Operator: Thank you. The next question today comes from the line of Greg Palm from Craig-Hallum. Please go ahead. Your line is now open.
Greg Palm: Thanks. Good morning, everybody. Just kind of following up a little bit on the last set of questions there. In terms of the confidence level and more of a second half ramp, and just kind of where your visibility is now, maybe you can give us a little bit of color of what gives you that confidence in that ramp as we progress throughout the year?
Ryan Martin: Yes. I’d say — good morning to Greg. I’d say, the biggest confidence is, just talking to customers. So talking to the customers, getting out there understanding the products that they buy from us, especially on a production side of our business, roughly 65% of our business is production reorders of parts and components. And so talking to them, understanding that we’re not losing orders. They are just pushing them off or having smaller amounts based on some short-term uncertainty with that. And I think that’s the biggest area that gives us confidence, Greg, is going out and talking. I’ve talked to — within our top customers, I’ve talked to at least 50 of them over the last — in the first quarter and really gain out understanding their needs where that’s at, our value proposition and where the timing is related to that.
And so, continue to be very committed to Fathom to what we are doing. It’s really just the timing. And so that’s what gives us confidence, as they continue to — they’ve really in most of our customers I see they have really pulled down their inventories where they may have been running eight to 12-week safety stock, based on some of the supply chain concerns that were occurring last year, where they were just taking everything as fast as they could, as they looked at this and said, we have got to right size the inventory. They brought that down and now a lot of them brought it down into levels that probably is not sustainable. And so we think that we are going to see a rebound in the second half, as you get back to more normalized inventory levels, which should benefit us.
Greg Palm: Okay. Yes, that’s helpful. And just in terms of your strategy, I guess maybe this is more specific to additive where you mentioned a little bit more competitive. But how are you reacting to that more competitive marketplace. Is your preference to hold price and seed share? Are you willing to sacrifice some margin, in order to retain and win some of that business? What’s your thought there?
Mark Frost: Yes. It’s a great question, Greg. So it’s a multifaceted answer on that. So one of the areas, we made the decisions we talked about previously to consolidate our Oakland Additives Center and our one in Hartland, Wisconsin. So, part of being more competitive is getting the cost structure right. And so we made that change, which will drive a more efficient cost structure to allow us to maintain the margins on the additive, while also offering competitive pricing, as well as we have made some investments, that I talked about in the prepared remarks related to more efficient equipment on the additive side of things, and so allow us to be able to produce the parts more efficiently. And I think what we continue to differentiate in additive and why we’re still very optimistic in the long term is, really being able to do more than just the print and ship, which is really the commoditized additive side of things.
And so, in our facility in Hartland, the ability to do a lot of the post-processing, bonding, inserting, painting, finishing, all of those ancillary processes really add value. And then focusing more on our larger strategic customers and using additive is really a tool to be able to do not only the development through the engineering validation ultimately into the production and really being able to have that total life cycle of that. And so we’re committed to continuing to focus on that, continuing to add more technologies, going into technologies like the Evolve, that we’ve added in the technology center. And so using the technology center to really introduce newer, additive, transformative manufacturing processes to our customers through that.
And then transitioning them to our Hartland facility where we’ll drive better cost efficiencies there. But we still believe that, additive can be a growth engine for the business and can maintain profitability as well. And so, we’re very focused in that space of not trying to be everything to everybody where you really have to compete in that commoditized print and ship. I think, it has hurt our growth short term, but long-term, the value proposition that we have with that I believe is differentiated and maintaining pricing discipline for the value, I believe is the right long-term strategy for the company.
Greg Palm: Got it. And then just a clarification, I think, I heard adjusted EBITDA growth on a year-over-year basis, can you confirm that? And then did you also say that revenue growth to return to year-over-year growth in the second half? Or did I miss that?
Ryan Martin: Yes. We — our plan assumes a decline in the first half and a flattening out and hopefully some growth in the second half. And based on that assumption, we do with the level of cost savings we’re taking out, we do expect to see an improvement in adjusted EBITDA in €˜23.
Greg Palm: And that second half is on a year-over-year basis. That’s not versus sequential
Ryan Martin: That would be on a year-over-year basis to be flat slightly up.
Greg Palm: Okay, all right. Thanks, best of luck.
Operator: The next question today comes from the line of Paul Chung from JP Morgan. Please go ahead, your line is now open.
Paul Chung: Hey, guys, thanks for taking the question. So just on free cash for €˜23, as margins benefit from cost cuts and 1 times $6 million charge kind of goes away, can we see consistent positive free cash flow and kind of progression throughout the year? And then I have a follow up.
Mark Frost: Yes. That’s a good question, Paul. We had a pretty big cash usage in €˜22 because of that $6 million as well as our investments in CapEx. We do expect based on this plan, that’s why we’re so aggressive on our cost take-outs was to get this plan — get this company back to a positive operating cash and positive free cash, despite the fact that our debt service will go up because of the change in interest rates and higher principle payments. But this plan assumes our ability to support the debt service and generate free cash in €˜23.
Paul Chung: Sounds great. And then secondly, as we kind of think about the dynamics in the industry with maybe a lot of customers, kind of not your customers, but maybe sweating assets longer term and maybe not purchasing systems or investing quite heavily, how does that dynamic benefit your business? And can we see more inflow of orders given that dynamic? Thank you.
Ryan Martin: Yes, we think as — it’s a great question on that front as well, Paul. That is obviously the genesis of our business. We think we can add more value allow our customers not to make the capital investments that they need to be able to leverage the outsourcing, be able to leverage our expertise, be able to leverage our footprint to be able to do that. And we’ve seen, historically in the past to even look back into COVID when there was a lot of uncertainty in 2020 related to the overall macro environment and capital spending, we saw double digit growth in that timeframe, as customers pulled back maybe on the investments that they wanted to make and in capital assets. And so, we believe that is continues to be an opportunity for us and as a long-term trend as more companies look to outsource the manufacturing services that we offer.
And I think for us, we’ve continued to grow, as we mentioned with our large strategic customers, we’re continuing to see strong growth there. We’re not losing orders with any of those customers. In fact, we grew with those customers and I think as we see them rebalancing their inventories, we think that as we talked about strong potential for growth into the second half of this year.
Paul Chung: Great. Thank you.
