Q3 2023 Fathom Digital Manufacturing Corp Earnings Call
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Good morning, everyone and welcome to the fall from 50 told manifest train five school top she fell from 23 on its conference call. All lines have been placed on mute during the presentation portion of the call, but the opportunity for a question and answer.
If you'd like to ask a question. Please press star followed by one on your telephone keypad I would now like to turn this conference call I bought two eyes.
Investor Relations Vanessa wouldn't talk please go ahead.
Thank you and good morning, everyone. Welcome to Fathom third quarter 2023 earnings conference call before we begin I'd like to mention that today's presentation and earnings press release are available on <unk> website, Fathom Mfg Dot com.
Where you will also find links to our SEC filings along with other important information about our company turning to slide two we note that this presentation contains forward looking statements within the meaning of the Securities Exchange Act. We encourage you to read the risk factors contained in our filings with the SEC become aware of the risk and uncertainties in our business.
And understand that forward looking statements are only estimates of future performance and should be taken as such forward looking statements represent management's expectations only as of today and the company disclaims any obligation to update them. We also note todays presentation includes non-GAAP financial measures to describe the way in which we manage and operate our.
Business, we reconciled these measures to the most comparable GAAP measure and you are encouraged to examine these reconciliations which can also be found in the appendix to our press release and a slide presentation.
With us today are Kerry Chen <unk>, Chief Executive Officer, and Mark Frost, The Chief Financial Officer, I will now hand, the call over to Mark.
Thanks Vanessa.
Welcome to Fathoms third quarter 2023 conference call as you're all aware, we recently announced that carry Jan was appointed CEO of Fathom, we're happy to have him join us today for his first earnings call Cary has been an active member of Fathoms Board for the past two years and previously served.
As a director of <unk> predecessor company for the past four years. He is an accomplished business leader with experience in global manufacturing and an extensive background in the industrial space.
I'll hand, the call over to Terry for some introductory remarks, and then I'll return to provide a review of our operating performance and financial results Gary.
Thank you Marc it's a pleasure to be here today as fathoms recently appointed Chief Executive Officer. My remarks. Today will include a brief summary of my background. Some high level observations of where we are today as well as the growth opportunities I see for fathom moving forward.
I will also discuss our long term goals and objectives to rebuild shareholder value as well as my top priorities and key areas of focus as CEO to achieve those goals.
I'll, then turn the call back to Mark for a review of our operating performance and financial results for the third quarter of the year as well as our full year outlook.
Before I begin I would first like to recognize Ryan Martins leadership role in guiding fathom through the company's transition to becoming a publicly traded company and establishing problem as an industry leader with strong prospects for the future.
My experience in manufacturing and food almost three decades of operational and management leadership with several growth oriented tech companies and a wide variety of industrial sectors.
As Mark mentioned I have been on <unk> Board since 2021, and a board member of its predecessor companies. Since 2019 I believe this experience over the past four years has provided me with an understanding of fathom strengths. The current challenges, we face as well as the opportunities that exist in the on demand digital manufacturing arena.
Including additive manufacturing metal cutting CNC machining and injection molding amongst many other service capabilities.
We believe that we have a significant opportunity to partner with quality manufacturers across a wide variety of end markets, given our superior manufacturing capabilities and reputation for delivering unique value added solutions.
At a high level.
<unk> remains a formidable leader in an evolving industry with significant underlying strengths our customer base represents high quality enterprise customers, many of whom represent a reliable recurring revenue source, we have superior manufacturing assets across a wide variety of complementary solutions or evolve stuff technology and our new <unk>.
<unk> introductions reflect a strong culture of innovation problem solving and creativity that is focused on providing market leading customer solutions. We service a wide variety of end markets, which include health care defense and other growth verticals and looking at our third quarter performance, we have several key wins, including <unk>.
EV manufacturer for injection molding and a defense contractor for CNC machining both of these new customer examples represent seven figure wins.
As you know we have taken several steps earlier this year to add experienced talent to our operating and sales teams dug beaten recently joined US as Chief operating Officer, and Kirk Board as Vice President of sales, both Doug and have done a great job in repositioning our resources to respond to the current operating environment that exists today.
I am confident that we have the internal resources in place to successfully execute our growth plans.
This leads me to my comments on our approach to building shareholder value. Our goal is to position the company to deliver sustainable revenue growth and leverage our operations to deliver meaningful profitability and margin expansion over time.
We've already taken decisive actions to reduce our cost basis through our optimization plan, we still have room to go but believe we are headed in the right direction I am a firm believer that a solid capital structure built to generate free cash flow is critical for a tech company like fathom to invest innovate and deliver strong sustainable earnings let me.
Turn to my initial top priorities in our areas of immediate focus my first priority is to work with our lenders and large shareholders to delever, our capital structure to free up cash and improve liquidity. We will also continue to limit non essential capital expenditures, Mark who will offer more details on this in a bit my next priority.
<unk> is to reposition our new business development efforts.
Resources against more recession resilient industrial sectors with a focus on those with positive mega trends.
In terms of our expense maintenance and reduction.
We'll continue to execute on the optimization plan, we initiated earlier this year and we will further identify opportunity to better align our expenses with sales and order flow.
Jay.
Reduced overall expenses by approximately $13 million and have eliminated redundant operating facilities.
My fourth priority is to create a flexible and nimble workforce that can accommodate both are low and higher volume business, while maintaining adequate burst capacity for incremental needs.
The final priority is to build scale throughout our entire operations.
And positioned to capitalize on new growth opportunities as business conditions improve in summary, I am excited about the opportunity to lead fathom. During this pivotal time in the Companys short history.
The excitement and optimism is based on our inherent strengths superior manufacturing capabilities excellent customer relationships and talented workforce combined with the large opportunity that exists now and going forward and the on demand digital manufacturing industry.
We will continue to provide outstanding service to our customers and deliver value added solutions that help them grow and compete efficiently in their respective markets I look forward to meeting you our public investors and analysts and sharing our progress along the way now.
Now I'll turn the call back to Mark for a review of the financial results Mark.
Thanks, Carrie I'll begin my remarks on slide three where we provide our quarter three highlights.
Our performance for the quarter was mixed we experienced order softness in several of our key end markets, including precision sheet metals and CNC.
In the third quarter, we delivered revenue of $31 5 million in line with our expectations and adjusted EBITDA of $3 1 million, representing a margin of nine 8% orders were $29 1 million down from $38 million in the prior quarter.
On slide four we highlight some of our key business wins during the third quarter and year to date stay.
Staying close to our customers, especially during this uncertain time remains a key priority for us as Carey mentioned in one of his new initiatives is focusing on markets that are less cyclical are performing well one market that is performing well as electric vehicle manufacturing during the quarter, we received a $1 5 million order for injection.
Holding an additive manufacturing for an EV client as the sustainability that electric vehicles offer has proven to be a resilient market.
On the last cyclical side, we had two wins in power generation, one for 300 400000 sheet metal and another for 300000 for injection molding and additive manufacturing.
The last one I would like to highlight is a notable win with a global defense contractor for CNC machining as we mentioned last quarter. This customer has the potential to be a recurring customer contributing up to $3 million annually over time.
I'll now move on to the financial results for quarter, three which begin on slide five.
Our revenue for the third quarter totaled $31 $5 million, which was within our guidance range and down from $40 2 million in the same period a year ago.
While we continue to make progress in ramping up our commercial activities and strengthening our go to market strategies. We have had some headwinds impacting our business in the near term impacting both our orders and shipments some customers are ordering more conservatively in reducing inventory as they lower their safety stock.
Other customers are responding to the uncertain environment by pushing out orders, which is delaying our shipments and lengthening our sales cycles.
Our revenue by product line for the quarter was as follows CNC machining totaled $12 5 million or 40% of revenue slightly down from $13 2 million sequentially, but a higher percentage of overall revenue.
Precision seat matter was $9 5 million or 33% of total revenue. While this business is roughly flat with $10 2 million sequentially. It remains the main drag of our year on year decline.
Injection molding was $5 4 million or 17, 1% of total revenue.
Additive manufacturing totaled $2 7 million or eight 6% of total revenue with the launch of our New Technology Center, we expect to build a more robust pipeline for evolve and finally ancillary technologies, our smallest product line was $1 4 million, representing four 3% of total revenue.
Turning to slide six we provide our adjusted EBIT performance for the third quarter.
In quarter, three adjusted EBITDA totaled $3 1 million, representing a margin of nine 8%. This compares to adjusted EBIT of $7 1 million or 17, 5% in quarter. Two 2023 as noted profitability was impacted due to lower orders as our customers worked through their excess inventory.
We've taken significant action to reduce our cost structure. So we are positioned for improved operating leverage.
During the quarter, we realized cost savings of approximately $4 7 million from the continued execution of our optimization plan. This included approximately $2 5 million of general and administrative savings and $2 $6 million in Cogs. The savings were an improvement when compared to cost savings of $4 3 million realized in the.
Quarter, bringing the cumulative amount of the <unk>.
First nine months to approximately $14 7 million.
We have responded quickly to the lighter order volume. This order volume this quarter and expanded our cost savings in September to include an additional $4 million. This will bring our total cost savings initiative to $23 1 million up from $19 $5 million communicated previously.
Going forward as Gary stated, we will continue to focus on less cyclical markets and those are positive mega trends to ensure operational activities align with our customer commitments.
For quarter, three our SG&A totaled $8 1 million a year on year over year decline of approximately 32% and a 14% sequential decrease this decrease represents a 400 basis point improvement from last year's third quarter.
The decrease was largely driven by the impact of our optimization plan, along with lower professional costs associated with the business combination reduced stock based compensation expenses and lower head count now.
Now excluding stock compensation, our recurring public company expenses in quarter, three decreased to approximately <unk> 9 million compared to $1 1 million a year ago.
On slide seven we show our liquidity and cash flow.
We ended the third quarter with available liquidity of $15 8 million. This includes $7 8 million in cash and cash equivalents and $8 million of undrawn commitments under our $50 million revolving credit facility.
As discussed in the past we have continued to pursue actions to deleverage our debt near term yesterday, we signed an amendment to our credit facility more details of the agreement are available in our 10-Q.
As of September 30th our total gross debt, excluding cash was $159 2 million and net debt totaled $151 4 million with no debt maturities before December 2026.
Cash provided by operations in quarter, three totaled $2 3 million up from $1 7 million in quarter, two reflecting continued improvement in our working capital management. In addition, supported by our working capital improvements as well as our optimization plan, we improved free cash flow by $3 8 million year to date.
In quarter, three our Capex year to date was $4 3 million.
This was comprised of $2 3 million of equipment purchases and approximately $2 million for investments in it systems to support future growth as.
As we mentioned last quarter, we continue to make progress with ERP and ADP systems in the quarter. Another site went live on our ERP platform and we soft launched our edp.
Program application I should say, which we are in the process of fully rolling out in quarter four.
Now turning now to slide eight we provide our forecast for the fourth quarter of 2023.
We expanded our cost savings actions consolidated our footprint and lowered our expense base as we position ourselves for scalability for the fourth quarter, we anticipate realized cost savings of approximately $4 million from our optimization plan, we expect to recognize the balance of $4 million further of the optimization.
Plan in fiscal 2024 now.
We continue to see orders taking longer to convert to revenue we remain optimistic market conditions will improve as lead times come down and customer inventories returned to more normalized levels.
Currently expect quarter for revenue and adjusted EBITDA to be in line with our quarter three performance. The continued execution of our optimization plan, coupled with upgrading key operational team members positioning us positions us well as the environment improves I would now like to turn the call back over to the operator for questions operator.
Thanks, Keith if you would like to ask a question. Please press star followed by one on your telephone keypad. If for any reason you sound like your question has been answered then you'd like to withdraw it stops on a psyche and as a reminder, if youre using a speakerphone. Please pick up your handset before asking your question.
Yeah.
So our last question comes from the line of Jim Ricchiuti of Needham. Your line is now open. Please go ahead.
Alright, thank you.
Good morning.
I wanted to go back to.
Some of the.
The commentary around improving.
Growth in profitability and maybe before we get specifically to that can you talk about the sequential decline in gross margin.
How much of that came from volume and how much.
She came from from pricing and I guess my question is just related to.
More to where the volumes begin to recover and I'm wondering what a realistic range of gross margins might look like for the business.
Sure I'll take the call. So the primary reason was was our revenue dropping from 34 million to 31, five so that we have as we've talked in the past.
30% of our cost would be considered overhead purely fixed but we have another 40% coming from labor, where unless you can immediately take actions Jim as we've talked about.
It acts like a fixed cost so basically what happens is we lose 70% unless we take actions to resize, particularly our labor force and that's indeed, what we announced on the call. So.
Our primary issue was absorption so.
To answer the second part of your call our expectation still is if we can get back to you.
Sort of a mid 30 revenue levels that we should be back to the low <unk> to mid 30% type of gross margin.
But coming to this level now.
Step back and we are taking actions that we hope.
Even at this level of $31 $32 million, we can get back towards 30% and that is our expectation and hope for quarter. Four is we'll be able to do that so does that give better color Jim on the situation. It does mark yes. It does I appreciate that.
If we think about.
Sure.
Strategy focus you have on some of these more resilient markets and when I hear even evs and how much.
Resiliency is there potentially were seeing some signs of.
Weakness, even pockets of weakness in that market and.
Wonder.
You think about the business is the focus going to be more on.
Generating business with newer customers.
Or really expanding the presence with existing I'm sure, it's probably both but.
Near term, where do you see the opportunities to maybe drive some revenue growth.
Yes, Jim So I think you answered my question for me. So it has answered all of the above.
So we have a very key strategic account managers that will continue to maintain and cultivate our existing enterprise level customers, but as you mentioned from a new business development standpoint.
I'm.
A fan of Wayne Gretzky and he always said you know what made him great wasn't scared.
Skating to where the puck was but.
Where it's going so.
As discussions of recessions and things of that continue to loom on.
There are some industries, regardless of what the economy does.
Think people still need electricity whatever the economy does I think people will still need medical attention and whatever the economy does the country will need to remain safe. So those are examples where we might shift our new business development focus as far as EV is concerned.
I guess we were.
Bit different from the current trends with our recent win.
But we are hopeful that as Mark you wait markets fluctuate up and down.
That 2024 will be a good rebound for that particular sector.
Okay. Thank you I'll jump back in the queue. Thanks, Good luck.
Thank you.
Thank you.
Our next question comes from the line of Greg Palm of Craig Hallum Capital. Your line is now open. Please go ahead.
Hey, thanks.
Good morning, and thanks for taking the questions.
Kerry I just wanted to maybe follow up a little bit.
With.
Your line of thinking around it.
The strengths the opportunity some of the challenges maybe if we can just start off giving us a high level review of of maybe what went wrong or what the company and counter to some of the most significant challenges over recent maybe their recent year I know macro and sort of overall economic condition.
They have been pretty pretty uncertain, but just from a strategy standpoint is there anything that you can point out that maybe it's top of mind.
Sure. So the way I look at the business and.
Coming into the role of CEO I still remain very bullish about going forward as I mentioned before I believe the company has amazing manufacturing capabilities, that's one key asset and as I.
<unk> gotten to.
B re acquaintance with some of the employees and get to know others.
Just amazed at their attitude their creativity and innovative spirit.
As we also mentioned we do have a very strong collection of high retention of enterprise customers.
A very strong capable management team that is ready to take the company to the next level.
As you mentioned, we have had some macroeconomic difficulties that haven't necessarily been are in our favor since we've gone public.
So my approach isn't to necessarily focus on the things that arent going our way.
But it's that's a focus on the things that we can control. So as Marc discussed we are still focused on our cost optimization plan.
Just as you mentioned increased by about $4 million.
And then as I also just talks with Jim about we intend to focus on markets that are either more recession resilient.
Positive mega trends going forward.
Got it okay makes sense.
And Mark I know you mentioned the.
The amendment from the lender perspective, I think you said, it's disclosed or will be disclosed in the Q I know that's not filed yet can you give us any sense on that amendment and what it entails and any update on when that you will be out.
Sure the Q will be out this afternoon.
Let me give you some high level as we've discussed the last couple of quarters.
We have continued to pursue actions and Carrie mentioned this in his opening remarks to deleverage fathom.
And we think this amendment should accomplish that fact, so a couple of major elements I think first.
We appreciate the support our lenders have given us we think this will give us a lot of flexibility and it works through a long term solution, we think for the forward future of fathom. So.
The first element is a resetting of various covenants, including leverage.
And liquidity.
The largest element actually is a commitment from our majority shareholder or other.
Other players.
To pay down $50 million of our debt.
At the end of first quarter or within the second quarter, either from a form of equity capital or a guarantee letter of credit structures, so that element.
We think we'll accomplish our ability to significantly progressed deleveraging.
The business there are some other elements that youll see.
In the 10-Q.
And we will file of course, the full amendment, so you'll be able to see that when we file. Our 10-Q later, so hopefully that provides enough detail Greg.
The amendment.
Yes.
That does interesting okay.
Thanks, a lot.
Thank you.
Yeah.
Final question comes from the line of Jacob Stevens.
Your line is now open. Please go ahead.
Yes.
Hey, guys. Thanks for taking my questions.
I'm just kind of want to focus your independent noted the stronger and environments for your solutions, but.
Maybe can you just talk about some of the end markets.
But were weaker than you had expected originally.
Sure.
I'll take a shot at that carry so.
The largest one has been the semiconductor side of our business Jackup.
And that hits in that particularly our precision sheet metal, but it's also hit some of our CMC activities.
The other one.
Actually started off well I'd say, the first quarter, but the last few quarters, we've actually seen weakness in medical and more specifically in the diagnostic imaging side of medical now talking to those customers Jacob the sense is this is a pause.
And they expect this to re energize as we go into 2024.
And we actually have recently seen some orders which suggests that.
That is our largest.
And market for the business in the high 20% level.
So that that particularly contributed in quarter three.
To the lower order rate and lower shipment rate for the business.
Okay, and maybe just on that point when you think about the more resilient markets.
Medical being one of those.
Are you focusing more on kind of the medical device side.
And.
Have you kind of pursued the qualifications for these.
Applications could you just kind of talk about your strategy.
Around medical.
Sure. So we have a medical certification at two of our sites checkups. So we continue to be highly focused on medical I think we had as I said a pause.
But we have a significant because of our certification.
You all probably understand that industry. It makes you sticky.
With your customers. So we will continue to focus on that.
As we move forward and as Carey indicated EV.
We will continue to focus on we've built some very good relationships with a lot of the significant EV customers and.
I would say electric vehicles are here to stay.
And particularly in the United States, So that will be continue to be a big focus area for us Jacob.
Okay. That's helpful. I'll hop back in the queue here at vessel luck going forward guys.
Thank you. Thank you.
Thank you as there are no additional questions waiting at this time I'd like to thank you all for joining us and thank you Tom manufacturing third quarter 2020 earnings conference call have a great rest of your day you may now disconnect your lines.
Yeah.
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Okay.