Nano Dimension Ltd. Q4 FY2022 Earnings Call

Good day, ladies and gentlemen. Welcome to today’s conference to discuss Nano Dimension’s Fourth Quarter and Full Year 2022 Conference Call. My name is Nick and I am your operator for today’s event. On the call with us today are Yoav Stern, Chairman and CEO; Yael Sandler, CFO; and Julien Lederman, Head of Corporate Development. Before we begin, I remind 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 did not receive a copy of the press release, please view it 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 Yael will answer questions. I’d now like to turn the call over to Nano Dimension’s CEO, Chairman, Yoav Stern. Yoav, please go ahead.

Thank you very much, Nick. Hi, everybody. Hopefully, some of you have seen me lately. Wish I could see you today, but I am trying to visualize you. I will go to the business description. You have a presentation in front of you. So I will try not to read the presentation just to scan through it. And if you have questions regarding the business, please write them down and we will be happy to answer later. So we had an excellent year, excellent fourth quarter, the best fourth quarter we ever – actually the best quarter we ever had $12.1 million and the best year. It’s not so difficult to have the best year at approximately $44 million, because the years before were hundreds of percent less. Now, it’s really the challenge going forward and continuing to grow at very high rates, which we intend to. So still, it’s good to let the employees and shareholders know that it was a good year and we had notable advancements with customers and relationships. We sold to very serious players all our products, including Additive Manufactured Electronics, Additive Manufacturing, Additive Electronics, people and organizations such as NASA and Western Defense Forces, all kinds of institutions, research institutions, etc. We have a partnership with HENSOLDT, which is a German-owned public defense company, personal relationship between the CEOs and the management team and partnership J.A.M.E.S is growing and doing very well, 50-50 partnership. And we got into engagement with the government of Bavaria, which is considering putting a grant in our operation in Germany. So it’s very exciting. On the technology and business side, we made two acquisitions this year, one at the beginning and one in midyear, and we launched our product in ceramics and metal printers, which are manufactured in Europe, in the Netherlands, and we are now in the process of merging those technologies, which is very exciting. We are merging the acquired technologies with the technologies of Fabrica, which we have and we are going to have new products and technologies, which are merged, not so simple, but justifies the acquisitions because it creates growth engines. We have patents in the AI and cloud manufacturing, etc. One of the most important points that people may overlook is the progress in standardization of protocols with IPC, which is the organization that sets protocols for electronic engineering. We are working with them, together with other companies, but we are leading. The fact that they will set special criteria for Additive Manufacturing Electronics means that our materials and products will fit the IPC criteria, because it will not be the same criteria for regular economics, due to the very new technologies involved. That by itself will enable companies to buy and integrate the products that our machines are making into their own products, because they are going to be IPC approved, which is extremely important. If you compare it to the business of medical, it’s like FDA approval. A little bit of the numbers. You have now that number highlighted in front of you. Let me focus on the yearly numbers, because again, the fourth quarter was very good, but let’s look at the full year and focus on the fact that we have improvements in gross margins and we have negative EBITDA, which is mostly affected by the R&D expenses. If you move to the next one, which shows actually, where is the full year? The full year is shown in the bottom part of the slide, you will see that the gross margins are up from last year, which is a manifestation of the fact that the majority of our higher margin products are being sold more. So it’s a product mix. We haven’t even started improving the gross margins of the products by reducing the cost of manufacturing. That’s going to be the next step, because we are still in the stage of product penetrating into the market. The most important for us is to put products into customers’ hands even if we reduce the price a little bit or even if we haven’t maximized the value engineering at the cost of goods sold. But that’s coming next. I expect in the longer term, gross margins to grow because new products with our advanced technology, when they go out to the market should have 65% gross margin. The 46% you see here is the combination of higher margin products and more mature products that are lower than 65%, thus the average ends up being 46%. Another thing to pay attention to again on the full year is the negative EBITDA of $88 million, out of which $55 million is an investment in R&D. As I said to people who have been listening to me for the last couple of years, the investment in R&D is recorded as expenses because we don’t capitalize those. But this is the value we built through these acquisitions. Most of the investment in R&D is between Additive Manufacturing and Additive Manufacturing Electronics. We are actually seeing the investments starting to slow down because we are getting closer to the performance we need, and I expect the investments in R&D to slow down in the next year or two, unrelated to acquisitions. Once we do an acquisition, then of course, investing in R&D there relates specifically to the acquisition. The next slide again shows you what I just described in graphic form, so I don’t want to get into too many details, but you see between the year '21 and '22, the large growth. Thank you, Yael and Julien. The difference between the IFRS and the adjusted non-IFRS, similar to GAAP, I always think, why should we ensure the non-GAAP, but there are certain peculiarities with the IFRS, including non-cash expenses that we need to remove to show the real operation of the business. Another interesting slide that I have been asked a lot about, including by people who are not shareholders but have a real interest in the company’s growth, brought lies and false information all over the place claiming that we don’t have organic growth. So we decided to show you the organic growth, which is combined 24% from the acquisitions that are mentioned here and it’s broken down here between three acquisitions. Each acquisition has a different growth rate after we acquired them when comparing to the year before, which illustrates organic growth, not to mention the organic growth of our own products before the acquisitions, which is also substantial. By the way, we are now close to the first quarter of 2023 and I can tell you that in the first quarter, this organic growth is continuing strongly. The next slide speaks about improving operational efficiencies, not good enough to my liking. Yael is sitting here looking at me. I want to say that when operational expenses are high, it’s easy to reduce high percentages. But the next stage will involve reducing those percentages even more toward profitability, and that will come in two ways: one, increasing revenue without increasing operational expenses because we built infrastructure with a run-rate of $44 million last year and this year is projected to grow dramatically. In a run-rate of above $50 million, the company within operating expenses will allow us to save significantly while making the next acquisition. Another slide relates to a subject that again, some shareholders are eyeing cash and don’t care about shareholders who are looking for an upside, they take it as a negative. We see this as a positive item: the fact that we have, theoretically, a cash run-rate we have today of 12.5 years. Of course, we’re not going to continue the cash run-rate negative for the next 12.5 years. We’re going to be profitable very soon. At least based on cash flow, I can tell you that our cash flow improvement from 2022 to 2023 is going to be significant. We’re going to have much less cash burn outs. Again, profitability will follow and it depends on acquisitions as well. If you compare ourselves to three other companies, based on last year results, I know Markforged, Desktop Metal, and Velo very well. They don’t have 2.3 years. Markforged and Desktop Metal don’t have one year and Velo may have 0.5 years. Those companies have less than a year to survive unless they raise money, and their share price is lower than ours in both numbers and in the value lost over the last 1.5 years. The strength of our business is we don’t need to raise money, and we don’t know what they’ll do, but you can guess behind the scenes. Next slide is about our intention to become a market leader. We are the best positioned company to become a market leader. This market is currently $16 billion, which according to industry reports is going to grow to $205 billion in 5 to 6 years. So, forget 5 to 6 years, let’s estimate $16 billion today, it’s going to $20 billion in a year or two. There is no 800-pound gorilla in this market. The largest companies are Stratasys and 3D, and they are not too large for a market that’s $16 billion. They are only $0.5 million to $600 million each, give or take, and they are not doing the right things to consolidate the market, plus they are not capitalized properly. We are, and we intend to do so based on synergies and on technologies while running a business focused on the bottom line, not on the top line. We’re not looking to be a $1.5 billion business losing $200 million a year. We prefer to be a $0.5 billion business making $100 million a year. That’s our aim. Our aim is EBITDA or eventually profit per share. We’ll achieve this both by growing organically, as you saw, and through acquisitions. Stratasys, by the way, saying no to the first proposal and now the second proposal since yesterday or so is out. They better hurry because we have three other potential acquisitions that we’re considering at different stages. We are not committed to buy services at any price, but we will at the price we’re offering, go all the way to get them. If eventually, shareholders say no, of course shareholders are shareholders. You will likely hear other news about acquisitions in parallel. So that was my presentation or kind of points I wanted to discuss. I took my 15 minutes of your time, and I’ll be happy to answer your questions. Thank you.

Thank you. First question comes from Anne Margaret Crow, Edison Group. Please go ahead.

Hello. Thank you for taking my questions. I’ve got three. The first is, could you please restate your target gross margin? Thank you. Then the second one is, can you provide a little bit more detail on what you’re doing with respect to merging the technologies you acquire? You mentioned Fabrica in that context. So it would be really helpful to hear a bit more about that. And then the third question was about the impairment. And my question is, is this merely to bring down the value of the balance sheet so it’s closer to the market cap? Have you looked at the underlying cash-generative nature of the businesses that you’ve acquired to get to that reduction? Or is it simply to get the balance sheet right? Thank you.

That’s great questions. Thank you very much. I’ll start with the first two. And if I can hold myself, I’ll let Yael answer the third one. Target gross margin: Our target gross margin for new machines in Additive Manufacturing and Additive Manufacturing Electronics is above 60%. When it’s totally new, it should be 65%, 68% when it’s a little bit older, it tends to slide down to 60%. Our target for systems and electronics that go into the machines and are sold as subsystems is about 55% to 60%, and our target gross margin for additive electronics is about 40%, give or take, because this is a more mature market. While we employ a lot of division intelligence, the robotics competition is somewhat stronger in that area. Therefore, the combination, as we expect the AM and AME to grow faster, will tilt above the 40% into the 60% depending on the product sales and revenue. Second question on merging technologies is a very interesting question. We acquired technologies including Global Ink Systems, which has extremely important technology in managing ink injection. We started using those technologies because they were suppliers to our machines. Now we’re integrating those technologies into our other machines acquired in the Netherlands. Secondly, we’re integrating our software and artificial intelligence deep learning with the Atlas software package made and developed by GIS to create combined software for user experience and designers and for operating the printing heads together with a good connection between the two. So we’re merging this across all company departments. Another example is the technology we purchased 2.5 years ago, Deep Learning. This technology goes into almost all our machines to improve throughput and yield. We’re even using it for predictive maintenance, and you can take this across the board in both additive manufacturing, additive electronics, and additive manufacturing electronics. Last but not least, regarding impairment?

Yes. Thank you. So, regarding the impairment, as of the end of the year, our market cap compared to our book value of the assets less the liabilities created a discrepancy because our market cap was lower. Because we have intangibles on our book, we needed to check for impairment. We did the impairment test based not on a specific value of any acquisition that we did, but rather on the total company as a whole. Because of this difference, we had no choice but to do the impairment. So, we recorded a write-down of approximately $40 million for some intangibles and some fixed assets. It’s important to note that this is not related to any specific acquisitions and is not an indication that the goodwill or technology from any specific acquisition is not good—quite the opposite. It’s a very technical accounting issue. I hope this answers your question, Anne.

Yes, it does. Thank you very much.

Next question please.

Next question will be from Eric Weiss, a private investor. Go ahead, Mr. Weiss. Alright. He is no longer on the line with us. Next question will be Eric Marcus, private investor. Please go ahead sir.

Thank you very much. Can you hear me?

Yes, please.

Okay. First, Mr. Stern, thank you very much for taking our questions and thank you for your presentation. In your recent videos and communications, you have said that you believe that the direction you are taking the company represents the majority of shareholders. As a shareholder who respectfully disagrees with that assessment, I am asking, why will you not call a shareholders’ meeting and put your chairmanship through a vote of confidence, allowing those of us who own the company to weigh in? Thank you.

First of all, I didn’t say that I believe I represent the majority of the shareholders. I only said that I propose to the shareholders what I think is the right direction. Secondly, in the next shareholders meeting, shareholders can make a decision and vote me down, and I will resign from the Board or leave the company, whatever direction the shareholders choose. I work for the shareholders, so it’s no problem, I agree with you.

When will that shareholders meeting be held to have that vote?

As we usually have a shareholders meeting after we publish the F ‘20 – we conduct annual shareholders meetings a couple of months later once we finish preparing all the paperwork. I don’t expect it to take more than a couple of months from now. As we did last year, we will do it this year again and you will be welcome to vote me out. If most shareholders want that, then I will step down. It’s not a problem at all.

Thank you.

Thank you. Our next question will be from Ram Reddy, private investor. Please go ahead.

Hello.

Yes. Please, Ram.

Yes. I have a couple of questions. The first one is, last year you said you were going to get analyst coverage within the next couple of quarters. It’s more than a year. I don’t see any analyst coverage. The second question is, what was the interest you had in the last quarter, Q4 2022, and how much interest revenue are you expecting for 2023?

Sorry, the second question again?

What is the interest you received for the last quarter, Q4 2022? I mean you have over $1 billion sitting in the bank account...?

Okay. I understand. First question, I will answer. The second question, I will let Yael answer. You are right. I was speaking to at least one analyst from a small firm in the Midwest that follows other companies in this industry. He promised and said he was very interested in writing a research report about us, but he didn’t follow through. I don’t understand why, and I recognize it’s my failure. I am still doing the same thing. The fact that we don’t have analysts writing about us is disappointing to me, and I won’t let it go. I assure you, the two or three acquisitions we are currently evaluating will spark interest from analysts. It’s the hope. The fact that we are employing two banks now, Greenhill and Lazarus—in a roundabout way, as people who work on Wall Street know, they will ultimately benefit from any closing deal, which will, I hope, also prompt analysts to write reports.

In terms of interest revenue, so in 2022, we had interest revenues of around $18.5 million. Obviously, most of this was towards the second half and very heavily even in the fourth quarter, due to rising interest rates. Currently, in this quarter, the first quarter of 2023, we are at a run rate of more than $11 million a quarter from interest revenue. So assuming interest rates continue at these levels, you can multiply that by four to estimate where we project our interest revenues will be. Additionally, as Yoav mentioned earlier, this is expected to significantly influence our total cash burn this year.

Thank you very much.

Thank you, Ram.

You’re welcome.

Thank you. This concludes our question-and-answer session. Now, I would like to turn the call back over to management for any closing remarks.

Okay. I will say a few more words in case others want to ask. I want to relate back to the question that the person before the last one asked. He said, and I want to reemphasize my answer to him. He said, Mr. Stern, you claim in your videos that most shareholders support your business plan for the company. I never claimed that in the videos. I don’t know if most shareholders support what I propose to lead the company towards. The only thing I know is that 90% of the shareholders don’t include these two entities on the shore of Lake Ontario. Other than those two, 90% of the shareholders don’t support their wish to dismantle the company and pay for those shares. That’s the only thing I said. I am trying to convince shareholders in the sense of moving along with the business plans we are proceeding with. I am clearly at the mercy of shareholders. This is business democracy. If they vote me out, I have many other things I can do with my life apart from working 18 hours a day. The only thing I would be unhappy about is not being able to help you make money. However, I will respect any directive from shareholders. So, that was just to reiterate this point, and to buy some time to see if you have any more questions, but I see that you don’t. As always, I am now much more engaged with shareholders—they are writing to me, and I am responding back. It’s actually a pleasure. Thank you very much for the opportunity to speak with you today.

Thank you. Conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.

Thank you.