SLM Solutions Group AG (OTC:SLGRF) Q4 2021 Earnings Conference Call March 24, 2022 11:00 AM ET
Company Participants
Sam O’Leary – Chief Executive Officer
Dirk Ackermann – Chief Financial Officer
Conference Call Participants
Lukas Spang – Tigris Capital
Troy Jensen – Lake Street Capital Markets
Sam O’Leary
Good morning. Good afternoon. Thank you for joining us today as we review our Fiscal Year 2021 Earnings. With me on the call is our CFO, Dirk Ackermann.
I’ll begin with a summary of our performance followed by an update on progress against our long-term strategy. Dirk will then run you through the financials, and I will close with a summary prior to the Q&A.
Before we start, I’d like to quantify our position regarding the ongoing geopolitical situation. As a business, we initiated the closure of our subsidiary in Russia during the second half of 2021. Since then, we get our business activities to a minimum, which has now ceased completely. The Russian market itself is no significance to our business. However, the impact of the crisis on the global economy, combined with the already strained supply chains, remains unclear. Accordingly, we will continue to closely monitor the situation and initiate actions if required.
So we look back at 2021 as another positive step towards our long-term growth plan. Our strong product portfolio continues to be recognized across all of our key target verticals, and has been the catalyst for our continued positive trajectory. Order intake in excess of €70 million was up 53% year-over-year as customer commitments through our core portfolio and the game-changing NXG XII 600 contributed to our largest ever backlog position of €43 million.
For clarification, this number is the systems only and does not include our sizable aftermarket business. Operationally, we delivered from a top line perspective, we posted a second consecutive year, where growth exceeded 20%, along with the second consecutive year of exceeding our revenue guidance.
We continue also to see bottom line progress with a gross profit margin of 56%, up 300 basis points year-over-year. In 2021, we improved EBITDA by 42% year-over-year on an absolute basis, with the EBITDA margin improving by more than 50% year-over-year. We continue to guide on achieving EBITDA profitability on a run rate basis during the second half of 2022.
We delivered on our NXG XII 600 beta program and received purchase orders from the automotive, energy, space, civil aviation and service bureau sectors, a clean sweep of our target segments and provides a solid base to deliver our 2022 growth commitments.
Finally, we are pleased to report that for the second consecutive year, we outpaced market growth and gained market share. The overall metal AM market size grew to €2.5 billion in 2021 and is expected to grow at an annual growth rate exceeding 25% over the next five years. The system or machine element of the market grew 11% in 2021, a rate that we significantly exceeded. A substantial growth of more than 50% was observed in the metal AM manufacturing supplier market. This represents more applications being transitioned to metal AM. This is a very positive indicator for future system demand.
We’re outpacing market growth. Even this rapid growth is penetrating a relatively small amount of the traditional manufacturing market. With the commencement of NXG production deliveries, we expect to continue to enable new applications and therefore, generate new demand. Alongside that, we will maintain a strong investment focus in new technologies and continue to push further penetration into the sizeable traditional manufacturing market. We are confident of maintaining and extending our market share in a growing market.
Laser Powder Bed Fusion is the leading technology in metal additive manufacturing, and in 2021 represented some 84% of total metal systems sales, up from 81% in 2020. The reasons are abundant and impactful. Geometrical freedom and complexity are for free, meaning design limitations are replaced by optimized – or replaced by optimized topology and the size of the component is only limited by the size of the machine build chamber.
Output is boringly consistent, no geometrical variation, combined with high mechanical properties, is the very definition of a manufacturing sweet spot. And an extremely broad material choice, quite simply any material that can be welded can be processed and crucially limited to no post processing. There is no need to plan for the huge shrinkage and distortion corrections required with other metal AM processes.
All of this means we have a mature technology that is already in widespread industrial use uses that will continue to grow driving further adoption and further market expansion.
Building on that point, the technical advantages of our technology are well known and understood. The reality is that whilst compelling, these alone will not drive the aggressive market expansion. However, several other favorable developments combined with that will.
Firstly, productivity. On a simplified basis, build rate drives cost per part. Reduced cost per part drives more economically viable production applications that can exploit the unquestionable benefits of this technology. Each new application penetrates further into the huge traditional manufacturing market.
On top of that, more and more components across multiple industries have been designed specifically for metal additive manufacturing to exploit the broad advantages that are now well known. Think, for example, to the Porsche e-drive housing that we shared previously, the opportunity to redesign and exploit the benefits of metal AM enable a compelling competitive advantage that is being taken on an increasingly exciting scale.
On an operational level, additive manufacturing technologies are being increasingly integrated into industrialized production processes, essentially meaning moving from the R&D hold to the production holds.
And finally, certified flightworthy components produced by metal additive manufacturing, the process is more understood at a maturity level that permits this and therefore this drives a significant continued market expansion potential. We see this every day, and we see the impact of what we are doing and what it has on our customers.
We have a large and rapidly expanding installed base covering the biggest players in the most important verticals. Players that have been through the pain points understand what it takes and are already in production. This is a strategic advantage and is a catalyst for continued growth. That growth is delivered by production applications enabled by higher productivity systems.
Production applications by definition need productivity. Productivity relies on multi-laser technology. To put this into perspective, approximately 95% of our largest ever backlog is for multi-laser technology.
Now it’s impossible to talk about multi-layers of productivity without talking about the NXG XII 600. We already led the market in productivity, then we took it multiple steps further. The NXG XII 600 proves that build rates that were previously considered on achievable are here now, and they are moving metal AM economics to a completely new level. It’s a game changer.
Following on from our beta program, we are pleased to report broad industry coverage in order intake for the game-changing NXG XII 600. Divergent have placed an order for initial three production units to support that increasing production demand from major global auto OEMs. This will take their installed base to six units during 2022.
Sintavia, our market-leading service bureau, placed an order for two machines, the NXG-enabled Sintavia to supply the unprecedented demand for metal AM production. Collins Aerospace added to their existing fleet of SLM machines to produce their aero engine nozzles faster. MAN Energy Solutions will employ the NXG to meet their growing demand and will use the machine for several production applications within the marine, energy and industrial sectors.
And finally, a leading California-based space company ordered two machines to make their space missions more affordable and efficient by creating lighter, faster and more robust space components. We expect to see continued positive commercial traction for this game-changing machine as we move through 2022.
But what is the value of power without freedom? Imagine buying a new car and being told you can only drive it in autopilot. Imagine being told you can’t differentiate from your competitors. Quite rightly, our customers don’t subscribe to these limitations. Open architecture is at the core of everything we do. It matters to us, it matters more to our customers. It allows our customers to differentiate and it allows them to develop a competitive advantage. It fosters innovation at SLM Solutions, but also in the wider AM industry. Fundamentally, it drives the industrialization of metal additive manufacturing.
What it means in practice is a recognition that one size does not fit all. Some examples of this approach are in regards to software, rather than restricting to one application or supplier, we open a broad selection by providing application programming interfaces to external software vendors. One size doesn’t fit all, our customers recognize this, we recognize this.
In terms of materials and process parameter, we offer free selection, no restrictions, just a value-add approach to making our customers successful. Even without restrictions, our customers are increasingly choosing our powder, acknowledging the added value of our know-how.
For our installed base, we offer customized service agreements to meet the exact needs of our customers with measurable success criteria. The list goes on, call it open architecture, call it an innovation drive, or simply call it doing the right thing for our customers.
We also recently launched a new software product called Free Float that enables the reduction or elimination of support during the printing process. It’s a need to rather than a USP. But what sets Free Flat apart is our open architecture approach, which delivers our customers the capability to customize and do what suits their product best, develop their own differentiation and simply do more. Why? Because they are the experts in their field. We enable their expertise. It epitomizes everything about our open architecture approach being a fundamental enabler to additive manufacturing.
At its core, it enables productivity for our customers that drives them product cost. It adds value by reducing build time in our process and reducing downstream processing cost operations by up to 94%. That’s a big deal. It’s a software product and is therefore retrofittable to our existing installed base. All of this allows our customers to do more with our machines and in turn drive additional future demand.
The 2021 results confirm our strategic approach and direction. We are the technology pioneers of this industry with decades of experience and a rapidly growing strategically important installed base of over 750 machines.
Our investments in pushing the limits of additive manufacturing will continue to see us maintain our technology leadership position in delivering what matters most for our customers from a hardware and software perspective. Our approach to operational excellence is already and will continue to provide the basis for long-term sustainable growth.
Lean manufacturing processes have been implemented enhancing efficiency across the value chain. And we took out approximately 3% on a like-for-like basis on our material cost in 2021 in an increasingly tough market environment. And most importantly of all, focusing on our customer success as a best-in-class solutions provider drives everything we do.
In summary, we are leveraging and extending on our technology leadership, combining it with laser-focused execution, and a relentless business-wide approach to delivering what our customers need from new products, the customer enablement via open architecture and just doing what’s right for the industry, our employees and our customers.
With that, I hand over to Dirk for a detailed financial review.
Dirk Ackermann
Thanks, Sam, and good morning and good afternoon also from my side. As Sam already highlighted, we finished 2021 very strongly, both overachieving our external as well as internal targets.
Looking at our order intake for the year, we achieved growth of over 50% compared to 2020. While a notable portion of this growth was driven by our NXG, our core portfolio performed very strongly as well. Even more importantly, we ended the year with a record backlog of €43 million, which gives us a head start to achieve our 2020 revenue goal of at least €100 million.
Finally, we’re extremely proud of the SLM team, delivering significant revenue growth for the second consecutive year, despite the ongoing supply chain constraints. Similar, as in Q3, we were able to mitigate all headwinds and delivered all planned machines in Q4.
As I mentioned in this note, based on the most reliable industry report from AM Power, which was published last week, we are once again able to increase our market share. Most importantly, we gained significant share in our key markets in Europe and the Americas. While Asia was comparatively weak in 2021, we already have a notable backlog and pipeline in Asia for 2022.
Moving on to the detailed financials, I would like to highlight the strong performance of our SLM 500. Last year, we shipped twice as many SLM 500 machines when compared to 2020. This clearly shows our market-leading position regarding multi-laser technology, it will be the basis for continued growth of our core portfolio besides the NXG.
While aftersales revenue growth looks moderate compared to the machine business, we’re not concerned about this as we concentrate the last couple of years on improving quality of our services and overall customer satisfaction. While this itself should be an accelerator for future revenue growth of itself, we also laid down the foundation for additional revenue growth.
For instance, since the beginning of the year, we have a dedicated product manager for services, which joined us from Airbus. Gross margin improved by 3 basis point compared to last year, mainly driven by product cost out and lower inventory write-off. As a final cleanup action within our inventory, we took a charge of approximately €1 million in Q4, which was related to an older legacy product which did not meet the expected sales demand.
While product cost out will be challenging this year, given the supply chain situation, we expect further improvements in regard to better product mix and lower inventory adjustments in 2022. In Q4, we benefited from the forgiveness of a second PPP loan in the U.S., which was around 800,000.
From an expense perspective, we see continued pressure on logistics with those costs as percentage of revenue showing significant growth even compared to the already high level of last year.
And finally, operating cash flow was negatively impacted mainly by two factors. As communicated previously, we increased safety stock levels to navigate through the supply chain constraints. Furthermore, receivables increased in Q4, driven by late shipments in the quarter as well as less favorable payment terms on a few larger deals. The positive point here is that we expect both items to be only temporary.
What I would like to highlight as well is that the quality of our inventory and receivable balances have increased steadily over the last two years and we feel very comfortable about – comfortably about this.
Looking at operational profitability, the continuous improvement in EBITDA over the last two years is a perfect indicator of the significant operating leverage of SLM as well as the impact of operational efficiency gains. On this slide, we would like to highlight a few measures, which are driving profitability.
In 2021, we implemented new manufacturing lines to improve product throughput and therefore, variable labor costs. Unfortunately, as the supply chain situation keeps forcing us to stop the production, we have not really been benefiting much from this change. We expect to get initial improvements from this in the second half of the year with the supply chain disruptions decreasing.
Further product cost out will be supported by lean project, which we initiated last year. Despite the difficult supply chain situation, we were able to drive direct material costs down by 3% last year. As we further diversify our supply chain, we still see significant opportunities in this area in the medium-term.
Last year, we have implemented a new CRM tool. While we have only seen limited productivity gains to this last year, we expect significant contribution this year and in the following years, especially in our service organization, which has almost completely digitized its processes.
We also started the process to upgrade our PLM system. While this is a long-term process with an initial go-live expected next year, we see significant potential to allocate our resources away from low value-added activities and engineering as a lot of those activities will be automated in the future.
Given the comfortable backlog position, our high operating leverage as well as the measures we have taken, we believe we are on track to deliver on our breakeven target this year, which is quite an important milestone for us that set us apart from most of our competitors.
We would like to confirm once again our guidance for this year achieving revenue of at least €100 million and achieving EBITDA breakeven position on a quarterly basis in the second half of the year. While we expect the impact from COVID on the supply chain to ease in the near future, the impact of the Russia/Ukraine crisis is still unknown, it may have a significant impact on us in our goals. At the same time, especially at higher commodity prices might be a further driver for the adoption of additive, given its efficient usage of raw material.
Finally, a quick update on our capital management. We closed the year with approximately €25 million in cash. In addition, we still have the third tranche of our 2020 convertible available, which is around €30 million and should be sufficient to fund our operations in the foreseeable future. As most of you are aware, our previous convertible from 2017 was originally due this October.
As communicated last month, we were able to agree with the bondholders on an extension by two years in exchange for an increased interest rate. At the same time to make the adjusted terms attractive for a large number of bondholders, we added a possibility for an early redemption at the original due date in October this year. We already agreed with our largest shareholder Elliott Management, which holds around 60 million of those bonds that they will not make use of the early redemption option.
All other bondholders have until April 8 to decide if they want to use the early redemption option. Based on the total amount of redemption, we may be required to raise additional cash this year. If this is the case, we will provide further details as soon as we have better visibility.
With that, I hand over back for Sam for closing remarks.
Sam O’Leary
Thank you, Dirk. So we are continuing to cement our position as the technology pioneer and innovation leader in this industry. We are an inventor of selective laser melting technology, the leading metal additive manufacturing technology for metal applications, and a market that is forecast to multiply by a factor of three over the next five years.
We have a proven track record of delivering breakthrough technologies that drive the most important aspects output quality and productivity. We have over 750 systems globally with an industry agnostic broad base of blue chip customers. We are starting to do other production units of our game-changing NXG XII 600 in 2022, with orders in place for 10 systems covering automotive, civil aviation, space, energy and service bureaus.
We’ve outperformed our guidance for the second consecutive year delivering more than 20% top line growth and posting market-leading gross margins. And we’re heading to 2022 with our largest ever machine backlog of €43 million and over 500 people entirely focused on delivering the future of Laser Powder Bed Fusion solutions. We will continue to deliver.
And with that, I would open it up for your questions. Thank you.
Question-and-Answer Session
Operator
Thank you. We will now begin our question-and-answer session. [Operator Instructions] The first question is from Lukas Spang of Tigris Capital. Your line is now open.
Lukas Spang
Yes. Hi, good afternoon, gentlemen. My first question is in the area of material prices. Probably you will have at least temporary higher prices on the material side. How do you handle this topic in terms of prices for your machines? Will you take it on the P&L for yourself? Or will you have price increases for your customers for your machines?
Dirk Ackermann
Hey, Lukas, happy to answer the question. So I think there are two elements to the material prices, the one on the machine side, as you pointed out, like for the maturity of our components, we actually have longer term contracts. So we already kind of seen like over the last year that most of our suppliers are coming back to us with kind of requesting price increases.
But as we still have, like a notable portion of single source items with kind of getting additional sources, and we actually are able to keep it relatively flat in most of those requests. And as we said in the presentation, we actually had a material cost out of 3% last year. I think this year will be not looking as good, definitely. But I think there’s a good chance to keep it at least flat.
In regards to the question you highlighted, if we’re able to kind of give the pricing also or kind of increase the pricing to our customer, this is very tough, because like we explained that we gained market share and others have been losing in the last two years. So there’s significant overcapacity at our competitors, which also leads to significant like pricing pressure on the – from the competitors. So therefore, we rather see that kind of a stable processor.
The other piece, as I mentioned, on the material prices, is the raw materials. So as our machines are running with powder, which is impacted, for example, by high nickel prices. As I mentioned in the presentation, we actually see it as a benefit again of the efficient usage of additive with this raw material is actually a driver for the acceleration of the adoption.
So at the same time, for sure, we also have higher powder costs, which we also give them further to the customers because here we really charge on a market price perspective. So overall, we don’t really see a significant impact on that on our P&L.
Lukas Spang
Okay. And then on the NXG XII 600 orders, we showed in the presentation that some orders you received are not booked yet at the end of 2021. So can you give us an indication of the volume you’re not booked for end of December, but you have right on the end?
Dirk Ackermann
Yeah, I can also take this question. So, as we laid out in the earlier press release, where we announced the preliminary results, we received in total 10 orders last year, seven of them being firm and three of them being conditional. And from – just from a definition when we say conditional, the customer has the right to terminate the contract without any negative impact for them.
So based on our internal policy, we would not book those. Of those three units, we actually received this week, the confirmation that one of this – one of those units is now firm. So basically, there’s still two conditional POs left, where we are still like, relatively positive that we can book that in the future quarters.
Lukas Spang
Okay. And last question is on the convertible bonds you prolonged for two years, the convertible price is unchanged, right?
Dirk Ackermann
Correct.
Lukas Spang
Okay. Thank you.
Dirk Ackermann
Thanks, Lukas.
Operator
The next question is from Troy Jensen of Lake Street Capital Markets. Your line is now open.
Troy Jensen
Hey, gentlemen, congrats on the great quarter and the great year.
Sam O’Leary
Thanks, Troy.
Troy Jensen
Hey, Sam, for you. I guess I’d like to know where is SLM with respect to like AI and machine learning where your machines are kind of analyzing the production of the parts in process and for better repeatability, consistency and feedback mechanisms in the system?
Sam O’Leary
Yeah. So we have, we have actually products that are integrated to monitor the multiple outputs and work with that data. This is actually something we’ve been doing for a great deal of time, Troy. The obstacle that you come up against, I think you’re referring to essentially closed loop modifications during the process. This is something that is generally not accepted for certified industries, as you’re essentially changing the process conditions.
So whilst we have these monitors for multiple analysis, what we focus on is the boring consistency that I referred to in the presentation, i.e., assuming the build process is controlled and right and that you don’t need to go and do in-process in layer modifications. That’s the primary focus of essentially how we design and how we validate all machines.
Troy Jensen
Okay, perfect. And then Sam, I’d love to hear I mean, you talked about support was metal capabilities. Can you just expand on that a little bit? Is it generally available now? What was the product called again, I thought it was Free Float, but I might have misunderstood.
Sam O’Leary
It’s called Free Float, Troy. It’s actually a capability that we’ve been using internally for a significant amount of time. What we decided to do is productize this and give this capability to our customers. So we run a beta rollout phase with a number of customers. It’s now available across our portfolio. And the differentiating factors here are – I mean, you know other people have this, Troy. This is a capability that exists in the market.
The difference that we give is the availability to manipulate this to have basic choices between high, medium and low amounts of support, and also to manipulate those choices as well to really drive the correct process parameters for a specific application case. So this is available in a number of materials across our portfolio and we see continued excitement about this. And this, for us, drives about enabling more applications and enabling growth of our existing installed base.
Troy Jensen
Great. More complex parts, I’d imagine and easier – like you said downstream production.
Sam O’Leary
Exactly, exactly.
Troy Jensen
All right. A couple of more questions for you. On the NXG XII 600, you guys talked beta, right, in the press release. I guess when I think of beta, I think of not generally available and am I thinking of that wrong? And if so when will the product be more GA?
Sam O’Leary
So yeah, it’s a great point, Troy. So we did the actual fireworks and product launch, if you will, in November 2020. The basis for the program has been operational since then. So we have a number of assets here internally. We have assets with our customers, developing process experience, developing applications for our customers. And this beta program is – has been used to develop the commercial activity, so producing components for our customers. We will start production deliveries at the end of Q2, give or take, a few weeks this year, and from that point on, we will be purely delivering production assets to our customers.
Troy Jensen
Awesome. Perfect. How about just one last question for me. Have you ever like done any survey of your users and find out what percentage of parts produced are for end-part production applications versus prototyping?
Sam O’Leary
Yeah, we have not done this on a global scale. But what I would direct you to, Troy, is we referred a couple of times during the presentation today to the AM Power Report. They do exactly that survey across industries. I would say on an average basis, somewhere between 60% or 70% of the people that they surveyed are producing end application components.
So I would say for us depending on which way you look at it, that could be much higher. Clearly, I mentioned our backlog is almost entirely for multi-laser application that means that essentially academic applications are all removed from that. And of course, if you think of anything, SLM 500 and above, so 500, 800, NXG, these machines are purely running production applications for end use cases.
Troy Jensen
Great. Okay. Awesome. Congrats again, and good luck this year.
Sam O’Leary
Thank you, Troy.
Operator
As there are no further questions, I hand back to the speakers.
Sam O’Leary
Okay. I appreciate everybody’s time. Thank you for listening. Thank you for the questions. And with that, we will close the call. Thank you.
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