Earnings Call Transcript - NNDM Q2 2023

Operator, Operator

Good day, ladies and gentlemen. Welcome to Nano Dimension's Second Quarter 2023 Earnings Conference Call. My name is Anthony, and I'm your operator for today's event. On the call with us today are Yoav Stern, Chairman and CEO; Yael Sandler, 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 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 some business updates followed by a question-and-answer session at which time the management team will answer questions. I would now like to turn the call over to Nano Dimension's Chairman and CEO, Yoav Stern. Yoav, please go ahead.

Yoav Stern, Chairman and CEO

Thank you all for joining the call today. We'll start with the presentation before moving on to the Q&A session. Looking at Slide 3, this past quarter has been outstanding, following two previous excellent quarters—Q4 2022, Q1 2023, and now Q2. Each of these quarters was the best in the company's history until now. Key highlights include what we view as an impressive organic growth rate of around 47% over the last three and a half quarters, along with a 33% increase compared to the same quarter last year. Revenue for the first half of this year is up 38% from 2022. Notably, our gross margins have significantly increased by 81% and 185% for the quarter and the half respectively, rising from 40% to 48%, depending on whether we refer to adjusted gross margin or gross margin. The first column on the left of the slide provides a comparison for the quarters in both IFRS and non-IFRS formats. In the right column, you can see numerous new successes with our customers. Recently, we secured orders from a major space company that is purchasing a substantial number of machines in a single order, with more orders expected, along with several other notable names that we can't disclose yet across various product lines. Regarding DeepCube artificial intelligence, we have made significant progress by attracting companies that are looking to purchase the DeepCube deep learning machine for their manufacturing operations. This is particularly exciting as we initially acquired DeepCube to enhance our machines and our cloud manufacturing network, but we now foresee it becoming a standalone profit center and revenue generator. We have four or five customers in the process of finalizing contracts, including one of the leading semiconductor companies that has already signed on. The rollout of the DeepCube engine is underway. In terms of R&D, the primary focus in additive manufacturing is materials, alongside artificial intelligence. Over the past three quarters, we have heavily invested our R&D efforts in materials, achieving significant advancements that we'll be announcing in November at the industry tradeshows. Looking at financial specifics, the profit and loss statement shows the comparison between Q2 2022 and Q2 2023. Revenue has grown organically by 47% since Q3, and while I’ve mentioned these numbers before, they are reflected here. The EBITDA loss was $23 million, with about $13 million attributed to R&D expenses, which we view as an investment rather than a liability. Additionally, we incurred $2 million in legal expenses related to various proxy challenges, which was an unfortunate necessity. The net cash used in operations was $28 million, but we have generated cash flow, resulting in a net of $21.5 million. We are earning approximately $10 million to $12 million annually in interest, which equates to nearly $50 million at current rates. Moving to the next slide, you can observe revenue growth over the last 12 months, where we saw an increase from $5 million in Q3 2021 to $52 million in Q2 2023, projecting a run rate of $60 million by year-end. In contrast to other companies in our industry, which have reported declines, we have achieved growth. The following slide graphically represents our revenue and margins, highlighting both IFRS and non-IFRS figures, with non-IFRS presenting a clearer cash performance by excluding non-cash expenses. Our next slide outlines the performance of our peers, with selected companies indicating widespread revenue shrinkage, while we maintained a 33% growth. On the matter of the proxy fight at the annual general meeting, I urge shareholders to vote. You have 10 more days to make your choice, and I encourage you to support our proposal to maintain the current Board. We are seeing strong fundamentals, with a 12% revenue increase and a 60% run rate. We anticipate three to five mergers and acquisitions, including two large entities. Notably, following our withdrawal of the proposal to acquire Stratasys, activity in this sector collapsed, affecting others adversely while we saw our share price rise. Historical numbers support our solid foundation for global market expansion, with investment levels that exceed typical small businesses as we aim for sustained organic growth. On the red side, there are those lacking comprehension of Nano's business, behaving opportunistically. Their Board nominees received $50,000 just to have their bios included, despite questionable qualifications. If shareholders choose to elect these individuals, I will step down because I am dedicated to our shareholders. I welcome any dialogue with them as investors, but I cannot work under those seeking to liquidate the company. I hope you will support us, and I look forward to addressing the challenging questions you may have. Thank you.

Operator, Operator

We will now start the question-and-answer session. I welcome all investors to stay with us. If they choose to remain shareholders, I assure Murchinson that they will profit with us. However, if they intend to take control of the company and liquidate it, I unfortunately cannot participate. This isn’t new, as I have mentioned it previously. I hope everyone on the call will engage with me, and I encourage you to ask the tough and challenging questions that I always look forward to answering. Thank you.

Unnamed Participant, Analyst

Hello? Can you hear me?

Yoav Stern, Chairman and CEO

Yes, please.

Unnamed Participant, Analyst

Hi. So thank you for the presentation. I'm actually also quite disappointed by the fact that Murchinson only talked about Nano's cash position without even providing any roadmap for the actual business and profitability. So I am supporting the current management. Having said that, can you please share some insight on the early turnouts and chances to win this proxy contest? Thank you.

Yoav Stern, Chairman and CEO

The individuals coming from Canada together represent about 12% of the company, roughly translating to around 20 million shares. I have some knowledge of a couple of other funds that they have convinced to support their vote, with their average cost per share being about $2.5. I’m aware of Clearline Capital and Intrinsic and have a good relationship with them; however, they became overly ambitious when they saw a potential for assistance due to similar cost prices. I expect that those who will likely vote in their favor to achieve $3.7 per share are the ones I've mentioned, making up approximately 15%. The remaining 83% is primarily made up of retail shareholders, around 160,000 to 170,000 individuals. Engaging these shareholders is akin to handling a parliamentary vote; convincing this many people is not as straightforward as persuading a few institutions one at a time regarding the benefits of our growth plans compared to a liquidation strategy. We've been actively trying to reach these retail shareholders for the past four weeks, many of whom have an average cost per share above $5. These are informed investors who have used their savings over the past two years. When I raised $1.5 billion, it was solely from institutions, leaving only about 15% remaining in other hands. Some of these funds sold their shares to retail investors at prices much higher than $4 per share. If these retail investors decide to support us, it could lead to overwhelming success, virtually a landslide with around 85% against 15%. However, a significant challenge we face is that many of these retail shareholders may not be accustomed to voting; they often overlook communications from their brokers due to other commitments. If we fail to motivate them to vote and turnout is low, we could lose. Conversely, if just half or 40% of them participate, we could achieve a substantial victory. We are doing our utmost to address this situation.

Unnamed Participant, Analyst

Yeah. Thank you.

Yoav Stern, Chairman and CEO

The crucial aspect for these retailers is that if the liquidation occurs and they begin purchasing shares from the public or conduct a share buyback at $4 or $3.50, they could see returns of 40% to 70% on their investment in just six months. Conversely, the majority of the remaining retailers, about 85%, are likely to incur losses. Additionally, we have announced our decision to seek court approval for an additional $227 million share buyback over the course of a year. This will allow us to strategically decide, based on the progress of M&A initiatives and acquisitions, what will truly enhance the value of our shares moving forward. Once we receive approval, we may choose to either acquire the targeted company to improve earnings per share through M&A or, if the purchasing pace does not align, utilize our resources for a share buyback. That’s where we stand. Next question, please.

Operator, Operator

Our next question will come from Katherine Thompson with Edison. You may now go ahead.

Katherine Thompson, Analyst

Hi, there. Hi. I have a couple of questions. I'll just give up the questions this way. And the first one, you mentioned a new large order. I just wanted to understand if that was from an existing customer, and also when you expect to ship that order and to recognize revenue. And then the second question was on the recent acquisition of Additive Flow. I just wondered if you could give us any financial information about the company, so any revenue or cost data, and also any information on what you paid for the company. Thanks.

Yoav Stern, Chairman and CEO

Can you just repeat the first question? I couldn't hear. There was a little bit of bad connectivity.

Katherine Thompson, Analyst

Yeah. So you recently announced a new large order. I just wanted to know if that was from an existing customer or a new customer, and also when you expect to ship the order and recognize the revenue.

Yoav Stern, Chairman and CEO

Thank you for your question. The large order we recently secured is the biggest in our history for a single customer, which is a leading company in the aviation aerospace sector. We plan to ship parts of this order within the next few months, with some deliveries this quarter and others early next quarter. If this initial order goes well, they anticipate purchasing additional machines as they are experiencing fast growth. Regarding the Additive Flow acquisition, we chose not to disclose the financial numbers for various reasons. The technology is quite advanced, and its clients include a mix of customers, some of whom I can mention while others I cannot due to confidentiality. The size of the numbers allows us to keep them private, especially given the sensitive nature of the technology and the competitive landscape surrounding Additive Flow.

Katherine Thompson, Analyst

Got it. Okay. Thanks.

Yoav Stern, Chairman and CEO

Next question, please.

Operator, Operator

Our next question comes from Donald Solomon with a firm. You may now go ahead.

Unnamed Participant, Analyst

Hi. Good morning. Yoav, thank you for your presentation. A lot going on, both in the release as well as the presentation this morning. Some shared and some new information. I guess a lot going on out there. I'm interested in picking your brain for a second. From your perspective, how do you envision the consolidation stage in the additive manufacturing sector following the termination of the Nano's tender offer? And the fact that the current 3D Stratasys deal in my opinion at least doesn't seem realistic, especially after their quarter two results and their current weak cash position based on those results.

Yoav Stern, Chairman and CEO

It's a very good question. I mentioned it earlier, but I will elaborate. Let's discuss who we are referring to. I would say our industry has more than 400 companies for sure, as Julien and our M&A department have identified a list of at least 400.

Julien Lederman, VP of Corporate Development

At least that.

Yoav Stern, Chairman and CEO

So those are the companies we are familiar with. There are certainly others that we don't know, but they likely represent a much smaller portion of the industry. The sector includes companies ranging from $1 million to $650 million in revenue. The publicly traded ones that are better known due to reporting their financial results include Nano, Desktop Metal, Markforged, 3D Systems, Stratasys, Velo3D, Voxeljet, Materialize, Protolabs, Shapeways, Fathom, Xometry, and others. Additionally, there are private companies in this space. Currently, this industry is valued at approximately $15 billion and is expected to grow to $30 billion by the end of the decade, indicating a need for consolidation. We attempted to kickstart this process by offering to acquire Stratasys, but they did not even respond to our full acquisition proposal. Later, when we proposed acquiring a portion of their business, they implemented a poison pill strategy, preventing us from proceeding. We believe our initiative is essential for the industry because most of the mentioned companies are not profitable, apart from possibly Materialise. However, Materialise and Protolabs don't truly represent additive manufacturing since Protolabs is more about subcontract manufacturing. The remaining companies are running low on cash, with five of them being SPAC survivors whose share prices have plummeted from $10 at their SPAC deals to under $1.5 today. Stratasys and 3D Systems have reported disappointing quarters, while the rest have also struggled, with Markforged feeling significant financial pressure. These companies don't possess a viable, profitable business model despite having promising technologies and driven entrepreneurs; excitement from customers alone isn't sufficient. To achieve a successful business model, the industry requires consolidation around synergistic integrations and focused vertical markets. It's difficult to understand how a company like Desktop Metal can cater to so many diverse sectors, from nuclear and aviation to dental and furniture, and similarly for Stratasys. There could soon be companies targeting the food industry, possibly with 3D-printed meat, leading to additional acquisitions. Markforged may stand out as a company with a focused approach, along with Nano Dimension. If one were to inquire about the industry's trajectory, the path we initially took but had to recalibrate after setbacks remains the only feasible route. As Churchill had to withdraw his forces during Dunkirk in World War II, we needed to step back to avoid squandering time battling issues with Stratasys' Board. We're now progressing again, establishing our leadership position by not only focusing on acquiring 3D printing firms but also by advancing cloud manufacturing and transitioning toward a digital industry managed through cloud technology and artificial intelligence. This can involve various edge devices, including additive manufacturing or assembly, provided they are digital and adaptable within a high-mix, low-volume setting. Our strategy is driven by the vision of creating an efficient and profitable industry rather than being solely technology-focused, and we will continue to push ahead. As mentioned earlier, we have several mergers and acquisitions already in the pipeline that align with our goal of purchasing and growing rather than just squeezing profits.

Unnamed Participant, Analyst

Okay. So based on what you just shared where you're saying that except for Markforged, who is doing it right, everybody else is just losing money, and we're seeing the significant sell-off in major cases as well as the decline in share price of Nano's peers. Is everybody just running out of capital? And do you foresee bankruptcies coming through like with everybody else except for Markforged and Nano?

Yoav Stern, Chairman and CEO

Nano is definitely focused on growth. I believe the team is knowledgeable enough to avoid bankruptcy. For instance, take Velo3D. They ran out of cash and had no choice but to announce a $70 million convertible debt raise last week. Their shares dropped by 40% as a result, and while they will secure the cash, they're not profitable at all. Velo3D has gross margins that are extremely low, around 15% to 20%, and lacks a solid business model, relying heavily on one customer for over 35% of their revenue. They managed to raise money, but that led to share dilution, resulting in a drop from $3 to $1.40, which is still declining. Another example is a smaller business with $30 million in debt that is approaching its cash limit. They are struggling to raise funds due to German corporate laws, which restrict their options for discounts and could jeopardize their survival. Desktop Metal will exhaust its cash within a quarter and a half. As for 3D, they cannot afford to buy Stratasys as they initially proposed because they had a poor quarter and exhausted their demand as well. They currently don’t have enough cash. Although I don't anticipate bankruptcy, I believe the management understands the need to consolidate to navigate the situation.

Unnamed Participant, Analyst

Great. Thank you very much.

Yoav Stern, Chairman and CEO

Thank you very much.

Operator, Operator

Our next question will be a follow-up from Rami Rodge with Private Investor. You may now go ahead.

Unnamed Participant, Analyst

Hi. Thank you. Following my first question, do we know how the voting is going? How many people are voting so far?

Yoav Stern, Chairman and CEO

So far, I have seen about 30 million shares voted out of 250 million. However, we still have 10 days remaining. Typically, people vote based on the advice of our experts from the proxy solicitation firm, and they usually cast their votes in the final days. Therefore, I am not surprised that the turnout is still low.

Unnamed Participant, Analyst

Okay. Thank you.

Yoav Stern, Chairman and CEO

Thank you.

Operator, Operator

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

Yoav Stern, Chairman and CEO

Let's wait a moment to see if anyone else has thoughts on the question before we wrap up. It seems quiet now, so I want to thank all the participants. I also want to extend an invitation. Over the past few months, I've been spending time writing and responding to emails from both private and public investors. I've made it my personal goal to reply, especially during this challenging time with negative comments and efforts to liquidate the company. If you would like, feel free to email or call me. There are also other team members dedicated to answering questions because we believe that if we can connect with 85% of our investors, we'll have their support. We are committed to doing our best. Thank you all, and have a great day.

Operator, Operator

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