Xaar plc (XAR) Earnings Call Transcript & Summary

Welcome, everybody to Xaar's 2021 Interim Results. As you know, 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 the first half of 2021, and then an update of each of the business units. We will finish with a summary and outlook for the business going forward, and then we'll be happy to take any questions you may have. When we last set a chance to me (sic) [ meet ], you remember that I said we had a plan and that we were delivering against that plan. We're gaining customers, growing revenue and delivering new products, all with the goal of bringing Xaar back to profitability. I'm delighted to say that we have made great progress in continuing to deliver this plan, and I'm excited to share that with you today. I fully believe that it's our great people and technology that will allow us to address this large market opportunity and that we will be successful. With that, let's look at the business highlights for the last period. We've made great progress across all areas of the business. We are very pleased that we can report a very positive outlook and are confident in returning Xaar's profitability in 2022. In our core Printhead business, the new route to market and updated product range has helped us maintain momentum in winning accounts across a number of market sectors, which is driving the current and future revenue growth. We are delighted to announce the launch of our next product from the ImagineX platform, the Xaar Irix, which strengthens our product offering in the accordion marketing sector. We are also excited about the acquisition of FFEI, who brings significant expertise and products to enhance our vertical integration strategy. On the financial results, we are pleased to be reporting revenues of GBP 26.3 million or GBP 2.6 million on this period last year, with gross margin up 2 points. We have maintained positive EBITDA in the Printhead Group, whilst increasing investment in R&D. Additionally, we have maintained a strong balance sheet with net cash of GBP 17.1 million. We continue to deliver on supply, despite global change outages and all of this against the backdrop of persistent COVID disruption, particularly in Asia. So clearly, a strong performance in line with our plans, which is further reflected in our commitment to ESG. So I strongly believes that operating responsibly is integral's business success. We have pulled the highest standards across our businesses and comply with all relevant regulations. During the reporting year Xaar has established an ESG committee and sustainability team. This group will initially focus on defining and developing our overreaching sustainability ambitions and ESG strategy. And we aim to disclose our sustainability reports in our 2021 annual report. Xaar's printed technologies delivered clear benefits, which contribute to a reduction in material and energy waste. We have a number of projects, which have a significant impact on the carbon footprint and environmental impact of our customers' operations. We offset all of the UK regulatory Scope 1 and 2 carbon impact that we made and reported in 2020, making Xaar one of the few carbon neutral inject manufacturers in 2020. We expect to continue in this vein as we drive to achieve complete carbon neutrality in line with the UK's 2030 goal. But we're also still passionate about supporting our local community. We started a program of work to establish apprenticeship in graduate schemes, which are in the process of being rolled out over this year and next. This is aligned with our sponsorship of local charities and organizations and Xaar launched its volunteering policy, which we are promoting across the organization, and we are working with local agencies to identify environmental projects that employees can get involved in. So a lot of good news in both business performance and ESG, which we are proud of. And with that, let me hand over to Ian to take you through the financial results.

Thanks, John. It's my pleasure to present the results for the 6 months ended 30th of June. They demonstrate the continued progress we've made and the positive momentum generated in the business. At a high level, we are delighted with the advancements that we have made with revenue being in line with expectation, demonstrating growth in key areas. Our ability to increase margins demonstrate cost control and cash management has delivered a positive underlying EBITDA. This provides us with a robust platform from which we will deliver growth. So let's start by first looking at the Group financial performance summary. As we reported in April, this represents our Printhead a newest 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 was GBP 26.3 million for the period, this is in line with our expectations, which shows significant growth of 11% versus H1 and 8% versus H2. So we are understandably happy with this performance that overall, as it demonstrates continued progress. Given the backdrop of continuing wide economic uncertainty created by the pandemic, this represents a strong performance and especially so in our key Printhead business. The growth in Printhead is driven particularly in one of our key markets of Asia, but also in Europe, and it demonstrates that we have been able to continue the momentum previously reported. As we have previously stated, EPS has been impacted by COVID, and whilst revenue is down versus H1, this is impacted by the strong start we had in Q1 2020. However, in the face of those challenges, it's pleasing to note that revenue is up 5% versus H2 last year. with the recovery in our inkjet machine sales. Gross margin is 29%, an improvement of 2 percentage points versus last year, which again is pleasing as it reflects some of the actions we've taken in the year. We can see the positive impact of the strong P&L leverage that exists in the Printhead business, but also the gradual underlying improvement in EPS. These results do include some one-off non-cash write-downs, mainly in inventory of GBP 1.3 million. As a result of realigning the new management approach with our overall strategy. We have an EBITDA loss of GBP 0.4 million after the EPS write-downs, but excluding these adjustments, we are pleased we have achieved positive EBITDA for the Group. This is another large step towards returning the business to profitability in 2022. We continue to be very focused on cash preservation and management. As a result, we have further reduced our working capital, while at the same time, reinvesting GBP 1.2 million in the business, mainly in our operational capabilities and infrastructure. Accordingly, we have a robust platform. Critically, we have a strong balance sheet, which will enable us to build and invest further. So a lot of good progress made, giving us control and efficiency and setting us well on our way to profitability. So moving to revenue, which continues to be positive. Printhead revenue has grown 11% for the period versus H1 and 8% versus H2. And as these charts show, there is now a consistent theme in our revenue growth with 4 successive reporting periods showing growth. This growth has been driven in our core sector of ceramics, which is pleasing and reflects the return of some of our previous customers in EMEA and Asia. Europe and Asia together now represent around 80% of the Printhead business, with growth in Asia alone this year of over 30%. For EPS revenue has declined by GBP 0.8 million versus H1. However, we have demonstrated growth, when comparing to H2, which stems from an increase in in-jet machine sales and some consumables, which attract a higher margin. So as I said, all movements in the right direction and in line with our plans. So turning to Printhead in some more detail. As already highlighted, we are really pleased with the progress we've made. Along with the revenue growth, we have increased gross margin to 35%. This is significantly higher than H1 last year, albeit 2020 did include inventory adjustments of GBP 1 million. We are pleased with this, as we've previously talked about the strong leverage, which we have in the business. This clearly demonstrates that as we grow volumes, we will achieve a positive return. Again, it shows the consistency of growth as this is 3 points higher than H2 last year. And whilst we would expect further improvement in H2, it will not be quite as significant. We continue to closely manage OpEx, tightly controlling discretionary spend across the business, whilst maintaining our investment in R&D. This commitment will continue throughout 2021 as we focus investment on our Printhead product road map. Whilst OpEx is higher than H1 last year by GBP 2 million, this is driven mainly by some significant one-offs last year, which benefited the P&L by around GBP 1.5 million. So accordingly, it's good news to report positive EBITDA for the half year. And again, good momentum and progress for Printhead. Moving to EPS. And the EPS business continues to deliver challenges, but we have made gains in aligning it with the overall business strategy. The business reports a gross margin of 8% versus 37% last year. Stripping out adjustments, the underlying margin is 28%, which is an improvement on the 24% of H2 last year. And this also sees a small positive EBITDA. In previous presentations, we talked about EPS transitioning to a modular strategy to eliminate a number of efficiency challenges across the business, due to delays in the execution of this strategy, we have taken action. And in April this year, we changed the leadership team. Having undertaken a detailed review, the new leadership have identified a number of issues in the business. And as a consequence, we have taken further write-downs of inventory and other restructuring costs. This has resulted in a financial non-cash impact of GBP 1 million of inventory write-downs in the period and a further GBP 300,000 of adjustments and costs. These relate to legacy products and support the process of streamlining our product offering. We believe it's the right and prudent action to take giving us a stronger and more efficient base from which to grow. Moving to cash. We have continued to demonstrate strong cash management discipline with a positive underlying EBITDA we have invested further in restructuring the business, both in the UK and EPS. Principally, we have managed working capital tightly, whilst we have invested in inventory, this has been funded by carefully managing debtors and creditors cash flow. Accordingly, total cash in the business has reduced by just GBP 1 million. So working capital is now at a particularly low level and we would expect to invest further in inventory in the near-term. This will be in line with market expectations. We continue to maintain a strong cash balance, which will enable us to invest judiciously to support and drive the business. So to summarize, we are delighted with the progress as 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. 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. I'll now hand you back to John.

Thank you, Ian. I will now take you through the key initiatives in the Printhead business. Customers remain key to the success of this business portal, which is built for partnerships. Despite not being able to visit in person, we have developed good relationships with new customers, supporting them through the stages of their product development. It has been pleasing to see the new design wins increasing and exciting to see the pipeline of new developments progressing towards commercial launch. We have previously presented our ambition to become more vertically integrated and to offer a one-stop shop for our OEM and UDI customers. The acquisition of FFEI, [ which expands ] our capability in digital ink technology is a major step forward in this goal as they already have capability in print bars and print engines. Whilst we have seen increased activity across a number of new market sectors, we are starting to see that our Printhead are becoming technology of choice in glass printing, PCB manufacturer and 3D printing. This is an exciting development and is due to Xaar's unique capability of printing highly pigmented and highly viscous inks. We see these as areas of strong growth in the future. Product capability and functionality is driving this adoption by customers, which is why our product road map is so important. And that's why today, we are pleased that we are launching the Xaar Irix, our latest new products. I'm also delighted to report the Aqueous technology development is progressing well. We have now shipped our first alpha heads to selected partners for test and evaluation, and we remain on track for a product launch at the end of 2022. End users are increasingly understanding how Xaar's high-viscosity capability can enable unique technical advantages and deliver commercial benefits in their applications. The realization of Xaar's high-viscosity technology can transform their application is driving real interest in market sectors such as 3D printing, PCB manufacturing and textile printing. All these developments are driving our organization and group structure. Operationally, we are making good progress, implementing efficiency programs across the business, particularly upgrading our MRP and other systems. These upgrades are passed for broader drive to improve margins and scalability across the business and key projects have progressed well in H1. In addition to this, we have strengthened the team across a number of parts of the business, including operations and IT. So good progress on key initiatives, which is driving our success. As I've mentioned before, our primary objective is to sell Printhead's designed and manufactured by Xaar. By focusing on partnerships, we will sell more integrated solutions, which enable our customers to get to market more quickly. The addition of FFEI delivers capability in print bars and printing engines, but I'm also pleased that we have developed a number of relationships within manufacturers and are now able to supply a range of sell branded inks to further support our customers. There are still some gaps in our vertical integration products offering, but we have a plan to fill these with further acquisitions and partnerships. Our ambition is to offer a one-stop shop to our partners, supporting them with everything from ink systems and application support. The key to this is having the best solution. Xaar is clearly very strong in Printhead products, but to achieve our goal of being vertically integrated, we need to gain the capability in system components by which I mean electronics, software and ink systems, as well as print bars and print engines. FFEI brings strong capability in print bars and print engines and some capability in system components. And we are delighted to report that the integration of FFEI into Xaar has gone smoothly, and we are already seeing the benefits we expected. You all have seen this slide before, but I wanted to remind everybody of the ImagineX platform as it is such a central part of the future itself. This is our new Bulk Printhead Technology, which will empower the next 30-years of innovation in inject capabilities. ImagineX 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, IP acquired from third-parties. All of this gives us core capability to take our product range forward across a number of parameters, increasing speed up to 150 kilometer, higher native resolutions of up to 1440 nozzles per inch, higher operating temperatures and crucially to operate with all fluids, including Aqueous. This will give us and our customers significant advantages in a number of key markets. ImagineX is powering our portfolio of capabilities and delivering a new range of products defined by a road map. We have made good progress in product development and have launched 2 new Printheads over the past 12-months that have enabled the revenue growth we have seen over this period. We have also made progress in our Aqueous Technology, having shipped first Printheads to alpha sites for testing and evaluation. This Aqueous products will open up new significant markets for Xaar and we are on track to launch it at the back end of 2022. I'm delighted that this momentum is being maintained. As today we introduced our increased Aqueous Technology in the new Xaar Irix, which I will talk about in the next slide. The Xaar Irix benefits from parallel print uniformity with AcuDrp Technology and has a wide operating window given increased reliability and uptime. But the real game changer is the Xaar Irix incorporates our latest nozzle manufacturing techniques, which increased drop placement accuracy. This enables good brand quality to be achieved at distances of up to 10 millimeters away from the print data. Typically, the market expectation is 2 to 3 millimeters, and so the Xaar Irix represents a significant improvement for our customers, as well as opening up new exciting market opportunities. So to summarize Printhead. We are seeing strong growth in revenue and EBITDA, but we do need to add a note of caution as we continue to see disruption in Asia, due to the impacts of the delta variant. As we move into the winter, we expect these restrictions to continue to impact our customers. And as we have discussed at the start, like every other electronics company globally has seen shortages in electronic components. We are confident we can continue to maintain continuity of supply. However, we will see an impact on profitability due to increased component costs. We're excited about the on-time launch of Irix and the acquisition of FEEI, which is a big step forward in our vertical integration strategy. And across the organization, we have a drive to improve margins and scalability to support volume growth in Printhead. So now let's have a look at our business units, starting with EPS. As a reminder, EPS designed, develops and manufactures bespoke print systems that are integrated into their customers' production lines. They have a great reputation in the US market for high-quality, reliable bespoke solutions. One of the new leadership, some issues have been identified, which has led to further restructuring of the balance sheet, but it does mean that we are closer to a leaner and more efficient business in line with the Xaar strategy. We are confident on the new leadership, we are on track, and we will execute on the modular strategy program as originally planned. The underlying performance of EPS is in line with management expectations. However, margins and profitability have been impacted by the resetting of the modular strategy by new management. We are pleased to report that there were no delivery issues, despite increasing lead times with certain key system components. However, component shortages remain a risk which we continue to manage. Some progress has been made in the modular strategy, but we have identified areas where significant improvements are still required. New management have taken the opportunity to restructure the operation, which has resulted in an inventory write-down, both underlying profitability of the business is strong and with a healthy pipeline, we see good growth potential in H2. So moving to Xaar 3D. We are pleased to report that the commercialization of the Xaar 3D product is progressing well, and we're delighted that the relationship with strategies goes from strength to strength. It has taken longer than expected to conclude the divestment of 3D, due to the mechanics of the deal, but we are confident that we are now close to completion, and we look forward to providing an update in due course. Finally, I would like to update you on our key short and medium-term priorities, as well as potential upsides. I am pleased to report that we are delivering positive operational cash flow in 2021. We are delivering on our product road map and our plans to extend our offering for vertical integration strategy. However, an additional key priority is to maintain continuity of supply across our product range. And despite the short-term challenges we had first due to COVID-19, we are still very optimistic about the future of Xaar and we are on track to deliver against our objectives, including a return to profitability in 2020. As we have discussed, efficiency programs across the business are progressing well, which will support future growth. Going forward, we need to ensure we realize further efficiencies as we implement organizational integration across the Group. We have become increasingly excited about the opportunity for Aqueous Printheads. Customer feedback is very positive on our proposed product specification, and we are on track to launch at the end of 2022. And we continue to see new markets emerging where Xaar has technical advantages over the competition. And this is mainly around the capability of our Printheads to deliver high viscosity and highly pigmented fluids. So in summary, we are really pleased to reporting revenues in line with expectations. We are pleased with the progress we have made restructuring the business and have built a stable platform driving us towards our goals. Gross margins have increased by 2 points, and we're seeing growth in revenue and EBITDA has been strong, and we have delivered a great performance in maintaining supply, despite the component shortages. This will result in some increased costs, but we will continue to drive efficiencies across the business to improve margins and scalability. We are really pleased with the on-time launch of Xaar Irix, and this is our third on-time product launch from the ImagineX platform in the last 18 months, which is an impressive result in the light of market challenges. Aqueous development is progressing well with hedge ship to alpha customers for testing and evaluation. And we are now seeing end users becoming aware that the benefits of Xaar's high viscosity capability, which is driving increased interest. And despite the difficult 6 months and change in leadership, EPS revenue is in line with expectations, although margin and profitability have been impacted by the write-downs and restructuring costs. The underlying profitability of the business is strong and with a healthy pipeline, we are optimistic about H2 performance. And finally, we have completed our first acquisition with FFEI to begin building our vertical integration strategy. So I continue to be hugely proud of the way that everyone across the Xaar Group has responded to the challenges to auditors over the past year. Considering the circumstances, the progress with customers, our product road map and internal operational projects has been exceptional. We do see short-term challenges due to the impact of COVID-19, particularly in Asia as we move into the winter. But this does not diminish the medium-term excitement about the potential we have at Xaar. As I've consistently said, we have great technology, great people and a large market opportunity. We will be successful. Thank you, and we are now happy to take any questions you may have.