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Edited Transcript of AM3D.DE earnings conference call or presentation 8-Aug-19 2:00pm GMT

Q2 2019 SLM Solutions Group AG Earnings Call

Luebeck Aug 17, 2019 (Thomson StreetEvents) -- Edited Transcript of SLM Solutions Group AG earnings conference call or presentation Thursday, August 8, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Meddah Hadjar

SLM Solutions Group AG - CEO & Member of Executive Board

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Conference Call Participants

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* Adrian Pehl

Commerzbank AG, Research Division - Head of TMT and Consumer

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Presentation

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Operator [1]

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Dear ladies and gentlemen, welcome to the SLM Solutions AG H1 Report 2019. At our customer's request, this conference will be recorded. (Operator Instructions) May I now hand you over to Meddah Hadjar, CEO, who will lead you through this conference. Please go ahead, sir.

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Meddah Hadjar, SLM Solutions Group AG - CEO & Member of Executive Board [2]

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Thank you very much. Good afternoon, good evening, and good morning, everyone. Meddah is here. I'm going to walk you through our first half results and second quarter earnings. We're going to talk about probably a couple -- few segments of the presentation. We're going to dive into the industry. Then we're going to go into our performance. And then we'll walk you through my first 90 days and my observations.

We'll go to Page 1. If you please follow us if you're not on the webcast. Really, I'd like to take a few minutes just to share with you some of the insights into the state of additive manufacturing industry. I spent a lot of time talking to existing and potential customers that we have in the last 3 months. And it is encouraging really to hear that the adoption continues to expand. So we see some great potential and momentum in the adoption in the additive manufacturing. And they will transition to AM machine. That's the link between the 2.

The aerospace industry is really one of the early adopters. So it's an -- we'll pick this as an example because it's a great example to share with you. It's really -- additive mix is being more and more integrated in the design process of the engine programs. And so is the other aerospace applications, whether it's in the space or the aircraft. But here, we're just illustrating some aero engines. We're going to see more and more increased number of applications on selective laser melting.

And this example here, you can see they are at a different phase of the adoption rate. Some are already in the -- for production rates, and some are in the prototyping, some in qualification phase. And it depends what phase they're in and how long it's going to take to get into the full serious production. And that adoption, this qualification and prototyping will dictate the adoption rate and how fast we go into the adoption. Some of it is related to the manufacturers, adoption rate, and some of it is related to our products in terms of the platform size or the productivity that we provide to our customers.

We are also seeing this in other industries besides the aviation industries. We look at power or medical, similar -- at a different scale and a different pace, but it's a similar approach here we see. And we see very, very good potential progress going forward.

On Page 2. So while we are increasingly confident in the direction that the industry has taken, especially on pace, in particular, the quarterly basis remains difficult to accurately predict. Similar to other technologies, the evolution, the adoption cycle in the early stages can be lumpy and challenging. But to be clear, the business case around additive manufacturing is not being questioned by customers. It's simply a question of when industrialization will happen and not if.

The immense complexity of this technology, coupled with a broad range of applications being discussed, are factors in which have, in the past, limited mass production. But we see great strides being made here. And this reinforce what we are hearing directly from our customers. So the current phase that we are in is really a transition phase. So if you think about then, the early phase has talked about prototyping and R&D. Now we're talking about the current phase, we see the transition in small series production ramping across the industry in regional segments. It's clear the improvement in the quality and reliability of machines, even though it's still a lot more work to do and some improvement needs to have, right?

Going forward, we expect to see acceleration in transition to mass production once additive machines that we are providing to our customers reach certain productivity and reliability. The message here is really additive manufacturing in the industry as a whole and the adopters will and are working together to scale this. That's how we feel really good about where we're heading with the additive manufacturing.

Next page. We are, at SLM specifically, uniquely positioned to manage the high level of the technological complexity required given that we have consistently been at the forefront of the technology. The roots of the company traces to the origin of the industry itself. And co-investors of selective laser melting base patented in 1996 and as the first manufacturer to offer multilaser system, we strongly believe that our existing machine portfolio is best in class in terms of quality, adaptability and reliability compared to our competitors.

Given the amount of capital we have spent in the last couple of decades on R&D efforts, the barriers to get into this technology keeps getting tougher and tougher as we push and push the envelope of the technology further and further, and keep deepening our knowledge base, we believe that we are well positioned to continue as the leader in the industrialization phase.

On next slide, on Slide 5, in case you're not following here on -- live. When you look at our product portfolio and you look at the industry as it's moving forward, our products have always historically proven our ability to increase productivity and increase reliability. As we talked about the industry maturation, where the products -- our products are relative to that, we see it going in the direction of better products, more productivity, better reliability, ready for scale and industrialization. And this is really what we're trying to highlight, is our products, especially the next generations, are really mature -- will be mature enough to be ready for scaled industrialization. And we expect to deliver up to 300% in productivity. And this is really, really a unique position for us that will allow us to be the leader in the industry.

On Slide 7, we're talking about our performance. So the second quarter financials are not really what we would have liked them to be, and we did have several issues and successes, and we'll discuss it. We have strong customer engagement on the positive side. You probably have seen our announcement with our customer Rolls Royce on the SLM 500. We are also really excited and pleased that some of our previous customers and SLM customers have now came back and in great discussion with them and a very important and significant endorsement of our products. And some of that shows challenges, which we have, implementing the last -- in the last 3 months. So while we entered the quarter with weak order backlog, we did see strengthened in the second half of the quarter as well, seeing an improved machine sales mix. And we'll discuss that a little bit in a few slides.

Importantly, we have taken some significant initial steps to right some of the previous leadership wrongs and which have led to company having to deal with some significant operational and strategic challenges. Past frameworks, agreements with resellers in China have now been addressed and canceled. And we are now in a very good position where we can actually go directly and engage directly with our customers in China and not only advance our product offering but will also improve our order and revenue visibility going forward.

As we announced in May, we have parted ways with our global head of sales and as we are currently in the midst of setting up the sales organization in a new, more customer-oriented and really focused on generating leads and providing better visibility and a better understanding of our customers and be closer -- and more closer to our customers.

We have also terminated our relationship with the North America head of business in North America in order to reverse the market shares we lost in North America. In that region, really, we have been in a position that lost share, that we want to gain back those shares and not really because of the product technology or the offering. It's just, basically, we have made some decisions that were really -- have caused us significant market shares. We have identified a replacement, and we are in discussion with additional potential candidates that we will announce at this time.

Despite having to make some tough decisions in the past few months, I believe the company has taken meaningful and necessary steps to address some of our shortcomings, especially in sales efforts. It's a key precursor to the company's reembarking on a growth path. To that extent, I'm really pleased that the strengthening of the organization with the new talent has already started, and I think they will be a great value that we're going to bring to not just our shareholders but also to our customers.

Let's go to really discuss the financials of the quarter. It's -- I think the results speak for themselves. And probably more details are in the report if you need further details. But the revenues for us are obviously disappointing. And going into the quarter with lower order intake and lower backlog has made it a challenge to increase the revenue that you see out there.

On the positive side, our order intake for the second quarter was significantly better than the previous quarter. And even comparing it to the quarter the same year -- last year, we have been fantastic. And I think this is driven by obviously the mix of the units that we have done in the second quarter. Obviously, it's back-ended towards the quarter, around May-June mainly. And it was hard to convert those orders in the same quarter. So that's why you didn't see that affecting the revenue. But I do want to stress that the quarter, from an order intake, was positive. It is a single data point. It's not a trend. And I just want to make sure that we are realistic here, and we have a long way to go to be in a very good position to be able to have a better visibility and a better forecast.

Really on the EBITDA again, we are -- spent the last 3 months here trying to understand where we are, how we are running the business better and how we'll position ourselves better. We had -- if you look at the adjusted EBITDA, and I will talk about the adjustment a little bit, we've seen the improvement versus last quarter. And with all the challenges that we have on the top line, we are driving a better operation. It's still early stages, but the write-off that we had onetime of is obviously the 6 machines that we have from a Chinese contract. From the frame agreements, we have purchased back some of those orders, 6 machines. And we'll talk about that a little bit. And we had some inventory write-offs and some personnel onetime payments. Now that drove the EBITDA to what it is, but on the adjusted, we see an improvement.

The working capital is really -- year-over-year, we're getting better on the working capital. And we're doing a few things. To start with, we're looking at our payment terms, in terms of our shipments and payment terms, we are strengthening that. We are also looking at our suppliers in terms of payables. We'll be discussing that with some of our suppliers. Basically, we'll continue to get better in this area. We'll still focus on the top line, but this is -- we need to get better at as well. I mentioned the 6 machines from the Chinese frame agreements. That has obviously increased our inventory slightly in the second quarter.

We are in a very good, strong position on cash, where we're close to EUR 30 million ending for the quarter. And that's what I want to touch on, on the financials.

I'd like to go into the -- really my 90-day observation here. So we go to the next pages. Page 12, if you're following with us. The last 3 months really have been an intense time for me just as where the company is and where it needs to be and how we get there. I am happy to report that I'm very excited to present my in-depth strategic plan with you in November just because of some sensitivity in terms of competitive reasons here that I'm not going to be able to share everything in detail.

But I would like to take the opportunity here to give you my 90-day observation. On the positive side, I'm even more convinced than ever that -- and since I was a customer as well, that SLM obviously have really the best multilaser technology products on the market. And this is not coming from me. I talked to some of our customers. And some of our customers have reaffirmed that as well. And both -- this is on both existing and potential new customers. And we -- from -- whether it's from safety, from capability to use, the productivity in the 4 lasers, and we see very, very good position going forward in terms of expanding on that on that strength.

So the one thing that also keeps me motivated about the company is the talent that we have in the company. It's a strong technical talent that is very, very motivated to address tough, tough problems and challenging issues from a technical standpoint of view. And they are the best in the class, and they are doing a great job in terms of providing with solutions for the technology and pushing the technology further.

So that being said, the previous leadership weaknesses, simply put, some of the bad decisions have been taken and has resulted in pretty significant strategic and operational deficiencies. That simple. From a commercial side perspective, we have this frame agreement we just focused solely on that region, on China, and thereby missing some strong opportunities in areas like North America, for example, where we have lost revenue and market shares. We did have some reliability issues on some of the products that were not addressed properly and immediately and probably on some of the positioning of the product, where we want to spend our time. This is really not trying to look back and hoping it is just the state of the company where it is today and how we're going to go forward. I believe this is really the message that I'm trying to highlight here.

On Page 13, we have identified key areas where we need -- what we need to do and where we need to go. Some we've already taken. And obviously, you probably know some of the immediate actions that have been taken, and this will help us reverse the trend of the company that's in.

It won't happen overnight. So this will be a process and a journey that we're going to go through. And this is really primarily why I have removed the guidance that was previously issued. I think this is an important subject that's probably interesting. My goal is really to be in a position again to offer you an outlook that we can all believe in, but only once I feel that I can do so with full transparency and the confidence that we're going to do.

Last quarter, we have already addressed several of the issues and deficiencies in terms of a range of short-term and midterm measures. We had talked about restructuring sales department. The hiring process is already in place. Replacement of candidates is already in place. We have already renegotiated the frame agreements.

I mean that was -- to me, since I started, that was one of the topic that I want to address right away because I identified it as immediate challenge and risk for the company. So actually my first visit to a customer in this role was on that specific topic and was able to address that right away. And obviously, as I said, this is better for us from a position standpoint of view. I think this is -- now will allow us to be focused on growing the market that we need to grow.

So in the near term, where I want to go with this is it's imperative that we have to grow our top line. Top line must be addressed immediately. We have to bring in the right sales team. We have to bring in the right sales organization and the capable organization to allow us to do that. We have started doing some operational rigors in terms of -- while we're waiting on building that organization, started with a rigorous operational sales and a clear value proposition on our products and getting confidence back to both our customers and to our employees and to the market.

The NextGen for us is critical. It's really critical. Not just really -- and I'll be very honest with you. This is not just necessarily to our top line and our growth but to the industry as a whole. This is -- as an industry, we have to push and work together to get additive manufacturing to a level where it's industrialized and much -- offer much better cost and productivity than any other technology that you'll see out there in the field, specifically displacing subtractive manufacturing. And this is where I want to focus on that as a key enabler for us as a company, as SLM but also as an industry as a whole.

And none of it will work without product maturation. We're selling our products to aerospace applications, medical, automotive. And products have to be mature enough that -- with a level of reliability that we already have started seeing this. Our products right now are running above 90% availability, which is something I'm very proud of. And I'm very, very happy about that. So we started seeing some -- a lot of traction in this direction. And we have established key initiatives here in the last 1.5 months or so to drive this industrialization and to drive this product to be mature enough to be able to scale beyond what we see today. And I think that's very, very good, positive for us.

Really, in summary, I just want to share with you some of my thoughts here before we dive into Q&A. The markets -- we are operating in a market that, I believe, is strong and dynamic and has potential growth portfolio that could continue on that trajectory. We are the technology leader, and we'll commend this proportional share of the upside as we enable industrialization in the market.

So the 2019 and 2020, it's a transition year for SLM, where we will have -- at times, take some tough decisions in order to be best positioned for long term. This is -- for us, it's not looking at a short-term cycle here. This is -- for us, it's a marathon. And we're going to be focused on growth and to be the leader in the industry. And in near term, we will be laser-focused on really reinvigorating our top line growth, like I said, driving market share gains in all segments.

We're not going to select one segment versus the other. We're going to develop all of the industrial segments. We have already started that. And we are growing in some areas that we haven't been there before, and we are strengthening our areas that we're really good at. And that's really where we want to take the company and the journey of additive in the near future and the long term.

With that, I want to thank you for your attention. And I think it's the right time probably right now to open it for some Q&A. I'll be more than happy to take some questions and have a constructive dialogue.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question we received is from Adrian Pehl of Commerzbank AG.

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Adrian Pehl, Commerzbank AG, Research Division - Head of TMT and Consumer [2]

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Yes. Actually, a couple of questions. I probably would suggest to do them rather one by one because there might be some follow-ups linked to your answers. Maybe just starting with a little bit of a housekeeping approach here. I was just wondering whether you could provide the split by machine type in the revenues and also, if possible, in the order intake because you were rightly referring to ASPs, obviously, both in order intake but also in revenue. And I was just wondering where that actually precisely came from.

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Meddah Hadjar, SLM Solutions Group AG - CEO & Member of Executive Board [3]

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Yes, Adrian. For the second quarter, our order intake was primarily -- there's 1 800 machine that's in there. And we have 13 machines on the 280 and the 500 machine -- the rest was on the 500 machines. So the mix for us was -- between the 500 and 800 was, if you look at the mix from $1, the 800 and 500 were the main driver for that.

Now if you look at the revenue, the revenue were mainly driven by the 280 line units and they were -- the smaller units, which is 125 or the 3 units, which is not -- don't have a lot of high calories on them.

So on the second quarter, just to give you the exact number, I think the 500, there were 8 units on the orders and 1 on the revenue. And I think -- this is for the half year, by the way.

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Adrian Pehl, Commerzbank AG, Research Division - Head of TMT and Consumer [4]

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Yes, right, exactly. And just to be very frank on that order intake pattern that you observed, fortunately, in Q2, which was a nice swing. And obviously, you're referring to actually the business has far improved over Q2 towards the end. But just to be clear, as Q1 was obviously very low, were there some kind of spillover effects from Q1 and Q2 so that simply, this is more kind of phasing and we should rather look at the H1 figure, if you want so, as a better picture overall? Or let's say, is the situation improving further in the sense of that also July connected basically to the monthly trend that you were highlighting in the presentation?

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Meddah Hadjar, SLM Solutions Group AG - CEO & Member of Executive Board [5]

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Yes. Adrian, just to be clear, I was very specific to say this is not a trend. This is a single data point. I don't want to make it as a trend, and I want to avoid extrapolating or speculating on that. I want to be very clear that this is -- the quarter was very good, but it doesn't mean that's how it's going to trend. So we still have work to do. And we still -- if you look at all of the actions that we have to take, and some of it is going to take some time to mature and will result in fruitful outcome, but that's going to take some time. So we expect to continue operationally improve the business to get better. And that's really what we're trying to aim at.

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Adrian Pehl, Commerzbank AG, Research Division - Head of TMT and Consumer [6]

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Right. And then a question on China. Obviously, let's say, from this perspective, I think it's fully understandable that you made some corrections here significantly on the order backlog side of things. But how should we think of it going forward? In the press release, you stated that there is still -- obviously, the customers are still your customers and there should be some discussions around that. I was wondering how strong the relationship is actually in that sense given also that you repurchased obviously a couple of tools. Have you been selling some tools under this framework agreement nevertheless recently? So are they still alive, if you want to and you just now booked the, let's say, respective portions that you sell into order intake? Or how should we think of that?

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Meddah Hadjar, SLM Solutions Group AG - CEO & Member of Executive Board [7]

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Yes. So the frame agreements are very clear for us. Basically, the frame agreements would not exist anymore. Basically, we have renegotiated where we cancel these frame agreements. And we go directly to the market and directly to our customers instead of going through the agents that we currently -- previously had. And this really will help us and position us much better than the frame agreements have historically been. Obviously, the frame agreements have not resulted in the results that we were all expecting and have hindered us from reaching the market and reaching our customers directly. And that prevented us from executing better or competitively in the market.

What we have done now is, in many of these contracts, and directly, we go directly and have a better conversation and communication with direct customers. And this is better for us from the visibility and also from understanding the market better and understanding our customer better. And this is a really, really significant improvement from us getting closer to the customer.

How this is going to translate, obviously, the frame agreements, currently, we mentioned the 6 machine that we purchased. These 6 machines, obviously, were in the -- what used to be called the call-offs, which is recognized as revenue but have been with us, will not shift. And we decided to take those back, and we put them on our books and resell these to other customers.

The order intake that was resulted from the frame agreement, we basically have corrected that and have made the proper correction. And now we should be in a better position with clear transparency. And you will get a clear view of how the business is performing going forward.

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Adrian Pehl, Commerzbank AG, Research Division - Head of TMT and Consumer [8]

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Okay. And have you already been successful with these customers that you had before under the framework agreements that you're now addressing directly to sell some machines in the quarter to them or book some in order intake?

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Meddah Hadjar, SLM Solutions Group AG - CEO & Member of Executive Board [9]

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The conversation with the customer is much better today than it was 1 quarter or 2 quarters ago. So it's a lot better for us going forward.

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Adrian Pehl, Commerzbank AG, Research Division - Head of TMT and Consumer [10]

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Okay. But I take this as orders are yet to come, obviously, under the negotiations?

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Meddah Hadjar, SLM Solutions Group AG - CEO & Member of Executive Board [11]

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Yes.

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Adrian Pehl, Commerzbank AG, Research Division - Head of TMT and Consumer [12]

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Okay. And then I've got a question actually on the progress you made on the receivable side of things. Obviously, that was managed quite well in the quarter. I have 2 questions probably relating to that. Has that also to do obviously with the changes that you made in China? And I was wondering if that is a level you feel comfortable with. And then I have a question probably linked to the same topic, if you want. So as it is geared towards networking capital on the inventory side of things. I saw that you obviously did some write-downs and corrections, which is probably natural if linked to these Chinese topic. But overall, the inventory level seems still pretty high here, and I was just asking myself whether we should account for risk that we'll see more write-downs on the inventories going forward.

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Meddah Hadjar, SLM Solutions Group AG - CEO & Member of Executive Board [13]

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Yes. So I think a few questions here. On the first one, I think this is related to the receivables. Operationally, we are getting better not just regarding China. So we are really addressing our payment terms and the way we are -- how we -- before we ship the machine, what we have to collect in terms of cash and other things. Like I said on the paperwork, we still have some work to do in that area because it's -- we have to go renegotiate some of these contracts with our suppliers and other things. So some work needs to be have there.

On the inventory in general, besides the 6 machines we got back from the frame agreement, which was probably -- it's in the slide that said $2 million. So if you take that out, we would be probably still flat, relatively speaking. But we are also scaling for the 800 and the next-generation product. So that's -- because we are still investing in the technology, and we're going to continue investing in the technology.

We do have inventory that we're going to address, but I don't expect a significant -- based on the first view that I have done, the -- we're still going to look at it, but I don't expect some significant write-offs. Some of the inventory we're going to try to utilize in our current product offering, and we should be able to drive better operations around inventory. So we still have some work to do, but we should be getting better.

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Adrian Pehl, Commerzbank AG, Research Division - Head of TMT and Consumer [14]

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All right. And then I've got 2 financial questions actually. One is also on CapEx, which I saw was like for tangible, for PP&E, like 6 million in the half year. And I was just wondering what the year-end will probably look like. If you could give us your sort of guidance. Given that obviously, the factory ramp-up has been concluded, that looks still somewhat high to me at the first glance, but maybe there's some explanations that you might want to add here. And secondly, I saw that actually the deferred tax assets were now completely written off to 0. Obviously, I sense that'll probably be the tax loss carryforwards still existing. That obviously means that it is hard to project for the time being that those can be used. But maybe you want to comment on that as well.

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Meddah Hadjar, SLM Solutions Group AG - CEO & Member of Executive Board [15]

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Okay. On the first one, we have, as I mentioned, our next-generation product that we'll continue investing in that. And we expect to ramp up, and we try to accelerate that program to go into the market. We're still in the early stage of assessing the details on how many better machines we're going to have and how many appreciators we're going to have. So there's still quite a bit of development that we have to do. And we -- that's roughly probably around 2 million, I would expect, out of that program. But we're still evaluating that. So still a work-in-progress.

I think on the other question in terms of deferred taxes, I think we have done the 6 million, I believe, write-off, that's really, I think, to strengthen our balance sheet. I think that's the right thing to do. And that should be it. Don't expect anything different in the near term here. And we're going to -- again, we're going to run this business better and clean and transparent.

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Operator [16]

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(Operator Instructions) If there are no further questions, I hand back to Mr. Hadjar.

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Meddah Hadjar, SLM Solutions Group AG - CEO & Member of Executive Board [17]

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Yes. Again, I think we'll have a -- probably some follow-up with you, and we've talked about the November time line. You're going to get a lot more details. And I want to thank you really for your time and for your patience. And I can't stress enough that this company will be well positioned going forward, and we're going to be leading this industry.

So thank you for your time, and I will give 15 minutes back to you. And have a great day, everyone.

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Operator [18]

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Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.