Fathom Digital Manufacturing Corporation Class A

Hello, my name is Charlie and I'll be the operator for this call this morning. I'd like to welcome everyone to Fathom Digital Manufacturing's earnings conference call. This call is being recorded and a replay will be available later today. After the company's presentation, there will be a Q&A session with instructions to follow at the time. I'd now like to turn the call over to Michael Simony, Fathom's Director of Investor Relations. Michael, please go ahead.

Thanks, Charlie, and good morning, everyone. Welcome to Fathom's second quarter 2022 earnings conference call. Before we begin, I'd like to mention that today's presentation and earnings press release are available on Fathom's website at fathommfg.com, where you will also find links to our SEC filings along with other important information about our company. Turning to slide two, we note that this presentation contains forward-looking statements within the meaning of the Securities Exchange Act. We encourage you to read the risk factors contained in our filings with the SEC, become aware of the risks and uncertainties in our business, and understand that forward-looking statements are only estimates of future performance and should be taken as such. The forward-looking statements represent management's expectations only as of today, and the company disclaims any obligation to update them. We also note today's presentation includes non-GAAP financial measures to describe the way in which we manage and operate our business. We reconcile these measures to the most comparable GAAP measure, and you are encouraged to examine those reconciliations, which are found in the appendix to both the press release and the slide presentation. With us today are Ryan Martin, Fathom's Chief Executive Officer, and Mark Frost, our Chief Financial Officer. I will now hand it over to Ryan.

Thanks, Michael, and welcome everyone to Fathom's second quarter 2022 conference call. I'd like to begin my remarks on slide three, where we will provide our Q2 highlights. During the second quarter, Fathom furthered its history of growth and profitability as we delivered positive results consistent with our expectations. In Q2, we posted revenue of $42 million, representing an increase of 17% compared to the year earlier period. On an organic basis, excluding the impact of acquisitions, revenue was up 9.4% in the quarter, including growth in all four of our key manufacturing technology lines. and adjusted EBITDA increased 16.1% to 8.7 million, representing an industry-leading margin. We continue to benefit from our comprehensive manufacturing services by providing enterprise-level customers with timely, value-added solutions across both additive manufacturing and traditional manufacturing. During the quarter, we entered into a new $1.2 million managed services agreement with a Fortune 50 multinational technology company. where we will lend our engineering expertise and serve as an extension of their R&D and manufacturing teams. We also secured a large order for just under $1 million with a global leader in healthcare technology to produce parts utilizing our hybridized model by leveraging our injection molding, additive manufacturing, and ancillary technologies as well. We also saw continued additive orders growth within our key EV, and robotics and markets, with two strategic customers placing more than $1 million in additive orders in the first half of 2022. We believe our technology agnostic approach, integrating speed, flexibility, quality control, technical expertise, and problem solving continues to position Fathom well to meet the rapid prototyping and low to mid-volume production needs for some of the largest and most innovative companies in the world. Many Fortune 500 companies remain highly focused on both diversifying their supply base through onshoring and consolidating their supplier partnerships to create greater efficiencies, increased responsiveness, and speed to market. We are particularly seeing this trend in the medical and industry sectors. Ensuring a more agile and local supply chain to protect against the rising number of global uncertainties provides a competitive edge for product-driven companies seeking to get ahead and stay ahead at fathom we continue to work closely with our customers to help them iterate faster and accelerate their manufacturing innovation although the positive secular drivers in our business remain intact including the condensing of product development life cycles reshoring of u.s manufacturing consolidation of supplier partnerships and the digitization of manufacturing Our second quarter orders of approximately $40 million were slightly below our expectations. Outside of the macro environment, one key factor that impacted orders was the speed we were able to build our platform-based strategic sales team. This effort was primarily impacted by the tight labor markets. And it is key to point out that we will always be building and working to build a larger, more concise sales team. We've made tremendous progress on this and we continue to build the very best team in the industry. As I sit here today, we have significantly strengthened our commercial team and I expect it to be in a stronger position to achieve our go forward growth targets. In addition to continuing to improve our overseas supply chain, which is a key part of our value proposition, we are investing more in our resources for our outsourced business, including new software support systems. We expect to further aid the sales process and increase throughput, which will improve our margins. In furthering our efforts to accelerate profitable growth, we continue to optimize our operations, and our most recent announcement is outlined on slide four. These steps are a natural progression in Fathom's growth trajectory as we have built one of the largest and most profitable platforms in the digital manufacturing sector. Our team is continually evaluating opportunities to promote operational excellence across the entire organization, which led to the creation of the multi-pronged plan aimed at optimizing our national footprint, increasing operational efficiencies, and fully leveraging our scale as we continue to pursue both organic and inorganic growth opportunities. Key steps in our current plan include the following. First, we will consolidate our existing footprint in Oakland, California, which currently includes four facilities totaling a little over 20,500 square feet into our corporate operations in Heartland, Wisconsin. Specifically, we intend to transfer our entire CNC operations and most of our additive technologies to Heartland. By optimizing our existing capacity and our state-of-the-art facility in Heartland, we expect to improve the utilization and lower costs. This transition is expected to be completed by the end of the year. Importantly, as part of this initiative, we intend to maintain a strong West Coast presence by opening our Silicon Valley Technology Center. This will allow us to be continue our proximity to our strategic customers while providing a unique opportunity to showcase new technologies that we're adding and continue to expand our industry-leading platform. The tech center will also serve as a hub for all of our Silicon Valley-based leadership, sales, marketing, IT, and other functions. Second, we plan on opening a larger greenfield site near our Austin, Texas location and consolidate those facilities Our current capacity in the area, which we assumed through two acquisitions in 2021, combined for a total of about 41,500 square feet, and we expect to expand this through our new regional center. In doing so, we intend to expand our presence in the strategic Southwest market while eliminating redundancies and laying the groundwork to ensure the seamless integration of future acquisitions in an expedited fashion. We expect to secure a new site in the greater Austin area by the end of this year, and complete the transition in the first half of 2023. Third, in further advancing our objective to operate as One Fathom, we intend to create a finance and accounting shared services organization to streamline company-wide processes and create economies of scale. We expect our new shared service system to be fully operational by the end of this year, and we intend to pursue additional centers in other administrative functions over the coming quarters. As a result of this plan and the efficiencies gained, we expect a workforce reduction of approximately 6% based on a combination of buyouts and attrition. In all these action items are expected to generate pre-tax annualized cost savings totaling approximately 5.5 million once fully implemented. Additionally, we expect to incur pre-tax charges related to these activities totaling 2 million of which approximately 1.7 will be paid in cash. Also of note, these figures exclude certain incremental costs related to the Texas consolidation of which remains in the early stages. We intend to update our estimates to reflect these termination costs and rent over time as this plan progresses. We remain committed to driving long-term scalable growth while attracting and retaining experienced professionals with an enterprise level background. To this end, we recently appointed a new Chief Information Officer, Dan Borkwin. Dan brings more than 27 years of experience in the IT industry, having most recently served as the Vice President, Global IT at Generac, a publicly traded, multi-billion dollar energy technology company, where during his tenure, he saw the company go from $150 million in revenues to over $3 billion in revenues. He succeeds our previous CIO who retired earlier this year. In his new role based in Heartland, Dan will be a key member of the leadership team, responsible for spearheading Fathom's digital transformation and implementing best-in-class IT systems throughout our entire organization in a uniform manner. He'll play a vital role in supporting Fathom's growth strategy, and we look forward to sharing our progress and more details about our strategic plans with you over the coming quarters as we continue to consolidate and upgrade the digital thread of our business to enhance the customer experience. Fathom has built a proven track record of strong, profitable performance with significant growth potential. By implementing these optimization efforts, combined with our robust industry-leading platform and attractive financial profile, we expect to further build upon our solid foundation, increase our competitiveness in the marketplace, and strengthen FABN's position for long-term success. With that, I will now turn the call over to Mark.