Xaar plc (XAR) Earnings Call Transcript & Summary

Good morning, and welcome to Xaar's 2024 Full Year Results Presentation. My name is Paul James, and I'm pleased to be joined by our COO, Graham Tweedale. Usually, John will be presenting our results. However, he is currently a little unwell, and we wish John a speedy recovery and look forward to seeing him back to work very soon. Since joining Xaar in November, I have witnessed firsthand the solid foundations and cutting-edge technology that Xaar possesses. Despite clear short-term headwinds that we have still to navigate, I'm excited at the prospects that lie ahead of the group. And this is why today, I intend to purchase shares in the company, because I believe -- firmly believe in the potential of this business. This morning, we will provide an overview of what was a mixed year for the group. While we did not meet our original revenue aims, largely due to the difficult market backdrop, we did make strong strategic progress. And shortly, I will hand over to Graham to set out the overview of the group's progress during the year. And then after I've provided details on the full year financial performance, Graham will set out the main drivers of future revenue growth. And I will then set out the medium-term outlook and provide guidance for 2025. Graham, over to you.

Thanks, Paul. I've been at Xaar for nearly 30 years, starting out as an R&D technician before moving up through the ranks, becoming Group COO in May 2022. I have been here through all the ups and downs. Historically, Xaar has been almost exclusively reliant on traditional print and ceramics. However, over the last 6 years, the recognition of our differentiated technology has slowly gained momentum, opening up a wide variety of new industrial markets. New printhead business, defined as revenue from products launched since 2019 has delivered an average compound annual growth rate of 24%, delivering revenue of GBP 18.9 million in 2024. However, this progress has been masked by the last stage deterioration of the ceramics market as it approaches the trough sooner than expected. The EV battery coating, automotive coating and desktop 3D printer markets are where we currently see the most significant revenue potential. Crucially, in all these markets, there are now fully operational machines using Xaar printheads. This significantly derisks future growth prospects. Our business model is to access markets through leading customer-focused OEMs. During the year, we continue to make significant progress in the wax and textile markets, as well as successfully trialing our enhanced go-to-market strategy. Being able to provide complete ready-made solutions to OEMs, we lessened some of the unique technical challenges posed by adopting high viscosity fluids, reducing the dependency on their product development cycles, something which has historically been out of our control, thereby reducing time to revenue for Xaar. Our focus remains on managing what is within our control, prioritizing key revenue drivers, maintaining disciplined cost and cash management, and continually assessing opportunities to further strengthen and utilize the balance sheet. The unique capability of our technology differentiates us from our competitors, allowing first-mover advantage, ultimately providing us with a substantial pipeline for future revenue growth. Going forward, our product portfolio has much more diversity in end markets and customers than it has ever had. Let me hand over to Paul, who will take you through the financial performance for 2024.

Thank you, Graham. Overall, we have delivered a solid performance in a challenging market for capital equipment. Revenue was GBP 61.4 million, down 13% compared to 2023. And this was due to the decline in printhead revenue, driven by the last stage weakness in the ceramics market, delays in OEM product launches and underperformance at EPS, amidst the backdrop of market uncertainty. However, gross margin was protected at 36%, despite increased energy costs and reduced overheads absorption as a result of lower sales volume. And this was largely offset by operational expense savings of 16% year-on-year. Overall, our adjusted profit before tax for the period was GBP 0.3 million. Despite the challenging conditions, we maintained investment in product development with R&D investment of GBP 5 million, or roughly 8% of revenue. We aim to maintain this level of R&D as a percentage of revenue in the medium term, with an increased proportion being deployed to support our OEMs to move from concept to launch more promptly, as this is seen as a priority for the group outside of our three key opportunities. The group remains well capitalized with net cash of GBP 8.7 million at the end of the year, an increase of 23% since the start of 2024, driven by disciplined cash management and improvements to working capital. This liquidity provides a strong base to invest in any capital or R&D expenditure required to grow group revenue. Slide 7 illustrates group performance. The first three bars concerning printhead alone, negative volume variance and mix of sales was worse than prior year. However, we managed positive movements in average selling price across the portfolio. EPS is down due to weakness in the single past market. Year-on-year, the group achieved cost savings of GBP 600,000, leading to a drop down to GBP 300,000 at profit level. So let us look at operating results in more detail. Slide 8, printhead new business, shows a faster-than-anticipated client in ceramics revenue as a result of the significant large stage weakness in the global ceramics tile market, and this continues to be a headwind for the printhead business. We have continued to grow our printhead customer base with 284 unique customers in 2024, compared to 281 in 2023, and 270 in 2022. New business revenue has increased by 23% year-on-year to GBP 18.9 million, which is a positive underlying dynamic and bodes well for the future. Given the relatively low level of revenue from ceramics in 2024, further downside is limited. As the rate of decline levels off, the underlying growth should be more apparent in the headline numbers. Adjusted profit before tax fell 24% to GBP 2.5 million due to lower sales volume and changes in sales mix as we saw in the previous slide. Now let's look at printhead performance. At the interims, we set out our expectations for new versus legacy printhead business for the full year. Given the macroeconomic conditions, we provided a range as the outcome is still uncertain. Overall, printhead performance was at the bottom end of this range, driven both by a worse-than-anticipated decline in legacy revenue, and a strong, but less than hopeful increase in new business. This is primarily the result of market uncertainties delaying investment. We continue to diversify our product portfolio, significantly derisking Xaar's overreliance on a single market and therefore, improving the resilience of the business to factors outside of our direct control. And as a result, in 2024, ceramics only contributed 17% of the printhead revenue. This diversification does not mean we have to give up on ceramics. This market does remain a future opportunity, and we expect it to return to growth over the medium term. We are proactively ensuring that we are well positioned to take advantage of any growth, working closely with both System, the global leader in the sector, and NKT, both of whom have recently launched products using our technology. The combination of significant growth in new printhead business and a relenting ceramics market headwind, providing a strong foundation for the business going forward. Let's look at FFEI. Following the disposal of the non-core Life Sciences business, revenue grew 7% to GBP 9.3 million due to the last-time orders for the Life Sciences business. Gross margin grew 8 percentage points due to improved pricing decisions during the completion of the last time buy orders. During the year, we successfully transferred manufacturing of FFEI print systems to Huntingdon from Hemel Hempstead, generating overhead savings and enabling the capture of synergies as it facilitated closer collaboration between our team to work on integrating our heads into print bars and print engines, ultimately making it easier for OEMs to adopt our technology. Now let's look at the slide on Megnajet. This business delivered GBP 2.5 million worth of revenue, a 7% improvement compared to the previous year. This was largely due to significant order growth from one customer in particular who had been through a period of destocking in 2023. With 44% growth in intra-group sales to Xaar compared to 2023, our main focus is on group projects as this is where our systems can help to exploit Xaar's high viscosity and high pigment capability, by providing enhanced offerings into target markets such as textiles. Gross margin improved significantly from 32% to 50% due to operational improvements and better pricing. And this resulted in growth in adjusted profit of 50% to GBP 1.2 million. Let's turn to EPS. EPS remains largely separate to the rest of our business with a distinct strategy and business model, as it utilizes both Xaar and competitor printheads. Revenue at EPS was 27% lower than the previous year at GBP 16.1 million, with the performance negatively impacted by market uncertainty, delaying the rate of new customers switching from analog to digital. This meant we were unable to replace revenue that had been generated in 2022 and '23 from a single customer who had placed a multiunit order across both years, and this order was completed in early 2024. Gross margin fell 7 percentage points to 31%, largely due to lower order volumes. Despite a substantial 30% reduction in operating expenditure, adjusted profit before tax still fell by GBP 2 million to GBP 1.2 million. It will likely remain a drag on group profitability during 2025 as new management focus on turning this business around by reducing overreliance on specific customers and widening the customer pipeline, leading to growth beyond 2026. And now let's turn to the balance sheet and our cash position. The group retains a healthy balance sheet and cash position, which gives us the liquidity and flexibility to deliver on our strategy, without the need for utilization of other sources of cash in the medium term. Net cash at the year-end was GBP 8.7 million, a net inflow of GBP 1.6 million as a result of an ongoing focus on careful liquidity management. We work hard to manage working capital effectively. And it was pleasing to reduce overall trade balances by GBP 3.5 million to GBP 30.4 million. While we reduced inventory levels during the year, we retain roughly 6 months of stock, allowing for a rapid response to anticipated future demand when required. Our revolving credit facility of GBP 5 million remains undrawn. And during 2024, we renegotiated the covenants going forward to provide further liquidity if required. As previous terms did not take into consideration our healthy existing cash position. So to summarize, we have delivered a solid performance in the face of significant headwinds. New printhead revenue continues to grow as Xaar technology becomes more widely utilized and ceramics revenue is in the final stage of decline before bottoming out in the short term. As Graham will explain, we have a compelling value proposition in a number of markets, which we are confident will deliver meaningful revenue in the medium term. We remain cautious on providing precise timing given the current market backdrop, and uncertainty caused by economic and geopolitical factors. With a sufficiently strong and liquid balance sheet, we are well set to take advantage of the significant opportunities for revenue and profit growth. I will provide our outlook for 2025 at the end of the presentation. At this point, I will hand over to Graham.

Thank you, Paul. Over recent years, we have developed a more resilient product portfolio with applications and avenues for growth in a diverse range of end-use markets. With the decline in ceramics market largely behind us, we can now concentrate on the accelerated uptake of our technology in markets that have substantial long-term and repeat revenue potential. Over the course of 2024, Xaar has continued to make strategic progress in opening up new, potentially sizable markets, providing the opportunity for sustainable and significant growth. We remain focused on fully utilizing Xaar technology in applications where our unique capability, namely the jetting of high viscosity and high particle-loaded material, can add significant value and revolutionize manufacturing processes. While we still believe there is significant opportunity across a wide breadth of market sectors, we recognize the importance of focusing on a few key markets. We believe these will deliver substantial and enduring revenue streams. The unique capability of our technology differentiates us from competitors, allowing first-mover advantage in areas such as EV battery coating, automotive coating and desktop 3D printing. For each of these opportunities, I will set out the clear value proposition of using Xaar printheads. I will start with the problems facing the current solutions in our target markets before explaining why our technology will be successful. We have reached key milestones in each of our target markets. There are now fully operational machines using our printheads. This has historically been the most significant hurdle to long-term growth. Moreover, this means that most of the heavy lifting, including R&D investment and CapEx from our side has been completed. Future revenue growth is dependent on the rate of customer uptake of OEM machines rather than the integration of our technology. Promisingly, in the EV battery coating and automotive coating markets in particular, we have extremely strong and highly credible OEM partners, driving additional customer interest in our technology. While adoption of Xaar printheads within the three main target markets will be key to the future prospects of the business, other markets continue to generate meaningful revenue. It is these markets which will benefit from our ability to offer a complete turnkey solution. And I'll provide more color on this later in the presentation. So firstly, EV battery. Starting with the battery coating market, there are currently two solutions used to insulate EV batteries. The dominant technology uses PET film to wrap the battery, while the alternative is to spray a fluid. With the requirement for even bigger and more powerful batteries, there is a corresponding increase in the amount of heat generated. The use of a plastic film, PET film, is increasingly becoming no longer fit for purpose, as it is unable to withstand the greater heat generated causing safety concerns. And while spraying doesn't have the same safety concerns, 40% of the paint is lost in this process, therefore, requiring a paint recovery system, making the process significantly more expensive. Meanwhile, Xaar Inkjet technology provides a coating that is capable of withstanding greater levels of heat, mitigating the safety concerns with a 99% yield, therefore, minimizing waste. In July last year, we launched two new printheads, the Xaar eX and Nitrox eX, through which we became the first company to enter this sector with specifically designed printheads. Through partnerships with OEMs, Omijia and Shifang, EV car manufacturers are now able to access our technology. While the highest quality batteries are used in EVs, those which don't reach the required standard are utilized in battery storage. This provides further incremental opportunity for Xaar as these also have a coating requirement, and customers in this market faced the same issues as EV manufacturers. Omijia and Shifang launched the world's first and second Inkjet EV battery coating machines during 2024. Both OEMs have had initial orders for their machines, and we anticipate orders scaling markedly going forwards as customer confidence grows. As we are the sole provider of this technology, the market uptake could be substantial. To scale the market opportunity within EV battery coating there are an estimated 1,300 EV battery production lines globally. 100% conversion of this market could generate GBP 260 million of revenue. It is anticipated that the printheads would need replacing every 2 to 3 years. Moving on. Automotive Coating is a market where the issues with current solutions inhibit its potential size. Both end customers and the OEMs are seeking our solution. With roughly 40% of paint lost when spraying, it is costly in terms of both materials and energy. On top of this, if manufacturers wish to utilize multiple colors, after the first color is applied, the car is taken off the production line, masked and process for a second time in the paint shop. This process is currently very inefficient. The consequence of this is that the paint shop is not only the largest environmental footprint, and the biggest waste producer in a car plant, but it is also the major capacity bottleneck. If customers wish to customize their cars, adhesive decals are typically used. However, these are prone to jet wash damage. Existing inkjet solutions at a lower viscosity faced several challenges, including sagging of the paint once it's applied onto a sloped or vertical surface. In terms of the 2-tone vehicle market, Xaar technology eliminates the need for masking and reduces energy and paint requirements, therefore, making it significantly more efficient than paint spraying. Our partner, Axalta, a global leader in the sector recently launched the Axalta NextJet, using the Xaar 2002 and Aquinox print heads. Axalta has already reported that this can contribute to a 30% reduction in CO2 emissions and significant cost savings for 2-tone vehicle manufacturers. Xaar technology also provides a high-quality solution to the drawbacks of the decal market, with the ability to jet lower volumes precisely, our printheads are leading the way in replacing current solutions with no sagging and no risk of damage from jet washing. Axalta has recently announced a partnership with Durr, whose machines currently paint 50% of cars globally. To provide a digital paint solution, combining Axalta's NextJet technology, with Durr's robotics. Durr are currently demonstrating their machines equipped with this technology to potential customers. And alongside Axalta and Durr, we will select our go-to-market partners around the middle of this year. There will initially be two to three, as there has to be a level of support required for installation, commissioning and testing of the application. We aim to have the first operational car plant with this capability in Q2, 2026. We'll start to see revenue from this market from this point onwards. Through our partnership with Axalta, this market presents a significant opportunity for Xaar, and we anticipate that our technology will expand the level of decals and 2-tone used today. The market has been crying out for this solution for years, and we are confident that the benefits outweigh the cost required to adopt the technology. Xaar will receive a royalty based on the number of cars painted. Currently, roughly 1% of the 90 million cars produced globally have decals or 2-tone paint. As the current sole provider of this technology, we have the potential to take 100% of the market. Moving on now to 3D printing. Within the desktop 3D printing market, there is currently an absence of a low-cost, high-quality product. Our technology provides the ability to get high viscosity fluids at a relatively low cost. This has enabled the world's first full color, high-resolution desktop 3D printer aimed at the consumer market. By utilizing Xaar technology, cost is no longer a barrier for end customers to purchase a high-quality 3D printing machine. The retail cost of the nearest competitor machine of equivalent quality is roughly GBP 40,000. Currently, those unwilling to pay so much for a printer resort to a single nozzle, monochrome, 3D printer, the price point of these machines varies between a few hundred pounds to over GBP 5,000. Flashforge announced their full color desktop 3D machine with Xaar printheads in November. Priced at roughly GBP 2,400 this significantly undercuts machines, which can match its finishing quality. In the short term, the machines are being sent to social media influencers to promote the products. Flashforge expects to ship its first orders in the second half of the year. We expect the other major global suppliers to engage with us to begin developing their own machines this year, as awareness of the benefits of our technology continues to permeate through the market. While there are over 1 million single nozzle, monochrome, 3D printers currently sold annually, we anticipate our technology will create a brand new market, as well as converting some of the current market. 1% share of existing monochrome market would generate meaningful revenue on initial sales alone, as these machines have been desired for printheads to be regularly replaced. We anticipate recurring revenue streams for each unit sold. Now on to other market opportunities. So in April 2024, Flashforge also a market leader within the wax printing market, launched their first product using a single Xaar printhead, and we anticipate a second product with three printheads to launch in the second quarter of this year. Despite OEM product delays encountered in 2023 and 2024, we are confident the market-leading capabilities of the Xaar 2002 printhead will provide an excellent opportunity. With the potential market size for this application being GBP 20 million per year, and the expectation that our technology will ultimately take a majority share, the opportunity is significant. Even in established markets like textiles and corrugate, there are significant opportunities for revenue growth. The Aquinox printhead, and its embedded ink recirculation technology, delivers a higher quality and more consistent finish in a single pass compared to other solutions in the market. In collaboration with our ink partners, Nazdar, we have developed sector-specific, high-viscosity aqueous inks for use with the Aquinox printhead, thereby overcoming one of the fundamental barriers to adoption and growth of inkjet within this sector. M&R launched its latest product powered by Xaar's Aquinox printhead in September 2024. Our technology enables consistently high-quality prints while printing direct to garments. With the textiles market being of a similar scale to the wax market, and our belief that we will take significant market share in the medium term, this also provides an exciting opportunity. So to summarize, Overall, these markets represent opportunities similar to the magnitude of ceramics, further illustrating how we are derisking our business model in a relatively short period of time. Unlike in ceramics, where repeat sales take longer to occur, the printheads in each of our target markets need to be replaced regularly, making revenue more recurring and highly attractive, and earnings of a higher quality. Previously, we have discussed how these, and other opportunities, will deliver revenue in the future. And while the most substantial revenue growth remains in the medium term, key markets such as EV battery coating and desktop 3D will deliver revenue this year, with revenue from automotive coating expected in 2026. These opportunities, on top of the opportunities in the more mature wax and textile markets, are no longer on the distant horizon. They are rapidly coming into view. So now to talk about the turnkey solutions. As alluded previously, we have not historically appreciated how the capability of our OEMs to harness our technology has varied. The process has repeatedly been frustrating and time consuming for OEMs and, on occasion, this has led to them withdrawing from the development process due to apparent unresolvable integration issues. However, we have been working to evolve our strategy to work more closely with customers in order to lessen some of the unique challenges posed by working with high viscosity fluids. By providing a turnkey solution, we can significantly reduce time -- the time line from a point of engagement to a Xaar embedded solution being fully operational and available for customers to purchase. This has significant benefits for us, both in terms of time to revenue, and deepening customer relationships. In addition, we can recycle this solution to other customers within that market, leveraging the initial investment made. As discussed in the interims during 2024, M&R took part in the first project of a complete turnkey solution in an effort to reduce the time to market of a new machine utilizing Xaar technology. We provided them with a functioning system which could easily be attached to their material handling system. This significantly reduced integration issues. The product launched in early September, just 6 months after the project began. Previously it would have typically taken 3 years. We are currently undertaking a second project, which is already delivering promising results. Although the provision of a complete turnkey solution is not appropriate to all our market segments, it is relevant to some. And while the turnkey solution does not expand the market itself, it does increase both our ability to grow market share and the timeliness of that revenue. We recognize this approach as a cost, but we are of the firm belief that is an extremely good use of capital, with returns well in excess of the cost of the capital. I will now hand over to Paul to discuss the financial outlook for 2025 and wrap up today's results.

Thank you, Graham. Well, the group enters 2025 with renewed optimism as several new potentially significant market opportunities start to gain momentum. Over the medium term, these opportunities should deliver meaningful revenue at attractive margins. However, in the short term, despite the decline in ceramic market beginning to abate, we will continue to feel the impact of the slowdown in EPS' end markets. While these dynamics will continue to impact revenue and profitability, they highlight the value of our strategy to diversify across a broad number of markets and applications. We are greatly encouraged by the progress we are making across our focus markets, having already secured some key customer orders and partnerships, and we are confident that we will continue to make strategic progress, whilst recognizing that how this translates to near-term revenue and profitability will be dependent on market dynamics and customer decisions to adopt OEM products. We will continue to manage cash tightly and maintain a strong technical balance sheet. In summary, I am pleased that through the continued focus of an outstanding team, the milestones John outlined in September have been delivered as planned. New business revenue growth is substantial, and we continue to work towards reducing the time to market for OEMs through our enhanced go-to-market strategy. Meanwhile, in the short term, the slowdown in EPS will remain a headwind and exact timing of the market uptake of our technology is uncertain. We will continue to make the right long-term decisions to ensure we capitalize on the opportunity ahead of us. Crucially, in our -- all our target markets, there are now fully operational machines using our printheads. There are EVs on the road using batteries coated by Xaar printheads, our automotive coating technology is being demonstrated by our partners, Axalta and Durr, and a groundbreaking 3D printer using Xaar printheads has been launched. We are confident that our approach will deliver significant value for our shareholders. The visibility and scale of the opportunities at Xaar have never been so strong. Now at this point, I would like to open up to questions. Thank you.