Xaar plc (XAR) Earnings Call Transcript & Summary

Welcome everyone to Xaar's 2020 Full Year Results. My name is John Mills, and I'm the CEO of Xaar, and I'm joined by Ian Tichias, who is our CFO. Today, we'd like to take you through the business highlights followed by the financial results for 2020 and then have a deeper dive into the 3 business units, finishing with a summary and outlook for the business going forward. After that, we will then be happy to take any questions you may have. I've been with Xaar now for 18 months, and I remain hugely excited about the opportunity we have. And I hope during this presentation, we get across why we are so excited and why we believe we will be successful. As we have previously discussed, we have undertaken a restructure and refocus of the business, and I'm delighted to say that we have made great progress across all the business units, and I'm particularly pleased that the go-to-market strategy for Printhead continues to deliver new accounts across wide range of markets. Also it's really exciting that we have such strong operational leverage in the business by which I mean there is significant relating capacity in the factory that can be realized with relatively low levels of further investment. We are also pleased today to launch Xaar Nitrox, the next product in our ImagineX platform. This product not only offers a 40% speed increase over previous, previous products, but the on-time delivery builds confidence in our ability to deliver the remainder of our product roadmap. I also have to thank every employee at Xaar for the way they have responded to the challenges thrown by the global pandemic, not only have operations run interrupted, but we have made huge progress on key projects across the business. This is all down to the flexibility, resourcefulness and hard work of our employees. Across the business, we have delivered revenues of GBP 48 million, which is in line with management expectations. We are also pleased to report that gross margins are up 2 points on last year at 27%, resulting in positive EBITDA for both Printhead and EPS. We had positive operating cash flow of GBP 7.1 million, allowing us to retain a strong balance sheet with net cash of GBP 18.1 million. We have announced this morning that we're in advanced discussions to divest the Xaar 3D asset, and as a result, it is now classified as discontinued operations. I will now hand over to Ian to cover the financial results.

Thanks, John. Firstly, it's my pleasure to present these full year results, particularly as they demonstrate the progress we've made. Looking firstly on our Group financial performance summary. And to reiterate the point that John made, this represents our Printhead and our U.S. Product Print business, EPS. Due to the ongoing discussions to sell our remaining stake in Xaar 3D, 3D is disclosed in discontinued operations and as an asset held for sale. Revenue for the year was GBP 48 million, which is in line with our expectations, and we're happy with this performance overall. Given the backdrop of wide economic uncertainty and the environment created by the pandemic, this represents a good performance, especially in our key Printhead business. Although the Group overall is down last year by 3%, we have shown growth in Printhead driven particularly in one of our key markets of Asia. It demonstrates, we have been able to stabilize and start to grow our revenue flows particularly in Printhead. EPS has been impacted by COVID as a strong start to the year with Q1 orders in line with the Q4 2019 exit rate was then hit with delays and cancellations of orders, which we believe we can recover during 2021. Gross margin is 27%, an improvement of 2 percentage points versus last year, which again is pleasing as it reflects some of the positive actions we have taken in the year. We are now starting to see strong P&L leverage in the Printhead business, the sales and production volumes increase. We have increased Printhead margin by 5 percentage points. We are also able to report positive EBITDA from continued operations, which is a significant step towards returning the business to profitability, which we aim to do in 2022. As you might expect, we've been very focused on cash preservation and are able to report positive cash inflow from our continued operations. This also takes into consideration our continued investment in R&D for the business, and we'll share more detail on that later. This good performance has come from a tight control and spend generally across the business with a particular diligent methodical approach to working capital, and this has enabled us to continue to still invest appropriately and judiciously. Accordingly, we have a robust platform. Critically, we have a strong balance sheet, which will enable us to build and invest further. So moving to revenue. Printhead revenue has grown 5% in the year compared to 2019. And also pleasingly has grown for the second successive 6-month period with H2 growth versus H1 at nearly 10%. This growth has been driven in our core sectors of Ceramics and Coding & Marking, which is pleasing and also reflects the return of some of our previous customers in EMEA and Asia. Together those 2 regions now represent around 80% of the Printhead business and with growth in Asia alone last year of over 30%. For EPS, there is a slightly different picture. Overall revenue has declined by GBP 3 million in the year. This has to be clearly linked to a COVID-related drop, particularly in our analogue pad printing sales, which tends to be delivered on a shorter order time and as a result, orders have been more easily delayed or canceled. We have seen some recovery in early 2021, and we do believe this will continue during the year. So looking with some more granularity by business unit. As already highlighted, we are really pleased with the good progress in Printhead. Along with the revenue growth, we have grown gross margin to 27%, 5 points higher than 2019. This is exciting as we have demonstrated consistent delivery of growth throughout the year. And again, this can be seen with the H2 performance versus H1. At half year, we reported gross margin of 23%, which had grown to 27% for the full year. And we do expect that momentum to continue with similar improvement in 2021. This improvement has largely come from greater efficiencies in our operations and reflects our controlled approach to managing orders, lead times and inventory management, which is now based on customer demand and demonstrates the strong P&L leverage that we have. We have closely managed OpEx tightly controlling discretionary spend across the business. And at the same time, maintained our commitment to R&D spending over GBP 4 million in Printhead. This commitment will again continue in 2021, as we focus the investment on our Printhead product roadmap. We have benefited from some positive one-offs in OpEx during the year, most notably about debt recovery that would have previously been provided and also with lower sales and travel costs, we will expect to see some rise in OpEx during this year. Accordingly, it's good news to report positive EBITDA for the Printhead business unit in the year. Coming back to the point of operational leverage, which John mentioned at the start. It's important to note that we have significant capacity in our Huntingdon factory. Over the years, it has been well invested. And it means that we have the capacity to increase revenue with volume growth by around 3x, with incremental investment of around GBP 2 million. We do have ambition to drive way beyond that. But clearly, with a relatively low level of investment, we do have a great opportunity to drive increased profitability and cash generation. And this is an area that we will return to and update further on our half year update. Looking at EPS, there is more of a mixed position. Through a change in approach and establishing a modular strategy and standardizing some of our product offering, something that we did discuss and referred to during our half year update, we have been able to increase our underlying gross margin performance by nearly 2 percentage points to just over 31%. This has been impacted by around [ $1 ] million of inventory write-downs in the second half of the year. These relate to legacy products and supports the process of streamlining our product offering, and we do believe it's the right and prudent action to take. Accordingly, the EPS business reports a gross margin of 27% against 30% last year. Good cost control in our OpEx has contributed to us delivering a small positive EBITDA in the year. Moving now to cash and what is a very positive performance. As critically, we have generated positive operational cash flow, which given the exit from 2019 and the scale of legacy issues to manage reflects the positive impact of the changes we have made. Excluding the impact of Xaar 3D, our continued operations have delivered an increase in cash of GBP 7.1 million from GBP 16.2 million to GBP 23.5 million, and crucially, cash generated from operations is GBP 8.1 million. Driven by positive EBITDA, coupled with the strong working capital focus, we have maintained limited but focused investment elsewhere. We have not taken any U.K. government funding for assistance. In the U.S., we [ did ] receive a U.S. government, payment protection loan of $1 million for our EPS, which we fully expect to be forgiven as we fulfill all the relevant criteria for that. We have also settled what we believe will be the last at the legacy liabilities from last year regarding the Thin Film business. This totals GBP 5.1 million in the year. So we enter 2021 with a strong cash balance which will enable us to invest judiciously to support and drive the business. So in summary, we are delighted with the progress. Revenue is in line with expectations showing growth in key areas. We have demonstrated the ability to increase margins, exhibit strong cost control and a focus on cash management. And as a result, we have delivered positive EBITDA, have a strong balance sheet, which gives a robust platform that will enable us to deliver growth.

Thank you, Ian. I will now take you through the key initiatives in the Printhead business. We have now simplified our route to market and customers are starting to engage and understand the new business model. This is particularly true in some of our core markets where previously we had lost customers due to our dual route to market. We are also seeing a growing interest in integrated solutions. And what I mean by that is electronic software and ink systems packaged together to meet customer requirements, helping them to [ cut ] development time and risk. However, we have identified areas where we need to further extend our product offering to fully meet their requirements. We now have a clear strategic plan on how to fill these gaps in order to provide a complete offering to our UDI customers. We have now opened an office in China to directly support our customers in that region. This is a critical step to support growth in the Asian market. Customers remain very excited about the product roadmap and the on-time delivery of the first 2 products is building confidence in Xaar's ability to deliver the future products. This confidence is critical to build long-term relationships. The new products also have a compelling value propositions, which is driving strong interest from customers, and what is pleasing is across a diverse range of markets. One of the challenges over recent years has been carrying significant overcapacity in the factory despite cuts in head count. As a result, Xaar has been operating below the breakeven point. However, this problem is now one of our biggest virtues as we enter a growth phase because we are able to grow the revenue substantially without any significant further investment in the factory. This will allow us to drive significant improvements in profitability in coming years as revenue grow. To support this growth plan, we are also looking at efficiency programs across the business in IT and operations, so we are able to scale the business without adding significant headcount. The business model is critical to Xaar. We have simplified the route to market, and we will only sell printheads designed and manufactured by Xaar. We are clear who our customers are, and they fall into 2 categories: firstly, OEMs, who build Print Systems and sell to other companies. These OEMs typically have a lot of digital prints experience and differentiate themselves by the way they integrate these systems. And as such, are less likely to want to buy integrated products such as print bars or print engines from Xaar. However, UDIs are customers who are building print systems for their own use, not sell to other companies, typically to replace an existing analogue printing process. These companies are not experts in digital print, and they value the integrated solutions and support that Xaar can offer to reduce their time to market and risk. By offering a flexible one stop shop, we are now seeing increasing interest from UDIs. OEMs typically make products that serve a single market for example, textile, ceramics or labels. It is the end use that defines the market segmentation. UDIs cannot be segmented in the same way as the industry often requires more than one type of printer. For instance, automotive covers a wide range of print applications, such as [ spray painting cars ], printing and fabrics, decoration of plastics, both internal and external use and glass printing. Each of these processes uses a different method to decorate the [ part ]. Therefore, UDIs needs to be categorized differently, and this is by the technology they replace. For example, replacement of spray painting is a UDI sector that covers automotive, aerospace, marine furniture and many other industries, but the enabling technology is the use of inkjet printheads on robots. On the right hand side of the screen, you can see a video of a Xaar Printhead being [ shown ] vigorously by a robot. But as you can see by the video underneath of the printed drops, the Printhead continues to function. It is significant that the functionality not required in more standard print applications can be a key differentiator for UDI application. It is the ability of Xaar's Printhead to continue to function under extreme acceleration that has positioned or as one of the leaders in the emerging market of replacing robotic spray painting with robotic inkjet painting. We are now working with a number of UDI customers in different industrial sectors who all have the common goal to replace spray painting with inkjet. The Xaar ImagineX platform is a collection of IP and technology that originates from 3 sources. Firstly, the significant investment in Thin Film over the past 10 years; secondly, the ongoing development of our [ bulk ] technology; and thirdly, from IP acquired from third parties. All of this gives us core capability to take our product range forward across a multitude of functionalities, increasing speed up to 150 kilohertz, high [ native resolutions up to 1440 ] nozzles per inch, higher operating temperatures and crucially to operate with all fluid types, including aqueous. The portfolio of capabilities in ImagineX is being deployed to deliver a new range of products defined by our roadmap. The successful launch of the Xaar 2002 in September 2020 introduced to the market, the key technologies of AcuChp, High Laydown and High Viscosity, and we are delighted to launch today the Xaar Nitrox, which I'll share more on the next slide. We've all made -- also made good progress in our aqueous printheads and are now engaging with OEMs to build [ ample ] systems to fully test them. The aqueous product will open up significant new markets for Xaar, and we are on track to launch at the back end of 2022. Today, we're delighted to launch the new Xaar Nitrox, which demonstrates the successful roll-out of our product roadmap. The Xaar Nitrox delivered significant improvement across a number of function. It takes speeds up to 47 kilohertz, that is 47,000 drops per second from each nozzle, which is a 40% improvement in speed and productivity. It also offers improved uniformity with AcuChp and the ability to print the widest range of fluids, which is why our partners will be able to go beyond with Xaar Nitrox. At Xaar, we are all committed to reducing our impact on the environment to meet and hopefully exceed the U.K. government target to become carbon neutral by 2030. We are set up a cross-functional team to fully understand our carbon footprint and to define and execute a plan of how we can achieve the goal of carbon neutrality. To date, we have made some positive steps. We have moved all our electricity supply to green energy and change all packaging to be fully recyclable. But we also have taken the further decision to offset the regulatory Scope 1 and 2 carbon impact that we've made and reported in 2020. This makes Xaar plc a carbon-neutral inkjet supplier from a reported footprint perspective in 2020. We clearly have a way to go to understand our full environmental impact, but we are committed to continue to reduce that impact and maintain our drive to complete carbon neutrality in line or ahead of the U.K. goal of 2030. So in summary, for Printhead, we have seen strong growth in revenue and EBITDA, despite COVID-19. We retain a strong cash position due to tight fiscal troll and having re-balanced stock through the supply chain. We have opened an office in China to drive further growth in Asia by offering technical and commercial support to our customers. The on-time launch of Nitrox is significant to drive customer adoption and also to rebuild confidence in Xaar's ability to deliver future products. And the operational leverage in the factory will drive profitability as revenue growth. And the new business model has been extremely well received, and we are seeing increased customer engagement with Xaar across multiple sectors. So moving now to EPS. EPS is a company that designs, develops and manufactures [ these Product ] Print Systems that are integrated into their customers' production lines. They have a good reputation in the U.S. market for high-quality, reliable bespoke solutions. However, revenue growth in recent years has not led to an increase in profitability and cash generation due to the fact that each bespoke system was effectively unique than previous development was not leveraged to reduce development time and cost. The key initiative was to implement a modular strategy to try and ensure that as projects were completed, the technology development was leveraged into other products requiring similar functionality. Current trade ensures that there has been an impact on demand due to COVID-19, with sales down 19% year-on-year. However, good cost control, the improved margins have generated positive underlying profit and EBITDA, despite this reduced revenue. The positive impact on margins has been driven by the introduction of the modular approach, which has cut project overruns and shortened lead times. We have taken the opportunity to restructure operations, resulting in writing down obsolete inventory as a result of introducing the modular system. Underlying profitability of the business is strong. And with a healthy pipeline, we see good growth potential as COVID-19 eases in the U.S. Moving to 3D. The 3D business has seen some delays due to COVID-19, particularly around the beta program, which has led to a requirement for increased investment over and above that was originally planned. This has led to a review of the future of Xaar 3D. As a result, we are now in advanced discussions to divest of the 3D asset. However, we will not be able to discuss any more details at this time, but we'll provide an update in due goals. So in summary, we are really pleased with our policy revenues in line with expectations despite COVID-19. Gross margins increasing by 3 points, along with strong management of working capital means we have delivered positive cash flow from continued operations. We are pleased with the progress we have made restructuring the business and have built a stable platform, and we are making good progress towards our goals. We have reengaged with lost customers and are gaining new customers across a wide range of industrial sectors. And as customers push for vertical integration, we now have a strategy to further enhance our product range to meet our customer needs. And we have a clear value proposition for both products and technology, which has created an excitement in the customer base. And the capacity potential in the factory gives strong operational leverage, which will drive profitability as revenues grow. The on-time launch of Nitrox is building confidence in Xaar's ability to deliver the rest of our product roadmap, and we have established alpha partnerships with Xaar's aqueous technology with particular interest in high viscosity fluids. But it has been a challenging year for EPS with the impact to COVID-19. However, we are confident that the modular approach is working, and we are optimistic about growth prospects as the economy recovers in the U.S. And as we mentioned earlier, we are in advanced discussions on the divestment of Xaar 3D. So looking forward, we are pleased to report that the positive momentum has continued and we have a strong order book into H1. So the priorities for this year: firstly, positive cash flow from operations; secondly, continue to deliver our product roadmap; and thirdly, execute on the plans to extend the product offering for the vertical integration strategy. In the medium term, we are very ambitious with Xaar, but we are clear this must be grounded in the philosophy of setting achievable goals focused on delivery. We want to review operations to maximize efficiency across the business to support the revenue growth. And we do see the returning to profitability in 2022. There are further upsides around aqueous capability of the Printhead, which will open significant new markets. This product is on track to launch at the end of 2022. Agility and flexibility to capitalize on new markets since they arise is a key benefit of Xaar, which means we are able to respond to our customers. We are also seeing new markets developing where Xaar has technical advantage, particularly around ability to bring high viscosity and high [indiscernible] fluids. So hopefully, you can see why I made the statement at the start that we have great technology, great people and a large market opportunity, and we are very confident we will be successful. And with that, we're now happy to take any questions you may have.