Fathom Digital Manufacturing Corporation (NYSE:FATH) Q4 2022 Earnings Call Transcript

Fathom Digital Manufacturing Corporation (NYSE:FATH) Q4 2022 Earnings Call Transcript March 31, 2023

Operator: Hello. My name is Bailey, and I will be the operator this morning. I’d like to welcome everyone to the Fathom Digital Manufacturing 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 that time. I’d now like to turn the call over to Michael Cimini, Fathom’s Director of Investor Relations to begin. Please go ahead.

Michael Cimini: Thank you, Bailey, and good morning, everyone. Welcome to Fathom’s fourth quarter and full year 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 2, 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, to become aware of the risk and uncertainties in our business. And understand that forward-looking statements are only estimates of future performance and should be taken as such.

Forward-looking statements represent management’s expectations only as of today, and the company disclaims any obligation to update them. On Slide 3, 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. We also note Fathom has not yet completed its reporting process for the three and 12 months ended December 31, 2022. Company expect to submit a notification of late filing on Form 12b-25 with the SEC later today. Our preliminary unaudited results are based on Fathom’s reasonable estimates and the information available at this time, and are subject to various adjustments that are still under review relating specifically to potential changes in the provision for income taxes.

And now I would like to turn the call over to Ryan Martin, Fathom’s Chief Executive Officer and Mark Frost, our Chief Financial Officer. Ryan, the floor is yours.

Ryan Martin : Thanks Michael, and welcome everyone to Fathom’s fourth quarter and year end conference call. In 2022, Fathom completed its first full year as a public company. During this time, we achieved important progress, advancing key strategic initiatives that further solidified our foundation and enhanced our ability to deliver profitable long-term growth. While Mark will discuss our Q4 and full year results during which we extended our track record of profitability in our core operations, we highlight on slide four some of our main accomplishments throughout the year. First, as we previously discussed, we launched an optimization plan last year aimed at consolidating our national footprint, enhancing operating efficiencies, and increasing the scalability of our business.

We’ve made great progress to date in the execution of our plan with the recent integration of our legacy Oakland facility into our corporate operations in Hartland, Wisconsin, which is enabling better utilization. We expect to generate significant cost savings from our plan in support of our future results, driving greater profitability and best-in-class margins, as we maintain our focus on empowering a more lean nimble and unified Fathom. Second, we created a new product innovation or NPI Center of Excellence at our headquarters in Hartland, Wisconsin, which has a unique set of capabilities unmatched in our industry. We took steps to further refresh a considerable portion of our additive solutions, namely large format SLS, DMLS, and MJF Equipment in Hartland.

And we added two DMG Mori 5-Axis machines in support of our dedicated quick turn CNC cell that was launched in the second half of 2022. Our world class NPI facility in Hartland enhances our national manufacturing footprint while serving as a valuable compliment across our other sites to provide a one stop outsource solution that supports customization. In all our growth, CapEx in 2022 totaled approximately $10 million. Further strengthening our broad on demand capabilities, we expect to generate positive returns on these capital investments beginning in 2023. As we continue to ramp our commercial activities, which we will also highlight on this slide as our third key building block. Upon going public, we’ve recognize the need to revitalize our commercial efforts as our team members historically had worked in small private bureaus focused on a single technology offering.

In transitioning to a platform-based strategic sales team, we successfully revamped our staff with a strong enterprise focus and public company mindset. We believe this transformation has enhanced our ability to fully leverage our comprehensive suite of nationwide offerings by taking greater advantage of potential cross-selling opportunities across our more than 25 Quick Turn manufacturing processes. At the same time, we launched our first ever sales development program to help facilitate success and promote career growth opportunities amongst our commercial team. And finally on this slide, we made significant improvements in our corporate capabilities in 2022. For example, we rebuilt our IT staff, led by our new Chief Information Officer, Dan Bourquin, who joined Fathom approximately one year ago.

During this brief period, through Dan’s leadership, we launched a single cloud based ERP system, which will be used as the template for all of our sites and help boost productivity, while deploying new cyber security programs and completing an infrastructure refresh at all of our sites. We also created a shared services organization and a system for finance and accounting to help to streamline company-wide processes and increase economies of scale. Notably, we achieved all of the above while successfully building out our public company infrastructure. This included developing finance and accounting teams to meet new reporting requirements, establishing internal controls, and adopting a HR model-based on public company best practices and much more.

The progress we achieved in 2022 contributed to year-over-year growth in spending amongst our larger accounts with annualized spend of at least $1 million and a majority of all of our customers utilizing multiple manufacturing technologies. Turning now to Slide 5. We believe these positive indicators that I just mentioned underscore the value of our strategy to accelerate manufacturing innovation for Fortune 500 companies, and continue to give us strong confidence in Fathom’s long-term growth potential. By focusing on rapid prototyping and low to mid volume production, we work closely with enterprise customers, so they can iterate faster and condense their product development cycles often for months to days. This allows them to become more agile in bringing new products to market faster, while creating a more resilient supply chain.

We built entrenched relationships by delivering hybridized solutions across both additive and traditional manufacturing technologies, with an emphasis on speed, adaptive technical responsiveness, flexible problem solving, quality assurance and a full service support system, effectively meeting the high mix and low volume production needs of companies in a manner that supports our customers’ manufacturing needs. This is how we differentiate ourselves in the market. Fathom’s solution based approach is centered on applying the best manufacturing process to achieve a desired outcome. And we do this without having to sacrifice our original — the original design intent of our customers. Our focus now is to build upon the progress we have made in the last year in solidifying our foundation and build momentum in expanding Fathom’s share of wallet with our blue chip customers, while continuing to add new strategic customers.

On Slide 6, we outline our strategic priorities for 2023, which we believe will enhance our ability to navigate the near-term macro headwinds, as we continue to focus on driving future performance. First, as part of our commercial enhancements, we strengthened our leadership team earlier this month with the appointment of Kurt Bork as our new Vice President of Sales. In this newly created position, Kurt brings to Fathom extensive expertise in enterprise sales and strategic growth management. He is an industry veteran with more than 20 years of experience, having previously served as the Vice President of Sales and Business Development at Mayville Engineering Company, a publicly traded Wisconsin based company that provides design, prototyping, and manufacturing solutions.

During his 8.5-year tenure at the company, Kurt led sales and business development activities for its extensive manufacturing infrastructure including 20 facilities in the U.S. and managed a team of sales and engineering professionals. Kurt’s proven track record of creating performance driven sales culture that establishes his accountability and empowers team members to excel will be instrumental in our long-term growth as we seek to strengthen our go-to-market efforts. He will serve as a key member of our Senior Executive team providing strategic and commercial leadership, and will report directly to me at our headquarters in Hartland, Wisconsin. Rich Stump, Fathom’s Chief Commercial Officer will be departing Fathom in Q3 of this year. Until then, he will work with Kurt to ensure a seamless transition while also leading our new technology center.

I’ve had the opportunity to work alongside Rich for nearly four years, and I can’t thank him enough for all of his contributions and continued support. We wish him well in his future endeavors. In connection with Kurt’s appointment, we’ve recently appointed new site directors at our facilities in Hartland, Wisconsin, Tempe, Arizona, and Denver, Colorado. As we fortify our frontline leadership, while seeking to attract and retain our highly talented workforce. We’ve also begun to reposition Fathom’s commercial efforts with the creation of two teams, our NPI, our new product introduction and production teams. This change will create greater alignment between prototype production as well as outside — outsourced work with the right resources and tools to drive new orders.

In further accelerating customer engagement, we’ve recently opened our new Silicon Valley Technology Center, strategically located in Fremont, California. This advanced hub demonstrates our novel approach to featuring the latest cutting-edge technologies while maintaining a critical presence in the Bay Area. The approximately 10,000-foot facility will serve as a catalyst to change the way we collaborate with customers as well as equipment OEMs. Our new Evolve additive solution is among the innovative technologies currently located at the technology center, providing an ideal platform to showcase our growing capabilities. In terms of our operations, we remain committed to right-sizing the company’s cost structure to achieve our growth initiatives with greater efficiency and discipline.

Consistent with these efforts, we took steps to expand our optimization plan last month. Specifically, we are consolidating our two existing facilities in Texas and reduced our workforce by an additional 14%, while implementing other productivity initiatives. We believe the comprehensive steps we’ve taken over the past year will generate pretax annualized cost savings, totaling approximately $19.5 million, up about 3.5 times from the $5.5 million originally upon the completion of our plan in the second quarter of 2023. And lastly on this slide, we remain focused on accelerating Fathom’s digital thread. We continue to make steady gains implementing a company-wide ERP system and expect to complete this multifaceted project in 2024. As we further upgrade our IT infrastructure and cybersecurity measures, we are in the process of launching our first enterprise data platform that will empower Fathom’s business and ensure we keep pace with the demands of a dynamic and fast pace market.

With a relentless concentration on these strategic pillars. We are a company with a more sustainable model that will further enhance our ability to achieve operational excellence and solidify Fathom’s role as a leading provider of on-demand digital manufacturing services nationwide. I will now turn the call over to Mark.

Mark Frost: Thank you, Ryan, and good morning, everyone. I’ll begin my remarks for our quarter four and full year revenue results on Slide 7. Our revenue for the fourth quarter totaled $38.4 million, which was below our expectations and down from $44.3 in quarter four 2021. Our results for the quarter reflect the near term impact of our production customers reducing their inventory due to the ongoing softness in the macro environment, particularly in the capital goods, semiconductor and building industries. Combined with the continued ramp of our new commercial activities. As we began to see in the second half of 2022, the near term economic uncertainty has led to a rebalance of customer inventories and extended sales cycles for new orders, and these trends have continued into 2023.

For the full year, reported revenue increased approximately 6% with higher sales driven by acquisition, related activity and growth within our strategic accounts. On an organic basis revenue in 2023 was essentially flat and reflects the impact of approximately $2.3 million in COVID related orders that did not repeat in 2022. Now, our revenue by product line for the full year was as follows: CNC machining climbed 35% to $58.4 million or 36.2% of total revenue, reflecting our ability to drive strategic growth following the acquisitions we completed in the first half of 2021. On a proforma basis, CNC grew approximately 10.5% in 2022 and 5% in the fourth quarter despite the macro headwinds. Precision sheet metal increased 3.5% to $55.3 million, or 34.3% of total revenue, primarily due to growth in some key strategic accounts.

Injection molding was $25.2 million or 15.6% of total revenue, dropping in 2022 in part because of the absence of certain COVID related orders from the previous year. In addition, production part reorders slowed compared to the previous year. We continue to focus on new tooling orders, which has improved towards the end of quarter one €˜23 and should lead to more reorders reduction parts in combination with a new tooling on a go forward basis. Additive manufacturing totaled $14.9 million or 9.3% of total revenue. Pricing competition remains as some companies use additive manufacturing as a loss leader to capture market share. Going forward, we expect to benefit from the roller of new additive technologies that Ryan mentioned and the consolidation of our Oakland facility.

And finally, ancillary technologies are smallest product line with $7.3 million, representing 4.5% of total revenue. We continue to focus on growing our accounts with annualized spending of at least 1 million, which increased approximately 5.5% for the full year 2022, and scaling our industry leading platform. Now turning to Slide 8, we provide our adjusted EBITDA performance for the fourth quarter and full year. In quarter four, our adjusted EBITDA totaled $3 million, representing a margin of 7.9%. In the prior year period, we reported adjusted EBITDA of $10.5 million for a margin of 23.8%. Now, our performance primarily reflects the impact of reduced production volumes and the follow-on effect of lower cost absorption, which was caused by excess labor.

We believe we addressed this issue, which I’ll cover in a minute. For the full year, adjusted EBITDA totaled $24.9 million versus $34.4 million in 2021, primarily due to recurring public company expenses totaling approximately $7 million. The adjusted EBITDA margin for the full year 2022 was 15.5% versus 22.6% for the same period in 2021. EBITDA margins would have been about 20% without the public costs in 2022. Now we mentioned our expanded optimization plan as part of our efforts to drive greater profitability and cash generation. We announced our initial plan in July 2022 and indicated cost savings in 2022 would be limited. Our expectation in ’23, is that we will benefit from both the ’22 plan as well as our ’23 efforts. Our expectation is to see about 90% of the savings realized in 2023 with approximately two-thirds of the total $19.5 million in cost savings, to benefit our gross margin with the remaining one-third resulting in lower SG&A expenses.

A further point is two-thirds of the savings have already been realized and are now improving our cash and profitability. In addition, we are executing additional cost control measures, including reducing our contract service temporary workers, limiting discretionary spending and restricting external hiring. SG&A decreased year-over-year in quarter four despite the public costs to $11.5 million, primarily due to lower revenue impacts. Excluding stock compensation, our public company costs declined again on a sequential basis to $1.8 million in quarter four compared to $2.1 million in quarter three. For the full year, our recurring public company expenses totaled approximately $7 million, which accounted for the large majority of the year-over-year decline in adjusted EBITDA.

On Slide 9, we show our liquidity and cash flow. We ended the fourth quarter with available liquidity of $23.7 million, this includes $10.7 million in cash and cash equivalents and $13 million of undrawn commitments under our $50 million revolving credit facility. As of December 31, our total gross debt excluding cash was $158.9 million and net debt totaled $148.2 million with no debt maturities before December of 2026. Cash used in operating activities totaled $3.4 million in quarter four and we generated $3.1 million in operating cash for the full year. Cash flow was reduced in 2022 by approximately $6 million for non-recurring, non-operational payments. In quarter four, our CapEx was reduced as expected to $2.2 million and totaled $13.2 million for the full year, which is slightly ahead of our annual plan, included payments from previous commitments made in 2021.

We anticipate a portion of the CapEx will support further manufacturing efficiencies in 2023. For 2023, we plan to eliminate non-essential capital expenditures, while preserving the integrity of our business over both the short and long-term. Now as a final note on this slide, subsequent to the end of the fourth quarter, we reached an agreement with our senior lenders to amend our existing credit agreement, providing for extended covenant relief. Specifically, the minimum net leverage ratio and interest coverage ratios have been suspended through 2023 and replaced with a minimum adjusted EBITDA and available liquidity requirement. Both covenants will be reinstated in quarter one 2024 beginning at 5x for net leverage and 2x for interest coverage, with a gradual step down and step up level on a respected basis.

These modifications enhance our financial flexibility, as we maintain our focus and actively manage our costs structure preserving capital and growing the business. I also note that our banking group is led by JP Morgan and Fathom does not have any exposure to Silicon Valley Bank, Signature Bank, or Credit Suisse. Turning now to Slide 10, we provide our fourth quarter for the first quarter of 2023. We believe we have right sized our operating structure in line with our business reality, while ramping our new sales and marketing activities to drive future growth and achieve industry leading margins. At the same time, the challenging macro environment, including increased uncertainty over the economic impact of stress in the banking system will likely contribute to slower year-over-year growth in the first half with an expected recovery beginning in the second half of the year.

For the first quarter, we expect revenue to range between $32 million and $34 million and adjusted EBITDA range between $2.5 million and $3.5 million. We anticipate a gradual improvement in both our revenue and profitability over the course of the year, as our commercial enhancements gain more traction and we begin to fully realize the benefits of our expanded optimization plan, which is expected to drive year-over-year improvement in adjusted EBITDA. We remain highly focused on returning to market outgrowth and fully leveraging our broad on demand platform in line with future revenue expansions. I’ll now turn the call back over to Ryan. Ryan?

Ryan Martin: Thank you, Mark. I will provide some closing comments on slide 11. Upon completing its first full year as the New York Stock Exchange listed company, Fathom further solidified its foundation to drive profitable long-term growth by launching a $19.5 million optimization plan, creating a premier NPI facility in Hartland, Wisconsin, increasing the company’s investment in new technologies, revamping the sales team, and strengthening our core capabilities. We continue to take aggressive actions to set the stage for future performance, implementing a multi-step plan that we believe will gain greater traction on the commercial front with new senior leadership, promote operational excellence and accelerate the digital transformation of our business, all of which combined will provide a greater customer experience.

Fathom has become an entrenched partner to some of the world’s most product driven companies, and we remain committed to delivering flexible technology agnostic solutions across our national manufacturing footprint that enables our customers to accelerate their manufacturing innovation. The steps we are taking will help to ensure our company can react with greater speed and effectiveness to new business opportunities, while strengthening our position to increase our scale. I’m proud of the effort and the resilience of our team to help further solidify our foundation and make Fathom the premier on demand manufacturing company in North America. As what we do matters. Growth is rarely perfectly linear, and I remain highly optimistic about the future of our company and confident in our ability to create value for our shareholders over the long term.

This concludes our prepared remarks and will now open the call for questions.

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Q&A Session

Operator: Our first question today comes from the line of Jim Ricchiuti from Needham & Company. Please go ahead, your line is now open.

Jim Ricchiuti: Well, thank you. Good morning. Hey Mark, you went through some cost savings. I just want to be clear on this. Did you say, you’re anticipating about 90% of the cost savings being realized in €˜23?

Mark Frost: Yes, 90% of the $19.5 million we expect to actually realize within the year.

Jim Ricchiuti: Go it. And in terms of the cost savings that were realized in Q4, were a portion of that was realized from the previous initiatives that you had announced?

Mark Frost: Yes. The other 10% of the 19.5 was realized over the full course of 2022. It wasn’t all in quarter four. We started, actually — we had some benefit quarter two, quarter three, quarter four.

Jim Ricchiuti: Okay. And Ryan, maybe you could talk a little bit about what you’ve seen in Q1. I mean, can you give us some color on the order trends that you’ve seen just, given that the quarter ends today? So I wonder if you could just elaborate on what you’ve seen relative to what you saw in Q4?

Ryan Martin: Yes. Good morning to you Jim. I would say, from an orders perspective, we’re starting to see certainly a comeback on more of the NPI and the prototyping side of the business, which represents ballpark about 35%. We’re still across the CMC sides of our business, still seeing strong growth similar to what Mark talked about in not only the fourth quarter, but for the full year. As it relates to some of our production side of our business specifically with customer exposure and market exposure too, the capital goods industry, semiconductor, building industry, which are three key industries where we have end market exposure, all great long-term growth opportunities. We’re still seeing some deleveraging of inventories and some cautious ordering related to that, not seeing losing of any customers.

In fact, I spent a couple days this week down in Texas, meeting with some of our key customers, met with six different customers earlier this week. And the value proposition of what we can offer continues to be extremely strong. They’re just a little more cautious with their end market and ordering on that side of things, which is where the guidance that we put out for Q1 is that. But they feel really good. And what I continue to hear from customers is they see a strong comeback in the — towards the — middle to end of second quarter and then certainly into the second half of the year, which is the way we’ve built the cost structure and modeling out the year for us.

Jim Ricchiuti: And last question, just with respect to those areas where you have seen some customer, the customer hesitancy, the inventory rebalancing that’s going on, is it more pronounced in any one of these areas? And when you just noted that just some of the conversations you’re having with customers are suggesting some improvement, looking at Q2, which of those areas are — have you had that color from customers?

Ryan Martin: Yes, I would say the biggest one that we see is semiconductor for sure. They’re definitely seeing a little bit of short term, obviously there was a huge push related to that. And then, I think there was the catch up towards the second half of this year. And then with the Chips Act really trying to figure out how that all sorts out would be. The amount of investment that’s going in both in domestically as well as everything with AI in talking to senior executives some of our key semiconductor customers, they feel incredibly optimistic. Right now, they look at it and say it’s about a $600 billion industry and they feel over the next five to seven years that will be north of $1 trillion industry. And so where we produce a lot of parts goes into really the capital equipment that’s used to make the chips at the foundries.

And so we have a lot of our products and components are going into that capital equipment. So feel really, really strong about that long-term. And as I’ve talked to these companies, really they see the uptick occurring starting in second quarter and into the second half of this year, Jim.

Jim Ricchiuti: Go it. Thank you.

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.

Operator: The next question today comes from the line of Troy Jensen from Lake Street Capital. Please go ahead, your line is now open.

Troy Jensen : Hey, good morning, gentlemen. And thanks for taking my questions here. Maybe for Mark, can you just touch a little bit on gross margins here? I mean, 26% was done fairly meaningfully and it didn’t seem like revenues dropped as much, is there a redundant cost with the moves? And you could also kind of project that forward a little bit. What do you think gross margins can look like for the first half versus your second half?

Mark Frost : Sure. Yes, an expected question. So yes, we had a tough fourth quarter, a fair amount it was due, we went backwards pretty significantly in the fourth quarter by 13%. The issue that really hurt us, Troy, in the fourth quarter and drove the gross margins down, is we had expected an improvement in revenue that did not happen. Now we saw that pivot on the production side in the second half of the quarter. So that put us in a situation in the fourth quarter that we had excess labor and that’s what drove it. Now, that’s what also triggered, we knew we had to resize our business for the revenue run rate we were running at, and that’s why we were so aggressive on the cost take-outs. So, our expectation with these cost take-outs, Troy, is we will get back towards €˜21 levels of gross margin, which was in the high 30s. So that’s what we’ve designed and built the cost plan to get us back to.

Troy Jensen : And with the cost take out to some of it coming out of SG&A too. I mean, if you did $10.8 million in Q4, update it is down on an absolute basis?

Mark Frost : I’m sorry, Troy, say that again?

Troy Jensen : No, keep going. I’m just wondering if we model it down on a basis with some of these cost cuts.

Mark Frost : Yes. SG&A will be down probably 10% to 15% on a sequential basis in ’23.

Troy Jensen : Got you. Okay. Well, thank you. So I wanted to just shout out to Rich for all the help over the years and good luck going forward.

Mark Frost: No, thanks, Troy. I will certainly pass that on to him and appreciate the continued success. Great questions.

Troy Jensen : Good luck guys.

Operator: Thank you. This concludes the question-and-answer session for today’s call and also today’s conference call. Thank you for your participation, you may now disconnect your lines.