SLM Solutions Group AG (OTC:SLGRF) Q2 2022 Earnings Conference Call August 18, 2022 10:00 AM ET
Corporate Participants
Sam O’Leary – Chief Executive Officer
Dirk Ackermann – Chief Financial Officer
Conference Call Participants
Troy Jensen – Lake Street Capital Markets
Sven Sauer – Kepler Cheuvreux
Michael Kuhn – Deutsche Bank
Constantin Hesse – Jefferies
Operator
Please stand by, we’re about to begin. Good day everyone and welcome to The SLM Solutions Group AG H1 2022 financial results conference call. Today’s call is being recorded. And now at this time, I’d like to turn the call over to Sam O’Leary. Please go ahead, sir.
Sam O’Leary
Thank you. Good morning. Good afternoon and thank you for joining us today as we review our H1 2022 earnings. With me on the call today is our CFO, Dirk Ackermann.
I will begin with a summary of our performance followed by some exciting customer updates, Dirk will then run you through the financials and I will close with a summary prior to the Q&A.
So we are pleased to report a multi-record breaking quarter. Order intake for the quarter stands at €22.6 million up 100% year-over-year. This results in H1 order intake of €39.4 million up 59% year-over-year. For the third consecutive quarter, we are pleased to report our largest ever backlog position of €49.1 million up 62% year-over-year.
From a revenue perspective we delivered our best out of Q2 and H1 performance. Q2 revenue was €26.1 million up 60% year-over-year and up 59% sequentially. This resulted in H1 revenue of €42.5 million up 34% year-over-year and delivered in the midst of continuing global supply chain headwinds. The revenue performance was enabled by the first two deliveries of validated production state NXG XII 600 machines and of course by the continued strength of our market leading core portfolio and install base.
This strong operational performance resulted in a net positive EBITDA of €1.3 million for Q2, delivering early on our 2022 guidance have been positive on a run rate basis in H2. The business has strong operating leverage and continued operational excellence transformation a key drivers for this positive momentum which we expect to continue.
Moving on to some key milestones during the quarter, the groundbreaking and market leading NXG XII 600 has successfully moved into the production stage delivery phase. For the first two series production units being delivered in Q2 meeting our long-stated program plan. On top of that we took an additional 2 NXG orders during the quarter. Aside from the NXG, we are proud to report that Rolls Royce has purchased the further two of our SLM 500 systems, expanding their installed base. So that’s SLM 500, which will be used as part of the pre-production ramp up to produce the Pearl10X engine.
And finally, I’d like to formally welcome Charlie grace to the management board following his appointment in July. Charlie joined SLM in February 2021 as Chief Sales Officer and extends his responsibilities as a Chief Commercial Officer joining Dirk and myself to form a three-person management board.
The first two validated production NXG XII 600 machines were delivered to our development partner Divergent Technologies, who are a longstanding customer with an installed base of 16 SLM systems, including already five NXG XLL 600 machines, with more on order for 2022 delivery. The NXG XII 600 is the additive manufacturing driver of the Divergent Adaptive Production System, delivering sustainable volume manufacturing and disrupting the automotive industry.
The NXG machines are utilized meeting the growing production demand from several major global auto OEMs with components such as the brake chassis assembly, shown in the image, producing just 61 hours using 90-micron layers. It’s game changing productivity for game changing applications. Divergent has raised over $240 million since April this year and we are proud to be their partner as they disrupt the norms of automotive production.
Switching gears but by no means switching themes, we move on to the SLM 500. We’re proud to announce two marquee customers from the aerospace and automotive industries selecting the SLM 500 for their production needs. Firstly has already briefly mentioned Rolls Royce in the UK have expanded their fleet of SLM 500 hardware machines as part of the pre-production ramp up to produce the Pearl10X engine. These SLM 500 machines will be used to print complex combustor tiles for the engine which will power the Dassault Falcon 10X business jet. These complex components will deliver valuable weight and emission reduction, ultimately contributing to the world class environmental performance of the Pearl10X, which delivers an overall 5% increase in efficiency. compared to its predecessor.
Moving on to the automotive sector, Bosch has completed the installation of two SLM 500 cordless machines to produce parts for its powertrain technology, including customer components for hydrogen and electric drive production applications.
With that, I would hand over to Dirk for a detailed review of the numbers.
Dirk Ackermann
Thanks, Sam. Good morning and good afternoon also from my side. As Sam already elaborated to, we continued our streak of strong quarterly performances in the second quarter.
Starting with order intake, we were able to double our intake compared to last year, finishing with a total of €22.6 million. As in prior quarters this wasn’t just driven by orders for an NXG XII 600 but it was accomplished by the continuous strengths across the entire product portfolio. At the same time, backlog increased by almost two-thirds compared to 2Q ’21. As we saw a strong backlog conversion in the second quarter, backlog stayed more or less flat quarter-over-quarter.
Revenue in the first quarter was relatively muted due to material shortages, we were able to catch up during the quarter finishing our best ever second quarter with revenues of 26.1 million, which is an increase of around 60% compared to last year, as well as to the prior quarter. On the next page, we provide a closer look into our financials.
Looking at the revenue performance in more detail both the machine as well as the after sales business contributed notably to the significant growth in the second quarter. But in the machine business, we were able to finalize the first two NXG XII 600 machines together with a strong backlog conversion within our core portfolio. Machine revenues increased by 70% year-over-year. After a strong performance in the first quarter, our after sales business also performed very well in the second quarter.
Overall, revenues in the segment increased 25% in the first half compared to last year’s period. Generally, Sam and I are very proud about the continuous improvements in our service business, which is not rarely the key driver for repeat purchases from existing customers.
On that note, I would also like to highlight that we signed several multi-year service agreements in the first half of the year. Furthermore, it’s important to remember that our after sales business benefits from the close on the machine business in a staggered rate, which led us to continue to be bullish for the future.
Our gross margin is still notably impacted by low productivity across our production lines, which is mainly caused by the ongoing shortage of electronic components. We do not expect an improvement in this area in the second half. Furthermore, we are also slowly experience increased direct material costs given the overall inflationary pressure. EBITDA was positive in the second quarter, meaning we already achieved our FDA guidance ahead of plan. However, we’ve benefited from a release of a legacy accrual and positive FX impacts during the quarter.
While our EBIT DA would be still slightly negative the fourth time, items were excluded. The result is still very strong, especially if you compare to the maturity of our competitors. There’s once again that showcases our strong operating leverage.
Operating cash flow was negatively impacted by the ongoing inventory buildup for the NXG XII 600 as well as other supply chain related working capital constraints.
On the next page, we want to give more clarity on where we stand in regard to our revenue target. As a reminder, our revenue guidance is for at least €100 million in 2022. Finishing the first off with €42.5 million in revenues, we required at least 57.5 in the second half. Looking at our backlogs at the end of Q2, we expect to convert around 42 million in the second half. Furthermore, looking at a run rate of around €5 million per quarter from the service business, we require only around 6 million of convertible orders in the second half.
As a reminder, the second half of the year is historically significantly stronger from both our as well as an industry perspective and therefore we remain confident that we can achieve our revenue targets. At the same time as mentioned previously, we’re still notably impacted by part shortages, which may hinder our ability to execute on our backlog in the second half. Overall, as in the first half, we’re actively working on multiple mitigation action to avoid any negative impact.
Moving on to our liquidity position, we finished the second quarter with around 37 million in cash. As most of you will remember we will need to repay around 30 million of the convertible bond 2017-2024 in October, which is the portion which was requested for early repayment earlier this year.
As we expect the notable cash usage also in the second half of the year, which is mainly driven by working capital requirements. We have been evaluating multiple options regarding new financing. While we cannot provide more details at this moment, we will add further color on this in the coming weeks.
And finally, a quick look at our guidance for the year. As discussed on the backlog conversion slide, we remain confident in our revenue target of 100 million for this year. In regard to EBITDA, we already achieved quality profitability in the second quarter and expect to remain on a positive EBITDA level also in the second half of the year.
With that, I’m handing over to Sam for some closing remarks.
Sam O’Leary
Thank you, Dirk. So to summarize, our product offerings are driving innovations across multiple industries and are simply redefining manufacturing. We continue to grow the business for demand being strong for our core portfolio of machines and the NXG XII 600. We reported record breaking Q2 revenue, record breaking H1 revenue and our order backlog is at its largest position for this third consecutive quarter. We delivered early on our positive EBITDA guidance and expect this trend to continue.
Our strong backlog position allows us to confirm our guidance of at least €100 million in revenue for 2022. An ongoing supply chain disruptions remain a key risk that we continue to manage this effectively on a day-to-day basis with multiple mitigating measures announced in our Q1 call. The results in Q2 are an indication of how well those measures delivered.
With that, I would welcome your questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] And we will first hear from Troy Jensen of Lake Street.
Troy Jensen
Hey, gentlemen, first off congrats on a really good quarter here.
Sam O’Leary
Thank you, Troy, much appreciated.
Troy Jensen
Hey Sam for you, I guess I got a few questions I guess you laser supplier curious to know if you have concerns just with your current laser supplier, are you looking at any backup sources? I guess I’m assuming you guys are single source on lasers but you could touch on a topic that’d be helpful for me.
Sam O’Leary
Let me start with that Troy, so as of today we have no supply chain issues in regards to the laser source. I don’t want to go into details of the supplier nor whether we are a single source but I would say this is not part of our ongoing supply chain issues.
Troy Jensen
Okay, perfect. That’s good to hear. And I know that this before and I’ve kind of done some more work on just kind of Free Float. So I know you guys have support lists capabilities, in my right in that you guys can do short runs of five degree overhangs and long runs of 10 degree overhangs?
Sam O’Leary
Yes. That would be within the ballpark, Troy, again depending on specific application depending on machine depending on materials but yes those numbers would be ballpark numbers that you can take into consideration.
Troy Jensen
Okay. I get that, that’s great for post processing rate reduces the time to get rid of the supports and stuff but can you just talk about the timeline to reach zero degree overhang for more complex parts and in closed parts?
Sam O’Leary
I mean the last situations Troy where we can do zero degree overhang. And we really, the reason I don’t like talking about this just on a generic basis is because we don’t consider it a generic view we have multiple different approaches here with Free Float where you can effectively minimize support. You can have a balanced version where supports are minimized to reduce post processing. You can also have a more aggressive version where support is limited to zero in certain cases such as very application specific scenario. And as with all of our technology, Troy, this is not a close black box, this is open for our customers to work with our application engineers, it’s open to explore the technology and to create individual solutions for individual components. It is another facet of our open architecture approach and those way we consider everything application by application with our customers.
Troy Jensen
All right, understood congrats again guys and keep up the good work.
Operator
Next we’ll hear from Sven Sauer of Kepler Cheuvreux.
Sven Sauer
Hi, gentlemen. Hello. Just one question from my side. So you had a very strong quarter, very strong first half. In the slide, you showed that you only require 16 million of order intake for the second half to reach your guidance. The second half is traditionally stronger, you’ve been successfully mitigating the supply chain issues. Order intake was 22 million in Q2, I’m just, adding all of these factors up. I’m just wondering what’s preventing you from maybe increasing your top-line guidance for 2022?
Sam O’Leary
Hi, Sven, thanks for the questions. Plus, I will give some feedback and I will hand it over to Dirk as well. I mean, first and foremost, our guidance has been clear it is at least €100 million for the quarter. Naturally we do everything within our power to exceed on that understanding for us that we’re in a nice position with our backlog, we see continued growth from an older intake perspective but also continuing to assume the operational risks associated with the supply chain crisis. And therefore maintaining a conservative approach.
But you’re right, we expect the industry and ourselves to have a strong second half and we will continue to push to deliver what is possible for the year. With that and I will hand it over to Dirk for his additional comments.
Dirk Ackermann
Yes, thanks, Sam. I think Sam mentioned most of the points. I think the key point is really here that we cannot have present for sure say that we can execute on all orders which we will see also in the third quarter for instance, which is in the textbook right now. I think as soon as we really mitigated all those risks, we will definitely increase our top-line but for now we kind of keep in buffer just to be sure that we can deliver on our target.
Sven Sauer
Okay. Thanks so just want to follow up questions, there could be a possibility that you might have to postpone some of those deliveries into the next year from your order backlog environment actions don’t fully workout?
Sam O’Leary
Yes. Sven, just to provide some color on this so we — as I mentioned in the summary, this is something that we deal with on a day-by-day basis. We are constantly ensuring that we’ve got the collective player components you have to recall that these machines contain 1000s of individual components and just the inability to supplier to have the availability of one single component of course affects our ability to deliver. So, yes, it’s an ongoing risk we manage it daily we’ve pledged a number of mitigating actions that are as you can see from the Q2 numbers working very well but clearly this is something we have to continue to manage effectively throughout the second half.
Operator
Next we will hear from Michael Kuhn of Deutsche Bank.
Michael Kuhn
Hi. Thanks for taking the question.
Operator
I apologize Michael, you’re cutting in and out. Hi, Michael. If you can hear me, you’re cutting in and out.
Michael Kuhn
I’m trying to –
Operator
It is not better. We cannot hear you.
Michael Kuhn
[Technical Difficulty]
Operator
And we’ll move on to Lucas [indiscernible] Capital Bank. While I work with Michael and his line.
Unidentified Analyst
Hey, good afternoon, gentlemen. My first question would be on the segments. Machine business now went positive in Q2. You mentioned already the service business topic. But what do you need to bring the service business really into positive numbers in the coming quarters and years.
Sam O’Leary
Hey, Lucas. Again, perhaps I start and I will hand over to Dirk, thank you for the question. I think maybe building on what Dirk said during the call, we’re happy with the progress we are making in our aftermarket business and continuing to grow that naturally as our install base continues to grow with just about 800 units now that gives us a greater opportunity to really drive that business forward. We’re placing a significant focus on capturing long-term service contracts. We’ve already announced some marquee ones, and we will continue to do that.
But I think the one thing you really need to consider as you know, if you go back 5, 10 years ago, you would see these machines in academic applications doing research, having small numbers of operational hours using a small amount of powder. As we move forward, think of the production applications that I’ve even mentioned in today’s call, the opportunity for long-term service contracts. And then integrated with that long-term supply contracts for consumable materials, such as the powder to build the parts, is really the fantastic building blocks for us to grow our aftermarket revenue is something Dirk and I are placing great focus on.
We’ve had some good wins, and it’s something that we’re really accelerating as the NXG XII 600 becomes a greater part of our revenue profile as well our installed base moving forward as well. So I let Dirk add some additional color to that as well, and then maybe take some follow up Lucas.
Dirk Ackermann
Thanks. So if you look at services is like two and a half years ago, it was really poor, like we had like customer complaints every week, for ongoing basis. And so one of the first things we did in the service business is really add, like a significant amount of heads to kind of improve the quality for the customer. We also implemented or sorry, the implementation of their customer CRM system last year, where we now start to see kind of good profitability — the operational efficiencies coming from.
So if you kind of take this together, we will not have significant more costs going forward in the service business. So similarly, as with our overall business, the operating leverage and the services will also kick in very soon. And so you will see a growth on the revenues, but significantly lower growth than the cost. So as Sam mentioned, besides multi-year contracts over the last quarter, so those will be then also become very quickly reversible. So we’re not really concerned about the profitability of the service business, especially in the long run.
Unidentified Analyst
Okay. And then if I look at your order intake and compare it with the machine business, it’s around 23% of the machine revenue for the first half of the year. But to reach your midterm guidance, you are more or less need a revenue guidance for the complete business sort of machine and after sales of around 35% to 40%. So in my view, it’s a little bit too low for your midterm growth ambitions. So your point of view would be interesting in this term.
Sam O’Leary
Dirk, do you want to start with the numbers and then I’ll add some from my perspective.
Dirk Ackermann
Yes. I think generally, we’re not really concerned about the midterm targets, rather kind of getting the strong results we are kind of further supported, I think in our long-term outlook. If you look kind of starting next year, in the years, after like, key part of the order intake in the second half, which is normal for the business, so everything, our core portfolio usually we have conversion time of around one quarter. So that means that for the first quarter of next year, the majority of orders for the core portfolio will come in the first quarter and from the NXG perspective, we kind of lower down kind of on the conversion cycle, whereas before it was more than two quarters, average will come down to two or even less of quarters. So from that perspective, I think the second half will be key and also keep remembering that the second half is significantly stronger for our order intake than the first half. So from the perspective I’m not feeling concerned about this.
Sam O’Leary
Thank you, Dirk. Maybe to add as well just you also need to understand now the maturity of the NXG 600 the impact that has on order intake, and of course we expect that to accelerate now as we are in a production phase. Considering the high ticket prices of these items that will naturally have a positive impact on order intake in the second half.
Unidentified Analyst
Okay. And then, can you maybe tell us a little bit about your order pipeline, you have, not just for NXG XII 600, but several machines and maybe in this term, also a little bit about customer behavior? So is there any change, you see in customer behavior, for example, that lead times are coming longer? Or is there any change, you see, or some impressions from your site would be very interesting.
Sam O’Leary
Yes, of course, I think, we obviously find ourselves in a growing market, I think this is, the need for additive manufacturing continues to grow, the technology continues to mature. And incidentally, when you look at a lot of the short-term headwinds that the companies are dealing with at the moment, supply chain crisis, for example, is energy crisis, all of these are in fact, long-term drivers for additive manufacturing technology.
People need to be able to produce components have control of their supply chain use less energy in doing so the benefits associated with this technology, and not just limited to in service benefits, but they’re also delivering a significant reduction in energy requirements as components are produced. So we’re seeing more and more applications, we’re seeing different industries opening up and using this technology as well. And the great thing is, is that — the vast majority of what we deal with are production applications, applications that can continue to grow, customers that can continue to grow. We have a fantastic mix of industries that were served, we’re not heavily reliant on a particular industry. And we feel very well placed for exploiting that that very favorable position in H2 and beyond.
Unidentified Analyst
So longer lead times are not a topic to see.
Sam O’Leary
I mean, we’re still delivering in the majority of cases on the 12-week delivery schedule. It’s obviously more and more difficult for us to do that. It’s not something we’ve currently achieved on the NXG XII 600, as we’ve already mentioned, but we are managing supply chain disruptions on a day-to-day basis to ensure that we can deliver for our customers and solve their short-term headwinds, and drive the continued transition to additive manufacturing for our existing and new customers.
Unidentified Analyst
Okay. Last short question and the 1.7 million of one offs, can you split this number into one offs from fix and provisions?
Sam O’Leary
Dirk, do you want to take that?
Dirk Ackermann
Sure. It’s around a million from the release of their crew and the rest.
Operator
And Lucas, was there anything further?
Unidentified Analyst
No, thanks. That’s from my side.
Operator
Great. [Operator Instructions] We will now try to hear from Michael Kuhn of Deutsche Bank. Michael, do you still have a question?
Michael Kuhn
[Technical Difficult].
Secondly, on the provision release, resulting in €1 billion in the second quarter, could you give us some details what that provision was relate to. And then last but since you mentioned [Technical Difficulty] maybe you can give us a few more details. Let’s say how — what are the key currently are and what you would expect [Technical Difficulty]. Thank you.
Sam O’Leary
Michael, the audio was incredibly bad. I think there was enough of a connection to be able to get the gist of questions one and two. I personally couldn’t hear anything as a third question, but perhaps for the first two, I would hand that over to Dirk.
Dirk Ackermann
I only got the second question. If you can help me out on the first question afterwards, that would be great. So on the second question regards to the release of the accrual. This was related to accrual of the three bills in 2019 related to payments for custom tariff in the U.S. were in the past, it was a few of the customs department that we only declared our machines or some of our machines, and therefore kind of sent us a letter that which was the basis for this accrual. But now all those are a significant amount of those machine shipments are out of the statute of limitations and therefore released — there is no claim from the Customs and Border Protection in the U.S. anymore. There’s still a couple of [100k] [ph] left which we will release as soon as the statute of limitations is also there for the remaining shipments. Sam on the first question, maybe you can summarize it.
Sam O’Leary
I didn’t hear the whole by any means, but I think the general context was around the exchange rate benefit that we took in Q2 and I would assume thoughts around how we see that impacting for the remainder of the year.
Michael Kuhn
Okay, thanks.
Dirk Ackermann
Generally like the U.S. dollar appreciation was very good for business as the key course is also coming from the U.S. especially from an NXG perspective, we see kind of the highest demand in the U.S. and therefore the strong USD is very good for us. And for kind of the one-time impact in Q2 that was related to depreciation of USD receivables mainly.
Sam O’Leary
And Michael, my apologies I could not make anything at all at the end of the third question.
Michael Kuhn
Do you expect the supply chain to normalize?
Sam O’Leary
Okay, Michael. So in terms of normalization of the supply chain, what I would say is while it continues to be problematic, it’s now very much limited to a particular area it is purely around electronic components, we have a supplier of ours that is responsible for supplying PLC components and associated drives, they’re still struggling to do it run those items. I don’t see any considerable easing of the situation in the second half my hope would be as we move into the new year that we start to have a consistent supply. In the meantime, as per our Q1 call, we have a stream of around 12 different mitigating actions that we are taking to ensure that we can continue to deliver for our customers that we can continue to solve their supply chain issues. We can continue to drive the transition to additive manufacturing and of course that we can continue to deliver for our own business results. And I think we’ve shown great results in delivering on that in Q2 and of course we put a great focus on ensuring that is exactly the same in the second half.
Michael Kuhn
Thank you and sorry for the audio.
Sam O’Leary
No problem. I’m glad we managed to get through all of the three questions.
Operator
And next we’ll hear from Constantin Hesse of Jefferies.
Constantin Hesse
Hey guys. Thanks for taking my question. Couple of questions from my side. One with regards to the NSX, how many orders or do you actually have in order backlog today actual. And yes, so on the actual basis and conditional and same question is on cash and balance sheets so you’ll have to pay back to 30 million by October so you’re obviously considering potential financing instruments. So just the only question I have is what kind of cash buffer do you typically give yourself in a normal operating environment. Thanks.
Sam O’Leary
Constantin I will move straight over to Dirk, who can you through the necessary details.
Dirk Ackermann
Thanks Constantin. So I think from a cash perspective in what we see kind of as a healthy balance is around 10 million, that’s usually the line which we don’t want to go below two, it has to be kind of efficiently you also have to consider that we have cash in multiple jurisdictions, not just in Germany and kind of keeping it kind of simple, I think around 10 million is usually the cash buffer, we want to keep to be kind of flexible from an operational perspective.
In regard to the NXG, please note that we will not provide further details that we already given during the call. The reason is just a very delicate information for our competitors, which are used very precisely so we’re going to give kind of maybe for the next quarter as well, how many orders we have received but we will not provide any further details on the backlog.
Constantin Hesse
That’s great. Thank you.
Operator
[Operator Instructions] And it appears there are no further questions at this time.
Sam O’Leary
Okay. So thank you everybody for joining. I appreciate the interaction and the questions and of course where to find this for appropriate follow ups as needed. So wish you all a great day. And thank you again for taking the time. Goodbye.
Operator
That does conclude today’s conference. Thank you all for your participation. You may now disconnect.
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