Xaar plc (XAR) Earnings Call Transcript & Summary

Good afternoon, and welcome to the Xaar plc investor presentation. [Operator Instructions] The company may not be in a position to answer every question it receives during the meeting itself. However, the company can review all questions submitted today and publish responses where it's appropriate to do so. Before we begin, I'd like to submit the following poll. I'd now like to hand you over to John Mills, CEO. Good afternoon, sir.

Good morning, good afternoon, and welcome to everybody. I'm, John Mills, CEO, and I'm joined by Paul James, who's our CFO. Today, I'd like to take you through the 2026 interim results presentation. And then give you a view of where we are. So I think so far this year, it's been a good year. We have seen some disruption to market due to the war in Iran. We have seen that when there's disruption uncertainty in the world, capital equipment purchases are affected and we sell print heads into what we aim to build equipment and what happens is that they sell less machines, and we sell less than the ring heads. As a result of that, there are certain markets where we've actually seen some decline in the markets. However, we'd be pleased to report that print head revenue was actually up by 5.5%. And the reason for that is actually because there's quite a lot of new business that's come through. So whilst we've seen some headwinds because of the global economic challenges, the growth has been there by these new applications that [indiscernible] and we'll talk more about that later on in the presentation. And combined with that Magna jet and EPS, we're pleased overall to report GBP 0.096 increase like-for-like year-on-year. Also, we've continued to control expenditure, and that's delivered a margin improvement of 2.2%. And 1 of the things that has been some frustration rating at this point in the first half is that 6 months ago when we were during the full year results, we were pretty sure that Flashforge launching the desktop 3D within days, if not weeks, at that time. Since that point, they've encountered a few technical issues that have delayed the launch and we've helped them resolve those to take those issues. And today, we have a team on site with them as they ramp up their premanufacturing launch. We're fairly confident that they will actually launch in the next couple of months. There is the remaining challenges, I think, have largely been resolved. And we're now importing them in production builds. So we hopefully will see that launch happening before the end of this year. And it's an interesting area because the opportunity with the desktop 3D is significant. And [indiscernible]. So the business [indiscernible] are a small company. We compete against very large comes like Epson, we call Fujimoto. And these companies have huge geographical reach, there are few reputations and significant manufacturing capabilities. And so how do we win? Well, we win as a small company. by being able to bring the fluids at no 1 else concrete. And that, as many of you may have already heard from sale that spot printing materials, which have had much higher viscosity or a higher treatment mode in the [indiscernible]. So for instance, an excellent had can bring GBP 0.08 to GBP 0.01 for us it's water, and 20% supports would be pre, 0.50 sports [indiscernible] and so the thicker you get, the higher the number an action tops out around about 8 center points. And what that means is they're limited to very lowest-cost fluids. So if you wanted to print Napoleone absolutely want to use that. However, for us, what we focus on is the high viscosity applications where if the fluid that you need to deposit is much higher this cost than really you need to be using [indiscernible]. And that is the differentiation. And that differentiation capability comes through our fundamental architecture, which delivers a much broader operating window. And that architecture is protected by a significant number of plates, 30 years of manufacturing know-how and greasing the application and expertise as well. So how do you actually use prepaid given application. And what that means is that for the print heads in into the market. We can fit much higher tenor we have a much wider range of fluids that we can create, and we can operate at much higher temperature. And what that means is that customers can typically bring the fluid that they want to bring and ultimately means that they can print with reduced energy, reduce waste and high precision. And the rate to market is actually quite complex. So it's 1 of the things that I think if you look at Xaar and followed us for a number of years, you might say, well, we've been talking about certain applications for many years. And that's absolutely true. We sell a print head into an OEM, they develop and build machine they test it in the application. And in many cases, the application requires other regulatory approval, it might require other investment in processes to adopt the broader manufacturing sense. And all of this means that the time frame to actually get the product into volume manufacturing in [indiscernible] application, can be very difficult to and predict and actually offer sometimes be many years. the benefit is that once you're in and once you're actually in the prime head of choice, all of those things that made it difficult to get in that makes it very sticky. And so it's for us, we believe that as we enter these markets, then it's we believe that we can sustain the position within that market, what's the [indiscernible]. And there's sort of 3 sources of revenue. There's the printers that we sell to OEMs to build machines that go into the application. And then as you build that installed base over time, you there will be pre-head replacement and the replacement cycle depends on the application in more extreme applications like. So we can look to we might see a replacement on an annual cycle in more of the less demanding areas, you might see a replacement every 6, 7 years. So if that sort of the replacement is every 5 years, then that means 20% of your installed base is actually effectively revenue going forward. So it's key to actually build that installed base and all that replacement revenue Increasingly, we're seeing as accessing the ink revenue. And if we've been involved in developing a solution, and there's often an opportunity to share in some revenue in the application. So with that, I'll hand over to Paul to take you through the financial summary.

Thank you, John. Yes. So I'm actually pleased to present these results for the first half, where we had year-on-year growth in all parts of our business, with group revenue, as John said, up 9.2%. And I'm particularly pleased about the recovery in our U.S. business called EPS under new leadership, which has come with an ever-expanding pipeline. The core of our business is print head, that was up 5.5%, and that's prior to the launch of Flash Forges desktop 3D offering. So that is actually in and of itself an impressive performance for the first half. The revenue performance translates to a profitable first half, really for the first time in at least 3 years, and we're in line to achieve consensus on profit. The balance sheet is -- balance sheet, sorry, is almost net neutral with a net debt position of GBP 0.1 million and an adjusted free cash outflow of GBP 4.3 million. And that was primarily driven by the need to build inventory to support the launch of Flash forges desktop 3D product. So that's the overall shape of the numbers. Let's have a look now at the divisional performance. So as you can see, I'm pleased with the growth in print head and with the expected launch of Flash Ford's Desktop 3D in the second half, year-year revenue performance for the second half is expected to be much stronger. The growth has been driven by new business, new applications and uses for our unique technology. Within all of this, we've seen the legacy ceramics market stabilize after many years decline. And that's been helped by the development of new so-called ceramic players technology. And as such, this decline that we've experienced from many for a long time now for many years, no longer represents a headwind for us in our growth going forward. Now there's a wider important point here. Xaar today has broadened its appeal to many different sectors and continues to expand and as such, there is now a derisked portfolio effect compared to the Xaar of old. Operational gearing effects show an enhanced adjusted profit before tax profitability, that's improved by some 100 basis points year-on-year. And Megnijet, gross margin is up 120% -- sorry, 120 basis points built on revenue increased 27% year-on-year, and the Magrajet business underlines the importance of supporting systems or system components for our core offering, supporting our customer base. The growth comes from new customers as well as increased demand from the existing customer base. And then back to EPS, much hard work has been done to rebuild a durable pipeline address the cost base, and that's work has been ongoing for some time now and solve some long-term intractable problems. So I expect EPS recovery path to continue into next year. So let's have a look at a bit of detail at the adjusted income statement. So taking it as a whole, the group grew revenue by 9.2%, a performance that would be the envy of many companies in the current global climate and growing gross margin performance by 220 basis points. The development of operational expenditure is worthy of mention. Now it's up just 5.7% year-on-year, but this increase is driven by building and some would say rebuilding capability in the front end, sales and marketing and the sharp end, which is how I turn research and development, and that's to drive growth in the innovation pipeline, which is our lifeblood after all. So general and admin expenses have actually declined by 1.6% note, a contraction in the cost of back-office roles. Putting that all together, we now see a business that grew profitability substantially in the first half to achieve an adjusted profit before tax of GBP 0.2 million compared to a loss of GBP 0.7 million last year. And similar losses, I must say, for the first half of the years before that. Then just to take a look at cash flow and turning our attention to cash. The group's adjusted free cash flow was an outflow of GBP 4.3 million. This was primarily driven by temporarily building inventory to support the launch of desktop 3D by Flash Forge. And once this launch has happened, we expect this to sharply reverse. In addition, the group has upped capital expenditure in the first half compared to last year, again driven by building out capability to support anticipated higher volume levels in the future, particularly with our new manufacturing facility in Dongguan, China, that is in itself enhancing supply chain resilience. Now I want to emphasize, and I've done this many times already since I joined a that the days of storing large amounts of cash in what is essentially a current account are over. We have entered into an expanded rolling credit facility, increasing it from GBP 5 million to GBP 10 million with an EBITDA covenant of 3x, whereas previously, it was 2x. And in addition, we have an uncommitted accordion facility of GBP 5 million and an increased invoice discounting facility of GBP 5 million. So at the moment, our liquidity is substantial. So that's it for me for now. I'll hand back to John.

So in terms of the strategy going forward, we -- as I said earlier, we compete against very large Japanese companies. And our key strategy is to maintain differential in capabilities to be a point a little bit that no 1 else can. And the real competitive advantage is based around our technology, and therefore, 1 of the key things that we will do is continue to actually invest in engineering and R&D to maintain this advantage? The other key thing is that if you go back 15 years, Xaar was pretty much a single product in a single market in ceramics. And when I joined 6, 7 years ago, there was very, very few applications for our technology. What we've done over the last 5, 6 years is really to focus on how we diversify and have a broader excessive market applications. And today, I'm pleased to say we have 21 separate markets where we are generating revenue across the maybe many territories and medications. And so the route to market through the OEMs. OEMs build machines and sell them into a particular application. We have another CapEx for user developer integration. So these are companies that actually buy that print heads our systems for their own use. And we see that increasingly as large -- very large companies start to adopt our technology in their process, and that's particularly true in the semiconductor space. And what we typically do as we enter into a new market is that we have a halo partner, somebody where we will get preferential pricing and significant support to get them to market knowing that once they're in the market and gaining market share because of the advantage of our print heads, then their competitors will come to a and at that point much more flexibility on pricing and how we would charge for and support. And if you look overall, the 4 phases of development, we would work -- a company we come along and really want to use inkjet in this application, we would work with them to development in that can get through about print heads and Apron has the widest range of promises that we keep deploying and then we move into a machine development pace. So they will actually develop a machine that will actually function and print whatever is that the item that you need into once they've done that, they can then use that to go into customer accreditation and that's can very significantly for the car battery application. The machines were built took about 1.5 years to build and develop the machines, then they started reducing batteries. And those batteries went through a substantial amount of testing with car manufacturers, putting them into cars, test and environmental test. So that took about another 1.5 years to be tested before the batteries were actually accepted into the reporter circulation. So from the point where we celebrate because the company has chosen our print head to the point where they launch a number of machines that we get repeat orders is those machines can be a number of years. And so over the last 5, 6 years, we've built a pipeline of applications that starting to come through now. And we talked a lot about desktop 3D and car batteries and screens and cars and wax. But there are others that are starting to come through and deliver revenue now. So conformance [indiscernible]. So this is putting a wallet quarter BCP so, for instance, you might remember a number of years ago, if you dropped your iPhone into water, it probably never work again. Now if you drop it into water, it survives. And a lot of that is down to course quarter to the U.K. PTB. This is an increasing market and the same court in this use of [indiscernible] can be used on the PCP and is much quicker and more efficient than the incumbent method and we're starting to see that now grow in particularly in China. We've also developed a new method of putting structure on top of surrounding tiles to make the tiles. We look more like a natural store organic tiles that have that natural look currently really expensive to manufacture with the high cost in pipe pigment loan, we're able to print a very heavily loaded fluid and book down significant amounts of crush pounders to recreate natural stalled effects. And this is actually now 2 OEMs, 1 in China, 1 in Europe and developing machines and the samples that they've been producing with really well received by the industry. Then in semiconductors and we're seeing a number of companies actually adopting our grid largely for the replacement of spin coursing. So spin coursing is a very widely used them process in semicon manufacturing right to put a layer of fluid onto the silicon wafer, you would spend the war you will then put through in the middle of the wafer and then the forests basically move the material out and physics mix, it gives you a very uniform fill. The challenge here is that when the fluid gets to the edge, a lot of it flies off the edge and it's wasted some of these materials that we are working with that now can be $50,000 per kilo. So waste and fluids that expensive, you can see that with EJet where the rate is effectively 0 that's very attractive ROI in that sector. So the number of companies are testing it. The question will be, can we actually deliver the performance the accuracy and the reliability needed for the semi industry. There are several machines now in large companies there on your testing determine that. And similar in solar panels, we're actually now -- there's 3 test machines that we developed that in pilot lines, looking at how we can replace some of the laser patterning steps with inject in solar manufacturer. So the thing that is consistent against those 4 applications is that the fluid that we're depositing, you can't compromise ARPU. And the reason why they're using our hands because those fluids just will not print in any of the. And that's why we come in using our bring head for the applications into these sectors. And those are 4. As I said earlier, there are 21 sectors altogether where we have revenue either revenue already from machines launched our machine is actually in development to launch. And 1 of the key things is getting our customers to market as quickly as possible. And then what we have done is we built a sort of ecosystem of supporting products around the print heads. So the customer now could buy a fully integrated print power operate engines instead of actually taking the individual printhead developing everything themselves because we take many years, customers are now opting to buy a print power of print engine out to make sure that they get to market within months rather than the years. And so particularly in the U.S. with the semi companies they're actually just buying a print engine that they put into their machines. So if you look at the sort of broad spectrum in China, promote buying printheads and existence and all the inspiration themselves, much more in the U.S. than buying print engines and full tank solutions. And if you look at the numbers, the percentages look quite big if you actually look in the actual numbers, sort of these numbers are quite small. The categories are split up really by the type of ink that it's producing. So ceramics and glass, really pleasing because for the last 10 years, that market has been in decline. But as a reduced its installed base the time in 2012 to 2020, where you had 10% market share and then [indiscernible]. And then we see going forward that the caramelize application, we should see some growth within the ceramics market going forward. According to marketing, that negative there is really just timing around half year. There were some issues around payment with some of our key customers at the half year, so we didn't ship port to them. They're all call now. We expect that to be on track by the end of the year. WiFi format graphics and labels up by 8%. But the real activity is in the 3D and advanced manufacturing, which is really where some of those applications we just talked about Packaging textiles, small numbers, but 1 of our key customers bought a significant number of print systems over the back end believed that they would install all of them. They went into the start of this year. We're still quite a few in stock and they burn through [indiscernible]. So that's hence they can actually finish than you were in the first half of the year, which you right still expected to be down at the end of the year compared to 2025, and then you'll come back up again as we go through into 2027. So overall, really not pleased with the growth in the new markets. So summary, we're seeing really strong demand across all its applications. And the rates at which we are now being contacted for new applications is growing significantly. The desktop 3D application with cash forages. It is delayed, but we do expect that to launch in the coming months. And then we have received the initial orders for production volumes, and we're helping them with their production ramp-up with the team in China. And what this means is that I think Xaar very much is, as I said earlier, was a simple in a single application. Now revenue stream is much broader and as we build the installed base, that just build an ongoing replacement plan revenue, which will grow as listed schools. So despite the economic headwinds, despite the turbulence in the markets, we with the new applications coming through ourselves and the Board look forward to the future with some confidence. And with that, we will take any questions.

[Operator Instructions] Just while the company take a few moments to review those questions submitted today, I'd like to remind you that a recording of this presentation along with a copy of the slides and the published Q&A can be accessed via Investor dashboard. May I please ask you to read out the questions and give responses where appropriate to do so, and I'll pick up from you at the end.

Yes. Okay. We take these questions in order. So you recently opened an office in China, what's the reason it's excise in the region? So the weakened a facility in China has multiple functions and the sales office training center engineering center will stay more sense. And we've actually often on manufacturing facility. So the print head that is in the desktop 3D, the front is actually built on U.K., where we're saying all of the like more the technology and then the assembly of the pens head with all with the PCBs and the tubes and the pipes and the cases is staying on in the manufacturing facility in China. And where we've got an optimal supply. What that means is, is that as volume for that product increases, we have the capacity and the margin would be substantially better than how [indiscernible] China. So the second question is which growth opportunity I'm most excited about and why? I think it's very much the desktop 3D. The market size -- so desktop 3D brings us, there was 8.8 million desktop into sort last year. And there are 4 companies now developing high resolution and for core machines used our and 2 of the significant ones on [indiscernible]. I've told us that they expect 10% of the market to be switched to this product category, which is therefore about 88,000 hits our revenue from each machine is about 5-year point. So 8,000 machines times [indiscernible], which is a crazy number. So even if that number turns out to be 1%, that's ultimately. And then -- so I think that the desktop 3D the category which is our first real B2C type upcase is potentially transformative for the and then so we anticipate launch over the next 12 months. And we will see is the reception of does the product work do the consumers love it. And do they buy it? And if you answer your question is yes, then -- and then we'll do very well. Question is, what do investors more misunderstand about our business? Just a question actually. I think the thing that's really difficult to get to reinitiate your head round is tiny little company like Xaar has this capability to print this fluids that nothing else can. Why would a giant like at be able to just do the same thing. And the reality is, is that their technology, and I use the analogy that they've effectively developed a formula [indiscernible]. So all of the big companies that can outperform the local is very good in long most fluids with high resolution and high speed be like for the long term. Well, we've is we've developed a bold which isn't as fast is not as good [indiscernible]. But if you want to actually sit the fan excitement, not cease, you've absolutely got the right rig count, and what you can't do is you can't start off with the formula longtime evolve it into vote you have to do is you have to start again and you have to develop a new product category. And if you do that, then you've got to triple over [indiscernible]. So I think 1 of the -- that's -- I think that's the thing that is the harvesting for investors to understand is how different our IP and our policies compared to the big companies and how difficult it would be for them just to switch to do something like we do. The next question is, do you expect further innovations to come from internal R&D or external R&D collaborations? Very much the innovation in the prepaid is very much most. So we have a very clear R&D pipeline technology that our significantly forward. And so we can see what the market requires and the developing products on a portion. What's interesting is that our customers are finding new applications that we couldn't even have thought of. And they're not in the presentation what there's 3 new applications that is if everybody on this call, we all went down a point out a few years and tried to think of things that you could use inkjet for. You just wouldn't come on these 3 application areas. So it's quite extraordinary the breadth of industries and the breadth of applications that we're now looking at. But it's pretty much anywhere where you have a positive fluid and you want to reduce waste and you want to reduce costs or you want to actually do it more accurately. And so I think that's going to be extremely interesting. Next question is, could you kindly expand on working capital dynamics as you work with customers [indiscernible]? Is there any use of custom or front payments to invoice discounting to help believe any short-term stress on sales working capital [indiscernible]?