Nano Dimension Ltd. Q3 FY2024 Earnings Call

Good day, ladies and gentlemen. Welcome to Nano Dimension's Third Quarter 2024 Conference Call. My name is Wyatt, 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, CFO and COO; and Julien Lederman, VP, 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 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 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 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. You may please go ahead.

Thank you very much, Wyatt. Ladies and gentlemen, I appreciate your participation this morning and afternoon. I want to start by sharing that I'm speaking to you from Frankfurt, which is hosting one of the main annual events for Formnext, a key tradeshow for the LED Manufacturing Industry, and it’s Dan’s most successful event to date. The level of interest in our work, both in the existing Nano and the excitement surrounding our recent acquisitions, is unprecedented. We are already seeing visitors from other companies, including potential acquisition targets, coming to engage with us. With this growing excitement, I’ll move on to our numbers. We achieved $15 million in revenue this quarter, marking our best third quarter ever and a 22% increase from the same period last year. Our gross margin rose to 48%, up from 44%, and the adjusted gross margin, excluding non-cash expenses, is now at 51%, up from 48%. This is crucial because companies in our industry typically struggle with gross margins and profitability. Once we reach 55% gross margins, we will begin to see substantial profits, which is very exciting. Additionally, our net cash burn has significantly improved. We have reduced Nano Dimension’s burn from $16 million per quarter last year to just $3 million now, and we are nearing breakeven. This is just for Nano and does not include the impact of our two acquisitions. We managed to cut costs, including a major reduction in headcount, while still maintaining revenue growth, underscoring our commitment to profitability. Regarding business updates, we successfully announced and completed the acquisition of Desktop Metal and right after that, Markforged, both major players in our industry. We are also pleased to report notable sales to Applied Materials, the University of Dayton, and a well-known aerospace and defense company, though we cannot disclose its name for confidentiality reasons. As we move forward, I’d like to remind you of our upcoming Annual General Meeting on December 6. We are strongly opposing attempts from shareholders in Canada, specifically Murchinson, who seem intent on dismantling the company. We, as a board, encourage everyone not to vote in favor of these changes. Our company is on a growth trajectory and is positioned to provide much greater returns than simply selling off our assets now. The cutoff for voting in this meeting is December 1. On Slide 5, you’ll see how our revenue has grown year-over-year, along with gross margin increases and reduced net cash burn compared to last year. We are highlighting three of our new customers this quarter, reflecting our growth in the original Nano segment prior to including Desktop Metal and Markforged, which will be discussed in future calls. Slide 7 provides a snapshot of our journey over the past three and a half years since we received your investment. We were careful stewards of that cash and promised to refrain from spending until we found large acquisition opportunities. We did spend on smaller acquisitions over about two and a half years, but we maintained our focus on significant acquisitions until now. The companies we acquired were trading quite high when we started, around 15 to 35 times their revenue, and we were under pressure from certain shareholders to distribute cash. However, we strategically waited for the right time, and by the end of 2024, we acquired both at less than 1x sales multiple, which we believe was a prudent decision that avoided the financial troubles they would likely face independently. Now, bringing these companies together creates a strong industry leader, as shown in Slide 9. Our old Nano comprises $56 million in revenue from various small acquisitions and demonstrated 29% organic growth. To clarify, this growth is organic, not reliant on acquisitions. The numbers cited by a Canadian company seem misinformed and do not represent our industry accurately. We are currently adding $190 million from Desktop Metal and approximately $94 million from Markforged, creating a combined business with projected revenue of $340 million for 2023. Moving forward, we may prioritize profitability over high revenue figures, even if it means adjusting our numbers, as higher gross margins will lead to increased profits. On the right side of the slide, you can see a comparison of our company against several public competitors. While smaller companies are losing value and some are no longer publicly traded, we stand out with $340 million in projected revenue and $470 million in cash reserves. This financial stability positions us well to transition this revenue into a profitable business, focusing on gross margins and bottom-line profits moving into 2025 and beyond. Slide 10 summarizes our key messages: we have fulfilled our commitments and are executing a strategy centered on value creation, not liquidation. Our leadership team is committed to progressing the company rather than selling off assets. In contrast, Murchinson and their associates lack a coherent strategy and are primarily interested in short-term gains. Most of our shareholders, including myself, invested at significantly higher prices than the $2.5 per share that Murchinson negotiated. The path to profitability lies in enhancing the value of our company and shares beyond those numbers. I urge you all to vote in line with our board's recommendations, supporting the continuation of our growth strategy rather than extreme, disruptive proposals. I am a shareholder like you, and I am committed to elevating share value to levels that reflect our true potential. Thank you, and I am happy to open the floor for questions now.

Our first question comes from Katherine Thompson with Edison.

Hi, good afternoon. I've just got three questions. First question is, could you give us a bit of detail on the reaction you had from your customers to the news about your two proposed acquisitions? Secondly, just a quick update from a regulatory perspective of where you are with both of the acquisitions, and just to confirm that you still expect to complete Desktop Metal in Q4 and Markforged in Q1 of next year. And then thirdly, just to also confirm, it sounds as if what you're saying is that you get to breakeven EBITDA, which I think you've referenced as being in Q4 of 2026, but that's going to be more through a process of cost synergies rather than revenue synergies? That's the three questions.

Yes. Regarding customer engagement, it's an exciting time as I meet many customers at the Frankfurt Formnext show. We're seeing enthusiasm not just from our existing Nano customers who are pleased about our expanded product line but also from clients of Markforged and Desktop Metal who are eager to discuss their future product offerings. The excitement is palpable in our booth, and I've attended most trade shows over the past three years, and this one stands out as the most thrilling. On the regulatory front, we are nearing the completion of our regulatory work. We're nearly done with Hart-Scott-Rodino and have successfully conducted the proxy vote, with Desktop Metal shareholders approving the deal. We're also finalizing the CFIUS process and anticipate closing the Desktop Metal transaction by the end of the year. Although we started the Markforged transaction later and are slightly behind schedule, Hart-Scott-Rodino is almost complete too. The CFIUS process for Markforged should be shorter since it's parallel to what we experienced previously. The shareholder vote for Markforged is set for early December, and we aim to finalize the deal in the first quarter of 2025. Regarding profitability, I expect to see improving cash flow and profitability in the initial quarters. The most significant cash burn will occur when we merge the three companies, as Nano is in a solid cash flow position, while the other two companies are still generating losses. However, once we take control and begin to cut expenses significantly, we aim to either show profitability or positive cash flow by early 2026.

And the next question comes from Sol Zelman with Gericare.

Yoav, you discussed the different factors related to finalizing the Desktop Metals merger and the upcoming steps with Markforged. The main concern among shareholders is the current situation with the AGM, where you are urging everyone to vote. If the activists succeed in appointing two directors to the Board, do you have any worries about them hindering or jeopardizing these transactions? This is a crucial issue for all shareholders in this AGM. I would appreciate your thoughts on that. Additionally, you mentioned the CFIUS aspects. What is that process, what does it mean for us as shareholders, and where is it heading?

I'll start with the second question. CFIUS is a standard process conducted by a regulatory agency in the United States. We have already gone through CFIUS and addressed most of the questions we anticipated. They informed us that they have no further inquiries. Regarding CFIUS and Desktop Metals, we expect this to conclude in a matter of days and are optimistic that there will be no issues that could impede progress unless something unexpected arises. Essentially, the question-and-answer phase has wrapped up, as reported to us by CFIUS recently, which is encouraging as it indicates they received answers to all their questions. Next, we will undergo the CFIUS process with Markforged, which I believe will be quicker because it pertains directly to Markforged rather than Desktop Metals. CFIUS needs to complete its checks on Markforged, but they have already conducted checks on Nano Dimension. This is a conventional process that all foreign companies must go through. It can take anywhere from 1.5 to 6 months, and we are hopeful that it will lean towards 2 to 3 months rather than the full 6 months, and it appears to be progressing positively. Now, addressing the issue regarding the activists, it's not as significant as it seems; the concern is more like a cat wanting to invest and disrupt the company. All they are asking for in this AGM is to insert two directors, and if you look into their backgrounds, one of them has a questionable history. They are hoping these directors will create some impact. One of these directors, despite their troubled background, is an honest person. I don't foresee these directors being able to undermine the company because the board will still consist of six other directors, ensuring a majority. The company has a total of eight directors. Ideally, I hope they do not join the board, but even if they do, they would be in the minority. A minority cannot significantly influence decisions since they lack the voting power. Furthermore, once they are on the board, I believe their focus will shift to the wellbeing of the company rather than the situation that brought them there. This concern about derailing transactions is puzzling. The deals in question are already signed and represent a commitment on the part of the company. If they somehow could derail these deals by assuming a majority on the board—which they won't be able to do—it would amount to tortious interference in contracts that the company has already committed to. Thus, I do not anticipate any derailment in these plans.

They don't feel what the severe activist approach that they're taking that they will try to find some way of derailing or killing it? I mean that shouldn't be a case.

Well, they can also say that they plan to attack Iran and solve the problem of the Middle East. They can claim sort of things.

And you're at the helm. We're following that guidance, and we'd like to understand that that's not a concern when we're making our decisions. So I appreciate that feedback.

I'll tell you the truth and the fairness. I am a warrior, not because I am a fighter. I'm a warrior for being worried. I'm always worried from the unexpected. I'm always getting up in the morning after not sleeping half a night because I'm thinking about what could have happened that I didn't take into consideration. I'm worried about events that are happening in the business. And if some activists like this are claiming that they will derail, then it makes me worried. So I worry and I go to lawyers and I go to advisors and I check, and everybody is telling me, yes, you don't have to worry, they can't do it. So that is the message I'm delivering to you.

And the next question comes from Felix Ziegler with Felix Investments.

Hi, thank you for the question. I would like to better understand the rationale behind the recent acquisitions. The last five acquisitions—DeepCube, NanoFabrica, Essemtec, Global Inkjet, and Formatec—haven't been well integrated, as evidenced by their declining revenue growth under Nano's leadership. These companies reported gross margins between 55% and 60%, while Nano's current gross margin is 48.2%. This suggests that the expected synergies haven’t materialized. Additionally, Markforged and Desktop Metal seem to be facing negative revenue growth and have a gross margin profile lower than Nano's, while continuing to consume large amounts of investor cash, which puts them at risk of bankruptcy. So, I’m curious why it makes sense to acquire these cash-burning businesses with investor funds. You mentioned a rationale based on low sales multiples, but using Spirit Airlines as an example, which had a billion dollars in revenue and subsequently filed for bankruptcy, shows that this approach may not be reliable. A low multiple doesn’t seem to justify acquiring a company that is burning cash. Furthermore, it seems you are defining net cash burn as...

Sir, what's the question?

Yes. The question is, how is Nano prioritizing the interests of shareholders? The stock has not delivered any returns for shareholders and continues to trade below cash, resulting in a negative enterprise value.

So that's the question?

So why do you continue employing a strategy that isn't working well for shareholders? And why are you defining your net cash burn in a way that makes it look better than it actually is in an effort to almost confuse shareholders?

I will address your concerns. First, your comments regarding the six acquisitions of Nano are incorrect and lack sufficient understanding of financial statements. These companies had lower gross margins and revenue at the time of acquisition. Except for DeepCube, which we acquired solely for its technology and never intended to boost its revenue, we did achieve significant organic growth. In our first six or seven acquisitions, we recorded a 29% increase in revenue, which contradicts your claims. Secondly, while it's true that the two companies we are acquiring currently are not performing well, my experience in mergers and acquisitions over the past 30 years has taught me the importance of understanding what you are acquiring and the potential for creating synergies that enhance performance. By acquiring these two companies, we are gaining over 1,000 customers and access to more than 10 advanced technologies that are unique in the industry. We plan to reinforce management to focus on profitability, streamline operations by consolidating facilities, and adjust the workforce to better align with the combined size of the three companies. This strategy aims to create value for shareholders, as merging these companies, despite their low acquisition price, will generate a high return. Regarding your mention of Spirit Airlines, the gross margins you cited do not align with those of Nano. You previously indicated that Nano had strong growth supported by its gross margins, but now you imply otherwise. For clarity, Markforged has gross margins close to 50%, similar to Nano, and we intend to improve that. Desktop Metal's average gross margins are lower due to their diverse business model, and we will exit any unprofitable lines that do not meet our margin requirements. Lastly, your comparison of Spirit Airlines to our industrial business is misplaced. Continental Airlines initially struggled but thrived after merging with United, demonstrating that strategic changes and strong management play critical roles in the success of a merger. Thank you, let's move on to the next question.

With no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to the company for any closing remarks.

In closing, I want to thank you again for participating in the conference today. Thank you for your questions. Very interesting questions. Some of them gave me, especially the last one, an opportunity to go through a business school and basic business principles of how mergers and acquisitions can add value to shareholders. So thank you very much for the last question. This was very helpful for me. And I promise you, shareholders, that I have been working for the last year without a salary. Actually, it's a year and a quarter because my salary was not approved by the people north of the border, activists that refused to approve my salary. So I work with no salary. My upside is holding shares and being a shareholder like all of you. And I trust and convinced that the right work on acquisitions by taking companies that have assets and values, but are not performing well necessarily because of performance of management together and doing the right thing will add value to you as shareholders more than what you or somebody think the share value or the cash under the share, which is by now $2.5 while the share is traded at $2.1 or $2.2. So we actually have a business coming into being a $340 million business, which will be valued based on its performance, and the share will be valued much more than a $2.1 billion, $2.2 billion or the cash under the share. That's my plan. That's my plan for myself because I'm making money based on the share I'm holding, and I did not receive from the company any free equity. And I hope that you shareholders will join us in this trail and travel towards success. Thank you very much.

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