Q1 2023 Fathom Digital Manufacturing Corp Earnings Call
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During the presentation, you have the opportunity to ask a question by pressing star followed by a one-note headphone keypad. Thank you for your patience.
Hello ladies and gentlemen, my name is Kran and I'll be your operator this morning. I would like to welcome everyone to the fandom that your total manufacturing earnings conference call. This call is being recorded and a replay will be available later today. Thank you.
After the company's presentation, there will be a Q&A session with insertion to follow at that time.
I would now like to turn the call over to Michael Simonyi, fandom's director of investor relations.
Thank you, Glenn, and good morning, everyone. Welcome to Fathom's first quarter, 2023 earnings conference call. Before we begin, I'd like to mention that today's presentation and earnings press release are available on Fathom's website at fathommsg.com, where you also find links to our SEC filing, along with other important information about our company.
Turning this slide to, we note this presentation contains forward-looking statements within the meaning of the Security's Good Exchange Act. We encourage you to read the REST factors containing our filings with the SEC. We see, become aware of the risks and uncertainties in our business.
And understand that forward-looking statements are only estimates.
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We also note today's presentation includes non- GAAP financial measures to describe the way in which we manage and operate our business. We reconcile these measures to the most comparable gap measure and you are encouraged to examine those reconciliations.
With us today, our Ryan Martin, madam CEO , and Mark Frost, the CFO . I will now hand it over to Ryan.
call. Our performance for the quarter was above management's expectations as we extended Fathom's track record of profitability and cash generation.
During the quarter, we executed well against our expanded optimization plan while taking active measures to strengthen our go-to-market strategies.
As discussed on our previous call, we took advantage of the temporary softness in the macro environment in Q1 to expand our original optimization plan and further right-size our business.
Of the current $19.5 million in projected annualized cost savings, we realized approximately $3.5 million in the first quarter, bringing the cumulative amount to $5.3 million.
two Texas-based facilities that we acquired prior to going public.
We also reduced our workforce by an additional 14% while prioritizing our investments and operations in line with the near-term revenue generation.
We expect to complete our cost reduction initiatives in the current second quarter and realize the benefits of the remaining 14.2 million in savings throughout the remainder of 2023.
While Mark will discuss our financials in more detail, the ongoing execution of our restructuring efforts contributed to a Q1 gross margin improvement of 810 basis points on a sequential basis. We remain committed to ensuring an efficient cost structure and will take additional steps as appropriate to ensure that we meet our financial goals. Thank you.
our new Silicon Valley Technology Center in Fremont, California. This state-of-the-art hub provides a unique opportunity to introduce corporate enterprise customers to some of the latest advancements in additive and traditional manufacturing while enabling Fathom to maintain a strategic presence in the Bay Area. Our new Evolve additive solution is among the innovative solutions.
by dramatically reducing lead times for parts across various applications without compromising quality, throughput, scalability, or cost.
In maintaining our focus on accelerating customer engagement, we bolstered our commercial leadership in Q1 with the appointment of Kurt Bork as Fathom's Vice President of Sales and Marketing. We believe his considerable experience in enterprise sales and strategic growth management will add considerable value in this newly created position.
as we renew our efforts to expand our share of wallet with strategic customers and add new corporate accounts.
In the brief periods since Kurt joined Fathom, we have built positive momentum advancing these critical objectives. Recently we received formal approval as a production supplier for a leading semiconductor capital equipment provider and a manufacturer of thermal solutions for the EV industry.
that we believe has the potential to deliver $10-15 million annually in aggregate incremental new business for FATM.
With these two large strategic customers, we expect to strengthen our pipeline with more stable and predictable revenue streams while further enhancing our ability to leverage our extensive low to mid-volume production capabilities. Notably, the approval to become an approved production supplier for the semiconductor company took over a year to secure and creates a significant barrier to entry for competitors and underscores the importance of Fathom as a critical supplier.
And finally, on this slide, we took steps during the quarter to increase our financial flexibility. Specifically, we amended our existing credit facility under favorable terms, providing for extended covenant relief through Q1 2024.
These modifications strengthened our ability to withstand the ongoing uncertainty in the global economy as we maintain our focus on preserving Fathom's long-term financial health while investing in the growth of our business. Additionally, the execution of our $19.5 million optimization plan
contributed to notable improvements in our net cash provided by operations, adjusted EBITDA and adjusted EBITDA margin on a sequential basis.
By actively managing our cost structure and preserving capital, we expect to further improve our profitability and leading margin profile over the remainder of the year and generate positive free cash flow in 2023.
I'm pleased by our company's ability to adapt to persisting macroeconomic headwinds and believe our resilient workforce combined with our diverse enterprise level customer base and comprehensive manufacturing services and deep technical expertise positions our company well to not only navigate the near-term macro challenges but
of our forecast of 34 million but down from 40.5 million in quarter one 2022.
In Q1, the macroeconomic headwinds persisted as certain production customers, particularly in the capital goods and building industries, have delayed new purchase orders amid the ongoing market uncertainty. We remain optimistic the bulk of these pending orders will eventually close, most likely in the second half of the year. Now although near-term demand remains soft, we continue to make steady progress ramping up our new commercial activities.
The Citizen Sheet Metal was $10.4 million or 29.7% of total revenue, reflecting the ongoing softness in the macro environment.
Injection molding was $4.7 million or 13.4% of total revenue.
including the condensing of product development cycles, consolidation of supplier partnerships, and the near-shoring of US manufacturing to ensure a more agile and local supply chain. We will continue to monitor the market landscape and remain committed to providing global product-driven companies with timely, value-added solutions that leverage our robust, on-demand digital manufacturing platform. Now turning to slide five, we provide our adjusted evil performance for the first quarter.
In Quarter 1, our adjusted EBITDA totaled $4.1 million, representing a margin of 11.7%. This was above the high end of our forecast of $3.5 million, with a sequential margin improvement of 380 basis points despite lower sales.
In quarter one 2022, we reported adjusted EBITDA of 6.2 million for a margin of 15.2%. Now our performance for the quarter was primarily driven by lower sales volumes and the associated overhead absorption impacts.
We partially offset the absorption impact by achieving notable progress in lowering our cost structure based on the continued execution of our $19.5 million optimization plan, which contributed to a gross margin of 34.1 percent, up from 26 percent in Q4 2022.
We also benefited in the quarter from strategic price increases, which should have a positive impact for the remainder of the year and into 2024.
In the prior year period, our gross margin was 37.5% when excluding the 3.2 million in one-time non-cash purchase accounting adjustments.
Now looking ahead, we anticipate further improvement in our gross margin, which is expected to be in the high thirties for the full year 2023 as our restructuring efforts continue to take effect.
Now, following the launch of our plan last year, we remain on track to realize approximately 90% of the anticipated $19.5 million in cost savings throughout 2023, with approximately two-thirds of the total benefiting a gross margin, with the remaining one-third resulting in lower SG&A expenses.
Now, for quarter one, our SG&A totaled $10.8 million, a year-over-year decline of 27 percent due to the impact of lower sales combined with a reduction in people-related expenses using practices of 66 seconds parallel to an expected sometime between May 18 and August 25, 2014. S Evidently, however, that is considering profitable business options and allowing
stock compensation, and public professional fees. Now as a percentage of revenue, SGA decreased to 30.8% from 36.4% in quarter one 2022.
Compared to the previous fourth quarter, SG&A declined 6.6%, notwithstanding the higher cost in quarter one related to the publication of our annual report and other SEC filings. Excluding stock compensation, our recurring public company costs declined again.
on a sequential basis to $1.5 million in quarter one, compared to $1.8 million in quarter four. In quarter one 2022, our recurring public company expenses totaled $2.3 million, reflecting the significant gains we have achieved over the past year in rationalizing our public company infrastructure.
Now on slide six we show our liquidity and cash flow. We ended the first quarter with available liquidity of $20.1 million. This includes $12.1 million in cash and cash equivalents and $8 million of undrawn commitments under our $50 million revolving credit facility.
As of March 31st, our total gross debt excluding cash was $162.3 million and that debt totaled $150.2 million with no debt maturities before December 2026.
The amortization of our term debt was offset by an increase in the usage of our revolver. Now cash provided by operations in quarter one totaled $0.5 million, which reflects an improvement in our working capital balance.
This compares to cash used in operations of $3.4 million in Quarter 4, a sequential swing of just under $4 million. In Quarter 1, our capex was reduced to $1.9 million, or 5.4% of revenue, which was consistent with our expectations and includes payments from some previous commitments made in 2022.
Our focus remains on limiting non-essential capital expenditures to generate additional cash savings with only focused capex investments critical to near-term growth.
Now, and finally, as Ryan mentioned earlier, we reached an agreement in quarter one with our senior lenders to amend our existing credit agreement providing for extended covenant relief.
Specifically, the minimum net leverage ratio and interest coverage ratio have been suspended through 2023 and replaced with a minimum adjusted EBITDA and available liquidity requirement. Both covenants will be reinstated in quarter 1, 2024, beginning at 5X for net leverage and 2X for interest coverage.
We appreciate the support of our lending group in further enhancing our financial flexibility as we continue to reduce costs and optimize our cash position.
Now, I'll turn to slide 7 and we provide our forecast for the second quarter of 2023.
For the second quarter, we anticipate further benefits from the execution of our $19.5 million optimization plan. We've realized savings approximately $4.5 million, up from $3.5 million in quarter one.
As we seek to maintain attractive levels of profitability in line with our backlog, the challenging macro-environment continues to weigh on our sales outlook. As discussed previously, the near-term economic uncertainty has led to lower customer inventories and extended sales cycles for new waters.
We are cautiously optimistic these trends will begin to improve in the second half of the year as manufacturing activity recovers and our commercial actions continue to take hold.
Currently, we expect Quarter 2 revenue to range between $32 and $34 million and adjusted EBITDA range between $4 and $5 million. This represents an implied adjusted EBITDA margin of 12.5 to 14.7%, up 80 to 380 basis points from Quarter 123.
Additionally, we remain on track to achieve positive free cash flow for the full year 2023 and expect to achieve a year over a year increase in our adjusted EBITDA while enhancing our ability to generate significant operating leverage once the overall market recovers.
I'll now turn the call back over to Ryan. Ryan? Thank you, Mark. I'm going to provide some closing comments on slide 8.
Our results for the first quarter demonstrate management's commitment to take aggressive actions aimed at driving future performance in a challenging macro environment.
The ongoing execution of our $19.5 million optimization plan will help ensure we maintain attractive levels of profitability as well as cash generation while our commercial enhancements continue to gain more traction.
By strengthening our go-to-market efforts, we intend to focus more on our strategic relationships within the Fortune 500 tier companies and return to market outgrowth for our additive and traditional manufacturing technologies.
We believe the positive long-term fundamentals in our industry remain intact and that our flexible hybridized approach integrating speed, quality, technical ingenuity, and problem solving positions fathom well to continue to meet the high mix, low to mid volume production needs.
companies in a manner that supports customization. Our focus remains on leveraging our profitable business model including an extensive and entrenched blue-chip customer base across diverse end markets and a breadth of leading offerings driving long-term scalable growth.
This concludes our prepared remarks and we'll now open the call for questions. Thank you. Ladies and gentlemen, if you'd like to ask a question, please press star followed by one on the telephone keypad now.
When preparing to ask your question, please ensure your phone is unmuted locally.
Our first question comes from Jim Ritueli from Lidum & Co. Jim, your lines are open.
Thank you. Good morning. Mark, first off, just wanted to make sure I
clear on this. So as you think of that adjusted EDA in 2023, you still think you could be up for the year as a whole? Did I hear that correctly? That is correct. You know, based on our cautious optimism for the second half.
last year's adjusted EBITDA number of 24.9 million.
You know with the optimization plan you know underway and it sounds like things moving a little faster what kind of revenue range?
is required to realize that level of adjustment. I know mixed plays a big role on this, but there's a range that we should be thinking of.
would be required to realize that level of adjustity. I know mixed plays a big role on this, but I'm just if there's a range that we should be thinking of that gets you there.
Yeah, what I would say Jim is we will need to improve upon our current guidance and be at a higher level level in the second half. I don't think it's a massive improvement but we will need improvement for our quarter three, quarter four second half revenues.
And I think I indicated last call, Jim, that
We see improvement, you know, towards hopefully...
improvement towards hopefully, yeah, I'll leave it at that.
Okay, I have one other question. You came in modestly above your revenue, guys.
for Q1 and so I'm curious what drove that and as it relates to that, normally Q1
is she's only your weakest quarter. If we take the low end of your guidance for June , I'm just wondering what maybe factors into that is obviously macro, but I'm also curious if there were any unusual contributions possibly in Q1 that from a business line standpoint that may not repeat in Q2.
Yeah, Jim, Ryan Martin, good morning to you. I would say, you know, as it relates to Q1, yeah, typically, you know, you're right on that, you know, it continues to build through that. I think we've continued to be cautiously optimistic in the macro environment as we look into Q1.
efforts that we're taking and bringing on Curt with some key customers there, as well as we've seen some of our production customers that we talked about in Q1 that were delaying some orders, some of the stuff that Mark talked about. We're starting to see those reorders start to play out towards the end of April and beginning to May. And so I think we continue to be optimistic that the momentum that can keep up with the actions that we're taking will be...
With our next question comes from Greg Palme from Greg Helen Capital Group. Gregialize Open.
Thanks. Good morning, everybody. I wanted to maybe just follow up on the last bit of thinking here, maybe just in terms of visibility, whether it's gotten better or worse or maybe unchanged relative to, you know, I don't know, six, seven weeks ago. And can you maybe just quantify the amount of some of these production orders that you alluded to maybe coming back in the second half? Thank you, everyone, and thanks for listening.
talked about before, one of the real strengths of the Fathom manufacturing platform is, you know, the long term relationships we have with many of these, you know, fortune 500 tier companies. And what we've consistently seen as I've talked to them and Kurt and others in our sales team is that
You know, we are not losing that business. They've just had a reduction in their inventories as they've been more cautious. What we're seeing here play out over the last couple weeks as we continue to meet with these customers, we're starting to see their inventory levels have came down. The demand hasn't slowed up as much as maybe they thought it would. And so now they're starting to have to reorder. We had a couple large medical customers that placed pretty significant...
You know, we've seen a slowness there, but they're anticipating a pretty big ramp into the second half of this year and really into 2024, which is, I think, pretty consistent across the industry. So, we are seeing more visibility into the orders and into the pipeline, which is going to continue as that starts to materialize and ultimately converts into order.
current quarter, maybe you can just tell us kind of what your assumptions are, based on these last, whatever six weeks. But sounds like maybe it's just more of a timing thing where that's gonna hit and contribute more in the second half of this year versus the specific quarter we're in.
Yeah, Greg, let me let me comment on that. And this goes to, you know, our better understanding of NPI versus production, where, you know, an order comes in for NPI. You can turn it around within weeks as you're familiar with. With these production orders, as Ryan indicated, we saw a continued soft April both on shipments and orders.
That then colors our view of what's going to happen in May and June because you have to bring the orders in and then you we will likely And most of these cases deliver 30 to 60 days out for a production order once you get the order in-house Now as Ryan said we're starting to see in May and our expectation is we'll see more
I would say multi-million types of orders in June , that we won't have the capability to deliver that until the second half, Greg, is basically the situation. And that's why we're being cautious optimistic. Now, if we do have more NPI type orders, that could lead to an outperformance on what we're talking to you about today. But if it is, we'll be happy to answer any questions.
purely production, likely receiving the orders in mid-May, early June means it's not being delivered till July or August in the second half. Does that help, Greg?
Yes, understood that that makes a lot of sense and I guess just lastly I wanted to touch on a couple of these these customer wins and I guess it wasn't clear whether these and I'm alluding to the 10 or 15 million of new business or these new customers are these.
wallet share expansion opportunities and just to be clear are these do you have orders in hand or maybe a little bit more color around the timing of this incremental new business because it was pretty significant at least in size.
Yeah, so related to the.
The semiconductor is really an expansion. We've been a large customer for us. We've been a conditionally approved supplier for a period of time. So becoming a full production supplier for them allows us to be able to access their entire buyer network across that. And so we have a combination of new orders in hand.
As well, as it opens up a significant funnel for new opportunities and based on the conversations we've had, we feel pretty confident around around those numbers and what we've discussed with the company and the different programs that we're going to be working on for them. As it relates to the.
The, the other related thermal supplier that is a really a new customer for us from a production standpoint. So that's new incremental where we do have orders in hand as well and then we're ramping from that. And so we're working on the, the 1st orders that we've gotten for them on. Sheet metal fabrication parts.
Understood. Okay, appreciate all the color.
Understood. Okay, appreciate all the color. Thank you, Greg.
As a reminder ladies and gentlemen, if you would like to ask any further question, please press star followed by 1 on your keyboard now.
When preparing to ask your question, please ensure your phone is muted locally. We have our next question, comes from Paul Zhong from JYM. Paul, your line is now open.
Thanks for taking the question. Chris Martin saw a nice rebound here.
sequentially despite some lower revenue. So as we think about the rest of the year, can you expand on some of the cost action impact on gross margins and where we should kind of shake out as we exit 4Q? Sure, Paul. So there's a number of elements in the cost plan.
One was the downsizing by about 14% of our labor force. So that's one of the first elements.
The second element was the consolidation of our Oakland facility into Heartland, which was completed at the end of the year. So that triggered benefits of starting 1-1. The third element was the consolidation of our two Texas sites, which...
which finished by the end of March. So we'll start seeing those benefits in quarter two. And then the fourth element was the management of overtime. And then a last element is the management of cost saving projects both in quarter two and quarter two.
from a material savings, better contracts, as well as other indirect cost initiatives. So all of those elements together, you can see it's multi-dimensional. All of that will be in place by the end of quarter two. A lot of it's already been executed.
And then it's just a question of realizing those savings through gross margin as we go through the year. So that gives us confidence, Paul, we'll be towards the high 30s as we exit the year at the end of the year. So, you know, another further 400 basis point improvement.
in our gross margins.
Okay, great. That's a very good improvement.
That's a very good improvement.
We have the seasonal slower in one queue. You mentioned a kind of positive free cash flow for the year. So how do we think about how that cash builds through the year? Thank you. Yeah, so we had a nice sequential improvement. You know, we're still negative free cash flow. We're a positive operating cash flow.
more aggressive.
particularly on our AR and collection efforts. So we're seeing a drop in our DSO, and we saw that in the first quarter and expect to see further improvements. And we're looking at our inventory and DPO management as well. So all those elements contribute that our belief will.
we'll get to positive free cash flow likely by fourth quarter on a run rate basis.
Great. Thank you so much. Yeah, no problem. Thank you, Paul. We have a follow-up question from Jim Ritchie from Needham & Company. Jim, your lights are open.
Just on the end markets, Brian , you talked a little bit about what you're seeing, hearing in semi-cap, and it looks like you saw a little bit of a pickup in demand in medical. I wonder if you could give us some color on some of the other...
in markets, particularly the ones that have been lagging. You mentioned, I think Mark alluded to capital goods and the building industry. Are you guys anticipating that?
a change in demand that gives you the confidence as you look out into the second half? Great question, Jim. As it relates to the capital goods, semiconductor obviously, I think everybody is very familiar, big ramp, and now we have a little bit of a...
slow down and then long term, you know, the trends remain very, very optimistic related to the growth of that industry. So I feel really good about how we're positioned with some of our key customers to support their growth on that side of things. Areas that we're continuing to see growth in that we're really well positioned, Jim, transportation, EV,
Automation, aerospace and defense, we're continuing to see growth in those areas. I'd say the capital goods and building supply industry continues to be a little bit soft. I haven't, you know, starting to see some signs of come back there, but I think we're going to continue to see some softness there. And so.
is my view. And so from a commercial perspective where we're focusing a lot more of our attention is the areas that we are seeing growth, which is medical, transportation, EV, automation, aerospace and defense. We're continuing to see great traction there. And then we think, you know, towards the second half of this year from the semiconductor side of things, which is an important industry for us as well. We'll see start to come back in the second half of this year and from all the conversations I'm having with the executives, some of our key customers in that in the semi industry.
We have no further questions on the line. Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.
We have no further questions on the line. Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.