in a strong market position.

Okay. In the previous conference call, you spoke about reaching out to companies that were difficult to negotiate with. Have you noticed any rebalancing in valuations, and have any of these efforts turned into anything meaningful?

Yes.

Can I follow that up with one more question, please?

Go ahead, please.

Could you disclose how many proprietary materials we have in the pipeline currently that show significant progress?

We have proprietary materials in the area of additive manufacturing electronics numbering between three to six, and we have additive materials in advanced micro polymer printing about three. Additionally, we have new materials in ceramics and metal about two or three.

Okay. And those are either available or in the pipeline?

I would say that they are either available or will be in the pipeline in a very short time. I'm not talking a year or two; I'm talking months.

Okay. Thank you for your time.

Thank you very much for your questions.

All right.

The next question is from David Shapiro. Please go ahead.

Yeah, I wanted to focus a little more on the share price. While your perspective may be that we're doing just fine relative to other companies, many of us who have invested in this company for a long time are not pleased with what has transpired, particularly the recent fall from the $3.50 range. I would like to explore that a bit more with you and specifically, explain the initiatives you and the company are pursuing to enhance the share price, particularly with respect to analyst coverage, which you discussed in previous calls?

We are discussing how we can engage analysts in our company’s reporting, which is quite important. We hired a specialized firm that specializes in this area. The firm will also initiate analyst reports themselves and recruit analyst support from outside. We're compensating them based on their work on a monthly basis. We have a project with them and a plan we've developed for the foreseeable future. We’re hopeful this will yield positive results. You're right; it's crucial. The share price of the company is fluctuating along with other companies in our sector. While you are dissatisfied, I share your frustration. I’m a shareholder too, and my interests are aligned with yours. The difference between you and me may be that I know what's coming, and I expect our performance will improve, which will in turn positively affect the share price. You're absolutely right that analyst reports are paramount. Additionally, we intend to engage in face-to-face conferences with investment banks and other organizations that are inviting us to present our work. This engagement halted for two years, and in that time, only Zoom calls were possible. In the next two quarters, we aim to significantly increase our exposure to the company through both investor and industry conferences, as we believe this will also help. Most importantly, we are effectively managing the business and improving results.

Those are commendable initiatives, and I commend you and the company for the progress being made.

Thank you.

The elephant in the room is the share buyback. I'm genuinely concerned as an investor that the responses about being 'considering' and 'maybe in the future' do not send a strong signal to potential investors or to those shorting the company that something concrete will occur to affect the stock price positively.

I hear your concern, but there’s no question there.

Thank you for addressing my questions.

Thank you very much.

The next question is from Devin Doral. Please go ahead.

Hi, all. How’s it going?

Very well. Thank you.

I have a few questions about R&D. A little over a year ago, you mentioned that you cannot time nano. Over time, there will be several inflection points, especially centered around R&D, that will impact the price. You also mentioned that you have hired 500 employees. However, I noted that you …

Just one second. I never said there would be inflection points causing the stock price to go up. I said there would be inflection points in R&D that would impact our business performance.

Well, you did mention that there would be inflection points that would lead to an increase in the price.

I did not indicate that the inflection points would necessarily lead to a price increase; the impacts are on business performance. Market perception could lead to price changes.

Okay. My question pertains to R&D. While we previously received updates about R&D and news reports, it seems like ever since securing funding, updates about R&D have diminished and we are now primarily hearing about acquisitions and balance sheets. Are there any breakthroughs in R&D, and is there something we might anticipate coming soon? Why the lack of updates on that front?

First of all, you have heard news about R&D since we announced new products. If something new arises, we will announce it, and there is no reason to withhold announcements. If there is a lack of news being announced, it means that nothing has changed. We will continue to announce anything that we can share without risking competitive information that may impact sales or revenue. When we have news, we will share it, and if everything is positive, you might be late to the company if you wait.

It just feels like we haven't seen much investor interaction beyond a handful of updates. You mentioned previously there would be more conference calls. However, it feels like the overall communication has dwindled over the last six months.

Sir, we haven’t had fewer conference calls than last year. If you want me to set a specific conference call, as you are speaking with me now, you are receiving all the information you desire. The next call will occur either with the next quarter or upon any relevant events; I can’t arrange a call where there is nothing to report.

In the last call, you indicated that analysts should consider covering you, as in a few quarters, you could potentially be industry leaders. Now regarding share price...

I never claimed that in a few quarters we would be industry leaders.

It appears that there’s a miscommunication because that was certainly the impression many of us had from your remarks.

Regarding stock price movement, as long as the additive manufacturing segment is stagnant, it will be much more challenging for any stock, ours or others, to break through that trend.

It seems like a stock buyback of $100 million would do wonders for this company, potentially raising the stock price again later.

I understand and hear you; I appreciate your sentiments and rest assured we will consider this.

There are no further questions at this time. Mr. Stern, would you like to make your concluding statement?

Certainly, but I see additional questions. Would you like to...

Okay, cancel. So, everybody, thank you very much for your participation. Again, we hope to be speaking with you soon either during special events occurring throughout the quarter or at the quarter's end with our next quarterly reports. Thank you.