Desktop Metal, Inc. (NYSE:DM) Jefferies Industrials Conference August 9, 2022 3:00 PM ET
Company Participants
Ric Fulop – CEO and Founder
Conference Call Participants
Andy McCleneghen – Jefferies
Andy McCleneghen
Good afternoon, everyone, and welcome to the Jefferies 2022 Industrials Conference. My name is Andy McCleneghen. I’m an associate with the investment banking team here at Jefferies. And today, it’s my pleasure to introduce Ric Fulop, who is the Founder and CEO of Desktop Metal. We’ll leave a few minutes for questions at the end of the session. And with that, I’ll pass it off to Ric.
Ric Fulop
Thank you very much. It’s great to meet you all, and look forward to sharing a little bit more about Desktop Metal. How many folks here are familiar with our story? All right. Awesome. Okay, great. Well, let me tell you a little bit about our company.
Our goal is to change the way people make products and making with a new process a lot more efficient, let you do much greater freedom of design and really simplify the way that those products are made and make that — eventually we think we can get to double-digit share of this new way to produce products, which is referred to traditionally as 3D printing or additive manufacturing.
The Company is in a segment that’s growing around 25% a year, and we project — or different folks project that that’s going to get to about $100 billion by the end of the decade as people shift the use of printing from prototyping into mass production. It gives you a significant levers and flexibility in how you do your supply chain. So, you now are able to produce parts on demand when you need them, instead of having to order them around the world, put them in a boat, get them over here and go through customs and tariffs and all that.
The systems that we’ve got have a significant improvement in throughput versus what existed before. We’ve got processes that are area wide that do the entire layer at once. And this is patented technology where we’ve got north of 650 patents applied and issued. And so, we have a huge moat for this class of technology. We’re able to print a much broader library of materials than our competitors. And we’ve got an incredible go-to-market in over 65 countries, with a pretty strong team over 6,000 customers for the Company, a lot of blue chip companies. I’ll show you a lot of designs and examples as we go through. And the products are razor-razorblades. So, they have high margin and have recurring revenue attached to them. As we grow our installed base, they’ll produce greater increasing percentage of the revenue that will become recurring.
Quick — a glance on our company. About $183 million in last 12-month revenue. Organic growth last year was about one 160-plus-percent. We have pretty broad portfolio of products, about 20 print platforms that span a variety of solutions. Our customer base is very much blue chip, everything from Tesla to Eaton to BMW, companies like Certa, Honeywell, SpaceX, a lot of the military armed services are invested in the business. And it continues to grow.
If you look at deployments in Q2, big — new customers include folks like Gulfstream, which is looking at doing a variety of things with our products, including aircraft interiors, Honeywell, Eaton. Many of these companies are repeat customers, in case of Honeywell and Eaton and Nissan, Kennametal, Kimura, they’re all — Saudi Aramco, growing their installed base systems dramatically. We have half a dozen systems at Kennametal. We have close to a dozen systems now at Kimura, lots of activity with people like Honeywell. So, it is a very much a growing business and we have product market fit. That’s pretty clear.
I mentioned that products have razor-razorblade model. And I think that’s very attractive part of our business model. This market is projected to grow to over a $100 billion by the end of the decade. And even at that point, it’ll be 1% of total parts produced. So if you’re looking at it as a secular long-term growth story, this has been a compounding industry and it’s projected to eventually be a few percent of the $12 trillion of products that are made globally. So, if you look at it — my personal view is that we’re in a similar time horizon as when semiconductors were in the 1970s, where you had a couple decades of growth in the industry. And I think we see the same in our particular segment where we see this market will continue to perform for significant amount of time, particularly the segments in the production side, where the technology is just beginning to be used.
Why would you want to print a part, instead of make it with analog? So, why would you want to make it digitally? There’s probably a handful of reasons. You don’t need to have inventory, like you do — for example, John Deere or Caterpillar have giant warehouses full of parts for spare parts. This allows you to have inventory of one where you have a smaller number of spare parts. And as you need them you just print a new one and you really free up cash. You could have much more complicated and complex geometry in your parts referred to as generative design or topology optimization. And you can lightweight components. You can mass customize components, or you could take 50 parts, print it as a single part, simplify your supply chain, reduce your costs, and you don’t have to ship everything all over the world. You can also dramatically improve your carbon footprint, because these products, when made with our process, don’t require you to — they don’t have spare materials that aren’t used. So, a 100% of what turns into a product gets used versus the yield that you get in other processes like machining or stamping or where a large percentage of the material used ends up outside of the net part. And then, you have to remelt it and reprocess it. So, it is a much better carbon footprint story than other processes.
It is an industry that needs a high bar in order to go to production. And that’s basically what we’ve solved, the ability to get very high quality surface, finish with accuracy, with the properties and the throughput to achieve the cost structure. And this is a pure-play very much on supply chain disruption. You’ve got the ability to decentralize your production, create on-demand inventory, which is more resilient, onshore, and localize your production, and then reduce the complexity.
I talked earlier about what the unit economics for these products look like. And they have very nice recurring revenue streams. One of these platforms on the polymer side, $170,000 investment will yield close to $1.6 million in recurring revenue over life of that product. And the same thing goes on in the metal side. So, the consumables are proprietary, and they guarantee a revenue stream once you grow your installed base and that compounds as we grow that installed base. So, it’s a very nice feature to our business.
We make the fastest machines on the metal side in the industry, we make the leading machines, bestselling machines on the casting side, and we have leading share in these two spaces. We have about 90% share in binder jetting, which is something that I think is an asset to the Company.
This is an example of what you can do with assembly consolidation. This used to be hundreds of parts. Now, it’s a consolidated part where all the hydraulic and other components are as part of the same component, and it really simplifies and gives you benefits from a light-weighting point of view and supply chain point of view.
Another part of our business that’s growing nicely is our healthcare part of our business. And there, we are the leader in Class 2 FDA approved parts over a 1,000 labs in practices are using this technology today. There’s over 70 materials that we offer. And we have the best properties in this segment. So, roughly 3 times a fracture strength of our closest competitor, half the moisture resistance — half the moisture absorption in about half of the wear over the life of the product of previous solutions. So, they’re very much best-in-class with the — I can confidently say we’re the best company in the world at making Class 2 FDA approved materials that are printed. They have the best properties.
And we have a new product also as part of this new photopolymer technology that’s in the foam space. This is a huge innovation where we’re able to create parts that have a very wide operating window from minus 50-plus to over 140 degrees. And this is a very good performance window for foams. These parts are printed tiny, and then you expand them to the net shape, and you end up using a lot less material than you would have with conventional foam. So, it’s less expensive. And it’s catching on in automotive with some of the leading companies in the space in footwear and mattresses and other markets that would benefit from this class of products.
Folks ask me where are your products being used and what are examples of production? These are some of the examples. This is one of our customers, Ventana, makes parts for Airbus. These are the hinges that are used to open the door in a plane. They’re lighter weight, when you print them than conventional manufacturing. You can see some of the designs of what can be done here in the bottom right of the picture. BMW is a major user of our technology. Every M series BMW, these are the high performance version of vehicles, is using parts that were made with our technology. And now, that’s expanding as the year progresses into a larger number of parts. We have good business with Caterpillar, pictures of some of the parts that are done with our printed casting technology. And that is also continued to expand.
So, these are customers who started with one machine, and then they continue to add capacity to their manufacturing, use huge benefits in going digital for folks in that space, because they remove the validation of the casting away from a supplier and they control it. And now, the printer can be in the print, in the drawing of the part and then any of our customers can produce those parts, and it turns it into a more competitive higher quality market where you can have — you can match the quality across the board in different parts of the world.
Collins Aerospace is another great customer of the company. You can see the big, soupy, large plastic parts in those business class seats. Those are — that type of product is made with our printed tooling capability. And it’s a new way to do large giant thermal foam parts. I don’t have a slide showing it, but it’s a pretty innovative process that’s super cost effective and being adopted at scale by customers at Collins.
This is an example of another major supplier to the auto space. This is a customer of ours from the UK. They are now doing engine blocks for a lot of the Formula 1 and Model GP teams as well as part for some of the leading electric vehicle manufacturers using our print technology. Lockheed is a major customer as well in many other aerospace components. Sikorsky, also major customer. So, the CH-53, their largest platform amongst many other products they make, use our systems. And we have a fantastic growing relationship in this part of the market.
Here’s a cool example with a company that makes one of the most advanced robotic surgery devices in the market, and you see some of those miniature components. That robot is tiny by the way. Let’s take — zoom that picture, but that’s supposed to go inside your body as doing robotic surgery. And those tiny mechanical components are printed. And then, some pictures of what we do in the world of Class 2 medical events.
So, comparisons to when we went public, we have today a much bigger addressable market. We are number one market share, but 90% in binder jet, which is one of the fastest growing segments in our industry. Digital printed castings are also a major growth area. We’re number one share globally in that segment now. We are number one in the world of printed hydraulics. And we are the leader by far in printed solutions for foams. We have the best technology in the world to do that. That alone is going to be mapping in $1 billion plus business. We have the leading technology for Class 2 parts that are FDA approved. And, we’re happy to answer all sorts of questions and tell you more about the Company, so.
Question-and-Answer Session
Q – Andy McCleneghen
Do you think the recent government bill passing will aid this process much?
Ric Fulop
Absolutely. So, there’s two pieces of legislation that will have a great impact into our business. The one that just passed, we have some major programs that we’re applying for with DoE that could be nine-figure type awards if they happen. With that type of stuff, you just never know. You work it and you see. But we could do great things. It’s part of this bill that just passed. And then the CHIPS Act has a significant component for additive manufacturing. That is in the — that’s quite large, but it’s too early to tell what’s going to make it and not make it, and you just never count on legislation. But both of them — I would say that the U.S. government would love to see reassuring and better supply chain resiliency on critical components and materials. And we have a huge program with the Military, with the Department of Defense. They have an agency called Defense Logistics Agency, and we are helping them develop better ways to make their parts more efficiently.
So, while we are primarily commercially focused. And if you ask me what’s the biggest segment, for our company 5 years from now, it will probably be consumer electronics. It won’t be government, but there is definitely a growing business on the Defense side and they’ve been an early adopter.
Andy McCleneghen
Ric, I had a question. You talked about being on the early stages of adoption for this technology, industry poised for massive growth. Can you talk a little bit about some of the barriers to entry for new participants and kind of, sort of how you’re building that moat?
Ric Fulop
Yes. That’s a great question. So, I mean, I feel like we have a great moat. We are in binder jet, the dominant player, we’ve got 650 patents. This is pretty complex technology. This is like the Olympics for — what we do is like the Olympics for I would say hardware type products. We we’ve got — when you do communications or software, you’re in one particular segment, but here you’re doing hardware, physical sciences, process, firmware, software as a — you may doing metallurgy or very advanced polymer chemistry. So, these products are quite sophisticated. And roughly half of all of our employers are engineers working on — and the machines we make are the fastest in the world. They’re 100x faster than legacy technology can before it. So, it’s not a simple process that’s easy to copy and it’s different than what you would remember as an old like desktop maker, bot type of printer. These are more like printing presses.
Andy McCleneghen
Any other questions?
Unidentified Analyst
Could you just talk to the cash burn?
Ric Fulop
Absolutely. So we, expect to burn a lot less cash in the second half of the year. We just started a major cost cutting initiative that we announced towards the end of the last quarter. And that will reduce about a $100 million in expenses over the next two years. We should be close to — depending how the year goes, we should be close to cash flow breakeven in Q4 for that particular quarter. And then next year, overall, by the end of next year, our plan is to be EBITDA — adjusted EBITDA breakeven. And I don’t know if you want me to give more specifics or – yes. So, I would say, we feel like we’re well-capitalized given our — yes, the plan is to be adjusted EBITDA even before the end of next year. And we feel like we’re capitalized to get through that and have a nice buffer.
Unidentified Analyst
[Question Inaudible]
Ric Fulop
I mean, it’s hard to talk about M&A in public. We don’t have any major transactions planned and I think at this price, I wouldn’t be a — I mean, we’re not doing anyone — any at the moment. If we see something that we find really attractive, we would consider it. But, we are — we set out to develop a position that was dominant on the binder jet side and on the photo polymer side. These two technologies benefit from Moore’s Law, so they get faster every year versus all the printing processes which don’t do that. So, the benefit of this is that if you look at it on a one decade basis, our binder jet systems are doubling in throughput roughly every three years versus other approaches to print parts. And we would become more competitive over time. I think, we’ve done most of the things that we set out to do, and — but it’s a vibrant market, so we’ll see what happens. My goal right now is to get the Company profitable and get it cash flow positive in the next 18 months.
Unidentified Analyst
And Ric, in the past, you’ve commented on some of the products come out and they’re just taking right off the floor, or there’s a backlog of demand. Do you want to touch on the more demand-driven products?
Ric Fulop
Absolutely. Yes, we’ve had some products we’ve introduced this year. I think you may be referring to our S-Max Flex, which is an awesome product. That’s been selling way faster than we expected. And we continue to see that — we still are planning to introduce some exciting new things later this year and next year. So, we could get profitable way faster, but it would require that we sort of really hamper long term growth. So, I think I feel great about the pipeline that we’ve got and we’ve got a nice backlog and continue to see demand growing for our products. So, we’re growing faster than any of our public company competitors in a market that’s going to be a significant market. And so…
Unidentified Analyst
[Question Inaudible]
Ric Fulop
Einstein was also a very successful launch. Yes, it’s turned into the category leader very, very rapidly. So, I think — and it’s the fastest product in its field. It’s the most accurate system in its field. And the materials that it prints are 3 times a fracture toughness of technology that came before. It is being adopted broadly in dentistry and all the markets. So, that’s going well.
What are the things that you think about when you think about our stock? Feedback, what would you like to see for the folks that know our story?
Unidentified Analyst
Just a little bit more competitive positioning and the technology in terms of the cost of — the powder and how many steps do you need once the product is 3D printed to refine it and so on?
Ric Fulop
So, let me just — so if I understood your question. So, what is your competitive positioning versus conventional manufacturing or versus 3D printing or?
Unidentified Analyst
[Question Inaudible]
Ric Fulop
I mean, the technology that we have is the cost leading process for making parts that are sort of — with metal binder jet, you’re roughly 120th the cost per part of a laser-based system. You have limitations in what’s the largest part that you can make with it. That’s the trade off. And then for larger parts, we have our digital printed casting technology, which is also a form of binder jetting, but much larger parts. And we are also the market share leader and the cost leader there.
Now, on the printed casting side, we are cost equivalent to analog, and we’re taking — that market is taking off and you’re seeing it in folks like BMW adopting it at scale. On the metal binder jet side — I mean, we’re in a segment where it’s growing faster than the industry. So, I think, we — the reality is that a lot of our customers will try one part with the process. And once it’s successful, then they’ll try a number of things across more product portfolio and then eventually they’ll deploy it broadly. And an example of that would be in automotive. You could do about 250 kilograms of parts in a car, cheaper with our technology than you could with other approaches that are being used today. But, it takes time for them to change everything to a new process. So, they’ll start with one thing and they expand it over the product portfolio and then eventually they right recipes that are broader.
And this is a diffusion issue, right? It’s easy when you just have to do a replacement like-for-like and you don’t change the design and you’re just maybe having a more efficient supply chain on the spare part side. But the exciting part is, for example, Mercury Marine has a new engine where all the parts internally can only be made with printing, with a process like ours. And that’s like fantastic type of — that’s where we want to go and — or some of the parts I showed you earlier that consolidate hundreds of components into a single component, and that makes it also much more difficult for people to go back. So, they start in one place and eventually they get to the Promised Land, or like the John Deeres and Caterpillars who have a long term vision too, in the future, don’t have warehouses that are mile long for spare parts, they would just have a digital spare parts center. And when something is needed, they print it, instead of having to have inventory, for — to sort of support that 20-year promise that they give their customers.
So, these are — it’s a very large market, $1 trillion of things that we make a year and 0.1% of it is additive today. And maybe in a decade, it’ll be 1%, and by then, it’s $100-billion-plus industry or $150 billion industry. And then, and Mackenzie thinks this will be like 6% by the end of the decade. That would be like 6 times bigger, so $600 billion. I don’t know if it’ll be that fast. If you ask Cathie Wood, she thinks it’s $100 billion by 2025. She’s put that in writing. I don’t know if it’ll be that fast. I think it’ll be more like in the middle, like we’re suggesting. It’ll continue to compound as an industry at 20% to 25%. And I think we’re going to continue to grow faster than the industry because we are in segments that our production, which is the fastest growing segment in our industry and our technology, unlike our competitors, benefits from Moore’s Law, which means it gets more competitive with every technical cycle. So, every three years, I’m doubling the throughput without increasing the cost, and it just becomes more competitive. So, it’s in a cost curve that the breakeven versus conventional keeps widening and makes more sense to invest in additive.
Andy McCleneghen
That concludes our time. Thank you all for attending. And Ric, thanks so much for presenting today.
Ric Fulop
Awesome. Thank you. I’m happy to answer your questions, or I’m going to head to the airport soon, but happy to answer questions.
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