SLM Solutions Group AG (OTC:SLGRF) Q1 2022 Earnings Conference Call May 12, 2022 10:00 AM ET

Troy Jensen - Lake Street Capital Markets

Lukas Spang - Tigris Capital

Good morning, good afternoon, and thank you for joining us today as we review our Q1 2022 earnings. With me on the call today is our CFO, Dirk Ackermann. I'll begin with a summary of our performance, followed by giving some context around the metal AM market and the general geopolitical drivers for continued growth. Dirk will then run you through the financials, and I will close with a summary prior to the Q&A.

So we are happy to report another strong quarter of growth. Order intake for the quarter was €16.9 million, up 25% year-over-year and delivering for the second consecutive quarter, our largest ever backlog position, now sitting at €49 million, up 57% year-over-year. Revenue was up 7% year-over-year at €16.4 million despite ongoing supply chain headwinds, which resulted in temporarily longer lead times. We remain very encouraged by the quality and quantity of our customer engagement with interest remaining strong across our entire product portfolio.

We are broadly seeing that the derisking of manufacturing continues to raise the profile of Additive and change the way companies allocate spend. So we believe this is not a short-term phenomenon, but rather the start of a long-term strong demand for Additive Manufacturing systems and, of course, consumables. We added 2 further NXG XII 600 orders to the backlog in the first quarter, one of which was for a defense application, further diversifying our customer base for 2022, which now covers the automotive, civil aviation, space, energy, service bureau and defense sectors.

Within a growing metal additive manufacturing market, we continue to deliver and outpace market growth, gaining share for a second consecutive year. In 2021, we exceeded market growth by a factor of 2. Building on that, we are confident that this trend will continue in 2022 and beyond, given the majority of the growth in the last 2 years has been enabled by the strength of our core portfolio of machines, namely the SLM 125, 280, 500 and 800. And from Q2 this year onwards, we start to see a meaningful contribution from the groundbreaking NXG XII 600 machine.

So the well-documented global supply chain issues are indeed a short-term headwind. They are, however, simultaneously a significant long-term growth driver. Whilst I'm proud of our Q1 revenue results, disruptions in the availability of material to produce our machines limited our ability to deliver a more significant top line growth within the quarter. As we are already executing on a strong demand for Q2 deliveries, we continue to take numerous mitigating actions such as increasing our inventory; qualifying new components and changing our product configuration to suit the availability of material; qualifying new suppliers; simply printing more of our own parts and our own machines, changing the manufacturing process floor to integrate scarce part later in the process; creating manufacturing flexibility on our production lines; and, of course, intensively working with our suppliers.

Whilst these short-term macro issues may be a challenge, there will be a significant growth driver in the medium to long term. Why? Because Additive Manufacturing fundamentally solve the issues the manufacturing world is currently dealing with. Reshoring of manufacturing with significantly lower energy consumption and the removal of multistage, multidisciplinary, multi-location or downstream dependencies addresses the supply chain issues caused by geopolitical volatility. Just last week, Joe Biden personally launched the AM Forward program driving the adoption of Additive Manufacturing capabilities and increasing the competitiveness of U.S. SMEs to proactively address these very issues.

The future of manufacturing is Additive. And we are already seeing this happen, as highlighted also by the broader market, the demand environment for AM remains very strong, and we are seeing this on the ground as well with a significant uptick in customer engagement as compared to last year. Our order intake for the quarter is up 25% year-over-year. Our existing portfolio continues to perform very well, along with the rollout of the NXG XII 600. Our backlog continues to evolve positively and is up 57% year-over-year and contained a fantastic mix of repeat and new customers. Around half of our order backlog as of March 2022 is made up of repeat customers. Customers that are not just exploring Additive Manufacturing but implementing more production applications into a broader range of industrial end use cases.

Alongside that, the demand for metal AM component production globally increased by more than 50% in 2021. This is a fantastic leading indicator as companies seek faster solutions in turn to experienced AM service providers. Naturally, this will lead to further system demand. Demand for anything from basic components to rocket engines, from F1 cars to public transport, from aero engines to roller coasters and from aircraft landing legs to hip joints. Metal AM is no longer serving a niche market. It's solving problems and changing the way the world manufactures and will continue to do so on an increasing scale.

With that, I'll hand over to Dirk for a review of the financials.

Thanks, Sam. As Sam already explained in detail, our output within the machine business was impacted by the ongoing supply chain disruption. And therefore, we finished the quarter more or less flat year-over-year despite going into the quarter with a record backlog.

At the same time, our aftersales segment benefited from the high utilization of our installed base, resulting in, one, higher consumable orders; and two, more service visits. Gross profit margin, while being in line with historic averages was negatively impacted by the lower utilization rates within our production department, driven by the described shortage of electronic components. But the increase in personnel expenses and other expenses is well aligned to our growth expected this year, EBITDA decreased year-over-year to the muted growth of our machine business.

Cash usage from our operations was negatively impacted by a significant inventory ramp-up. The increase was driven by 2 factors: one, an increase in the number of work in progress machines, which we could not finish within the quarter due to material shortage and two, the assembly of our first NXG XII 600 production machine, which will be shipped very soon.

As communicated previously, we have been working to change the presentation of our financials from the total cost to the cost of sales method. While our official reporting for Q1 is still representing the total cost method, we only wanted to give you an insight how our financials will look under the cost of sales, which in turn allows easier comparison to our peers. You can find an overview of the reclassifications between both methods in the appendix.

Overall, the presentation of our financials should now look very familiar to everyone. Given our technology focus, we are showing research and development expenses as a separate base cost category. As you can see, the gross margin and the cost of sales is significantly different as various expense items were classified as well as the costs were the biggest driver being certain personnel expenses. While the gross margin in Q1 was negatively impacted by the underutilization of our production department and an unfavorable product mix, we expect to achieve gross margins notably above 40% going forward. We will start reporting under the cost of sales method officially from our half-year results onwards.

Before handing back to Sam, I want to give also a short update in regard to our capital management. We finished the quarter with €12.7 million in cash. The cash usage within the quarter was negatively impacted by the ramp-up of our inventories, which I explained earlier. We expect a significant lower cash burn in the second quarter, which is also supported by the collection of significant down payments for NXG XII 600 orders in April and May. Furthermore, we initiated the process to draw the third tranche of our 2020 convertible, which we expect to receive in the beginning of June. The total amount of this tranche is €30 million.

Finally, on our 2017 convertible appeared to request the early redemption of the bonds ended in April. In total, we received requests covering just short of €30 million, which will become due at the original maturity date in October this year. As communicated previously, we may consider additional funding options during the course of the year.

With that, I'm handing back to Sam.

Thank you, Dirk. So bringing this all together, we are confident in our ability to deliver on the guidance that we gave you in November and expect to generate at least €100 million in revenue and the EBITDA positive on a run rate basis in the second half of the year. We have an extensive product portfolio of the most advanced technology in the industry. We have an installed base that will drive continued growth. We have broad coverage across all of the key industry verticals that will drive growth. We are gaining market share. We have the largest backlog position in the history of the business. We will continue to grow our aftermarket business. We will deliver.

From a long-term perspective, our view remains the same. So we have the fundamentals in place to grow the business aggressively, both in terms of technology maturity, future product development and our business operations. We expect to deliver a 5x revenue growth for the top line of approximately €350 million by 2026.

With that, I will open it up for your questions.

[Operator Instructions]. We have a first question. It's from Troy Jensen of Lake Street Capital.

Congrats some of the nice results in a tough environment. Hey Sam, maybe to start with you. I guess, I'd be curious to know what percent of systems or parts are produced on your machines that are in production applications? Have you ever kind of looked at that or have an estimate?

Well, it's interesting Troy, it varies machine-by-machine, and it's obviously an improving or an increasing trend. And of course, it depends on how you look at it. If you give a percentage in terms of number of components, it would be relatively low, given that typically a machine consists of around 10,000 components or so. But in terms of value, it would be increasingly more so. Now naturally, we look for the best applications for our technology where we can integrate this. So it's increasing and it continues to increase on our newer technology. So for example, Troy, there is more AM produced components in the NXG than there is in an SLM 500. But out of the 10,000, it's a low percent.

Okay. All right. Then just another one for you, Sam. Just curious, I know you've talked about having support-less capabilities here and customers are currently using this? And then also, is there any overhang limitations on support-less capabilities?

So it's a great question, Troy. We launched this some months ago. We have customer applications in the field. In fact, just before the call, I was on with a customer who is using this fantastic application. So it's well received. We are seeing significant interest and demand within EMEA and within the U.S. as well for this application. We have different capabilities in terms of what is required to be achieved. So we can get down to some extremely impressive overhang angles. And it's difficult to give a specific number, Troy without an exact application case. It's really case-by-case specific.

Okay. Perfect. And maybe a couple of here for Dirk. So with regard to the component constraints, any way you could kind of quantify how much business that you had expected to ship in Q1, got shifted into later in the year here?

Yes. It's around €4 million to €5 million in machines, which we.

€4 million to €5 million. Okay. Awesome. All right. Perfect. And then also for you, Dirk, to hit €100 million in sales, that's going to imply that you did about 16% to 17% of the revenues here in Q1. So I'm guessing I'm asking, is that kind of a normal Q1 percentage? Or is '22 going to be a little bit more back-end loaded versus previous years because of these component constraints?

So I think generally, we will see definitely a back-end-loaded year similar as last year. I think it's a bit even more kind of back-end loaded because of kind of the material shortages. But anyway, because of the introduction of machine, where the majority of the machines were shipped in the second half, it was always already planned that there's kind of a significant portion of the revenue in the second half. So what is very important, I guess, we have the backlog, we expect just a shift to the right. So it's not lost revenue for us.

Congrats again, and keep up the good work.

The next question is by Lukas Spang of Tigris Capital.

Maybe a quick follow-up on the question before. So you mentioned the €4 million to €5 million in revenues you couldn't realize in Q1. So will we see already a catch-up effect in Q2? Or will this also be a topic for Q3 and Q4?

Lukas, this is Sam. Thanks for the question. I think a couple of points. Naturally, we still work on mitigating supply chain issues. We're not going to give a quarterly projection. We have a couple of things to be aware of. We expect to start NXG shipments within Q2 as well, which will have a positive shipment -- a positive impact along with, of course, impact from rollover deliveries from Q1.

Okay. And I don't know if you ever talked about the number or revenue potential or revenue guidance for NXG XII 600 this year. But can you give us an idea how many machines you planned for this year to ship?

Yes, absolutely. We expect to ship around 10 machines during the course of the year.

Okay. And then my last question on LinkedIn, I saw that you had a post that was about partnering up with Siemens industry, and I was wondering if this is something new or just an old partnership. So if this is a new one. Can you give us a little bit background about this?

I can, indeed, we're very much looking forward to exhibit in Hannover at the Hannover Messe at the end of May. So this is a partnership with Siemens that covers multiple areas, specifically in regards to the NXG where we took the decision to move to Siemens controls on that equipment and integrate some of the other capabilities as well. Siemens, with respect to their control division, but also the additive manufacturing division see the groundbreaking capabilities of the NXG and the NXG in fact, the machine is going to be a huge part of the physical booth there in Hannover. So we have the partnership in terms of the control system, but we're also working on other areas of partnership -- technology partnerships with Siemens too.

The next question is by Constantin Hesse of Jefferies. The line is now open to you.

A quick one. Then in terms of -- I mean the tone of voice of your customers, obviously, the macro environment is planting basically every day and every week. I'm just wondering if you've seen any changes to the tone of voice of your customers in terms of the trend or kind of like the demand trend of your order intake, if you've seen any -- any of the tones basically getting older. And just in terms of your expectations of semiconductor supply, I mean, it looks like it will definitely be tied into '23, quite well into '23. So just wondering what your expectations are there.

No, it's a great point. And I would just maybe take the first one. In terms of tone of customer, it's incredibly positive. I think this -- the entire supply chain situation at the moment is simply driving demand and is driving use cases for this technology, which is fantastic. We see an increased level of engagement. We see an increased number of longer-term high-volume projects going on board. So it's extremely exciting. And the tone within the industry is extremely nice from our customers' perspective. So no concerns at all there.

You mentioned the shortage of supply of electronic components. Naturally, this is something we continue to monitor. We have specific agreements with our suppliers, and we have also mitigated this by switching around component configurations, as I mentioned earlier to get around this. We feel we're making significant progress as we move into Q2. And whilst I agree there will be a scarcity of these components, and that will continue. I think we are increasingly well placed to be able to manage this throughout the year. And key when you think of things like the NXG system as well, these are not short-term production projects. So they're not a 1-, 2-, 3-week production cycle where you're ordering material to suit a short-term build schedule. So these are things that you can plan with significant advanced preparation and therefore, ensure relevant material availability of the components.

For the moment, there are no further questions. And so I hand back to you.

Okay. Thank you very much. I appreciate you taking the time to join and look forward to connecting on future calls. Thank you, and good day.