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Edited Transcript of AM3D.DE earnings conference call or presentation 7-Nov-19 10:59am GMT

Q3 2019 SLM Solutions Group AG Earnings Presentation

Luebeck Nov 27, 2019 (Thomson StreetEvents) -- Edited Transcript of SLM Solutions Group AG earnings conference call or presentation Thursday, November 7, 2019 at 10:59:00am 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

* Uwe Schupp

Deutsche Bank AG, Research Division - Small and Mid-Cap Analyst

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Presentation

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Meddah Hadjar, SLM Solutions Group AG - CEO & Member of Executive Board [1]

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Hello, everyone. Meddah here, and welcome to our Q3 calls. First of all, it was a great day for us today to announce our new CFO, Frank Hülsmann, that will start in January 1, in addition to the other leaders that we have added to the organization in the last 30 days or so. So very, very pleased to have additional leaders coming into the organization. I'm very happy about that.

Let's look at what we did well and what we are still working on since last time we talked. Given where we started -- or when I started May 1, I feel better on where we are and where we're heading. We have made great progress in the last 6 months. We are transforming the organization to be world-class. The talent we have hired have the right skills and the disciplines to take us around to the next level.

We will continue to invest in our talent in the foreseeable future. We have made also great progress in our next-generation products, and we have reached a key milestone. The program currently is running on the first (inaudible). Basically, it's very, very impressive results so far we have seen. We have demonstrated the concept and we are in our -- on our way to launch as a product.

We will show builds from these products in our formnext. And hopefully, you'll get a chance to see it. We are also continuing our evolution plans to industrialize existing products and also the staff that we have hired will help us accelerate as well the industrialization of our machines. This is a journey for us and we are at the forefront of it. We have a long way to go, but we are prepared for the challenges ahead.

As I shared with you earlier, the metal additive market is in the transition and consolidation phase, which has manifested itself in the soft macroeconomics that we see today and also in 2019. And that's really the background behind the macroeconomics that we see today.

Let's look at the order intake, we continue to make progress and reverse the trend that was observed earlier in the year. Just to remind you that in Q1, this year, we were down by 60% in orders and 50% in revenue. And -- but in Q3, we have made a lot of progress and we're about at the same level as last year.

It took a lot of efforts to get here. And very, very proud of the team. And the people that we have in the organization to be able to step up to this challenge. Our discussion with existing and returning customers is that SLM technology with the multi-laser platform is important to their adoption road map because of the machine, print speed and superior finished quality.

And the changes also we did in North America leadership and the Chinese go-to-market strategy has driven some of these key discussions, and we should expect a positive momentum forward and positive growth forward. Given the nature of the size of the capital investments in these products, it takes between 7 to 8 months to build a strong solid pipeline and strong leads. We are working diligently to accelerate any opportunities we see or for that matter, pull any orders forward, but not always, obviously, easy due to customer time line and budget constraints.

Our products command a premium price in the market due to the technology differentiation. We expect to see more pressure on the pricing going forward. We have already taken actions to reduce price and stabilize margins via cost out. This is in the range probably somewhere between 10% to 20% that we expect.

And one of the key things that we focus on in the second half is a large platform, given the current market dynamics, specifically on the SLM 800. And we have the first 2 machines going to the U.S. We sold the first 2 machines in Q3 to an aerospace application in the U.S. This is important to our product strategy and also our product commercialization.

We hired the [GFR] product management with expertise in this area, which also will help us improve our position. But again, we still have more work to do in the area -- in this area, specifically, including commercial staffing and go-to-market initiatives.

On revenue, positive trend and recovering well in Q3 with lower machine backlog than last year at the same period. In Q3, we ended up with 24 machines, about EUR 80 million backlog that could have been converted in the quarter. But due to customer delivery time line and our stringent quality requirements before shipment have also drove these machines not to be shipped for the quarter.

On the margins, you can see on EBITDA, we have made some significant progress there. And really, we did it by operational excellence. We take cost out and utilize inventory. Our investment in NextGen and hire the talent and also we expect some events in Q4 that could drive some of the costs in short-term and could drive this -- could drive this increase in the foreseeable future.

So -- but however, we'll continue to drive cost out and run the business lean. We're talking on -- let's move on to working capital. We built toward and utilizing inventory. We expect the working capital to continue in the right direction. I think the initiatives that we have implemented have started showing favorable results. And where we ended up with the quarter with $28 million. So we see good activities in this area.

On the near-term initiatives, building the foundation for growth by having customer trust in our products and in our people. The upgrade of the leadership is essential to our confidence and credibility in the market. It serves both on the SLM branding and also in operational excellence, how we execute.

Not only by industrialize the current products, but also put strong processes and systems in place to deliver our commitments. This is important for our Q2, Q3, Q4 and even Q1 going forward. We continue to improve our processes and strengthen our operational excellence.

Great progress in some of the priorities, like I talked about, like the NextGen deliverables, which we will show in the formnext. And just to be clear on this, we're not showing the machine in formnext, only the builds that we did on the machines.

And on the last page, and I highlighted this earlier, and I think I shared this with you earlier. I believe in the technology and the way this technology is reshaping the design and manufacturing of future products. The earlier hype in the previous years might have resulted in a market stabilization we see this year. However, I expect the growth to continue once the customer adopts new ways and as suppliers provide industrialized and productive machines.

We have said earlier that 2019, 2020 will continue to be transition years for SLM, specifically for us, but we are building the company for sustainability and long-term growth. And we really see this environment is favorable to us in terms of getting the company where we need it to be.

And with that, I think I will open it to Q&A, and hopefully, to see some of you at formnext or at the Investor Day event in a couple of weeks.

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Questions and Answers

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Operator [1]

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The first question is from Adrian Pehl, Commerzbank.

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

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Yes. Meddah, actually, a couple of questions. First of all, on the new hires, again, that you made in the U.S. I was just wondering whether you did already some layoffs on the other side, maybe in Germany also to streamline the organization, is there kind of a cost-cutting program going on, at least since the personnel expenses did not really grow further?

And secondly, on the working capital development. Obviously, you did already quite a good job on the receivables side of things in Q2. Now with Q3 and having sold off obviously some finished goods, I would expect that the inventory level would have come down even further, as it actually did. Maybe you could give some clarity here on that position?

And just to clarify, on the Chinese framework agreements that you had or still have, but obviously, you adjusted for that in the order backlog. Nevertheless, I wanted to ask whether you did sell any tools to these customers in the third quarter actually. And if so, maybe you could give us an idea of what kind of tools that were and how many of those? And then I might have some follow-ups.

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

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Adrian, on the hiring in the U.S., first, let me start by -- since I started in the last 6 months, I started looking at the staff, at the leadership level and we assessed where the areas that are needing improvements and the areas that need adjustments. So we took some actions back in July and August. And we have changed -- resulted in some dismissals of some of the staff that were not publicly announced, but we have also highlighted last call that we had removed the head of sales in North American and the head of P&L as well. So some other areas, we took some of the performance -- nonperformers out. And we have added additional staff in the U.S. both the GM and the head of sales of Americas. So that's the balance that -- that's the time line. So it took probably 3 months by the time we replaced the staff that we let go.

On the working capital, again, I think we have pretty much made very, very stringent requirements to move inventory -- use inventory from the current, really, primarily using inventory or specifically if there's a special requirements from customers who might proceed with purchasing new equipment. That remains in place and it remains today. And we see also -- we've seen improvements in inventory from 30 to 35. And obviously, we still have, on the receivables, we have implemented a favorable term contracts for us on both -- on the payables and receivables that we should see more going forward positive output out of that.

Just the delay in terms of seeing this hasn't worked its way through yet, but we expect to see positive results on the working capital going forward. I think on the Chinese frame agreements. So we have a really -- if you look at what we have done since last time. So we canceled the frame agreements we -- and because we didn't believe those are going to be producing any products that -- or purchase orders that we will depend on for our revenues or backlog orders and we start going directly to the customer.

So by going directly to the customer, we have created a stronger pipeline for our future orders and we also start having a relationship with the customer directly to understand better their future pipelines.

Doing so, I think last quarter, we have delivered higher orders out of China than we did with frame contracts. And overall, in Asia Pacific, if you look at this year, we have delivered roughly 4.4 million this year and versus 2.2 million last year. I think let me double check on an order intake. So -- and so yes, so this quarter, in '19 was much better than last year. So without frame agreements, we seem to be making progress. And there were only 2 SLM 280 that were delivered to previously frame contract customer in the last quarter.

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

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All right. Okay. And on the first topic again on the layoffs. So I would assume that has not been kind of a big program, but rather picking some people here on a case-by-case basis, as far as I understood, is that correct?

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

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That's correct because one of the things that we want to do is we see the potential for us to grow, and we want to make sure that we don't go with a restructuring program or anything like that because there's opportunity for us to grow, and there's an opportunity for us to build capacity and also be able to service our customers better. So we'll only do it as needed.

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

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All right. Understood. And sorry to bother you again on working capital. So should I nevertheless, assume that there has been some kind of shift of the compensation in inventory, i.e., less number of finished goods, if you want sort of finished tools. But did you buy -- if you want sort of new components, as you expect a better demand level for Q4? Or am I wrong here?

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

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Yes. We purchased some new equipment for the new products that we're doing like the 500 1.3 and the upgraded machines on the SLM 280 production series. So the new products that we are launching, which are to address the reliability and industrialization. So there is a different version of the current product. So we have existing products and existing inventory finished and unfinished. We keep eating through that and that's what we're going to continue to do and same thing for Q4.

In addition, we have some customers that want a more product that has more reliability and has additional powder features and safety features that includes permanent filters and the upgraded sieving stations. So those products we have acquired additional products in Q3 to serve our customers.

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

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All right. And then -- yes? Sorry.

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

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And that's just only to -- it's per order. So we only do it as we see the order coming in from the customer.

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

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All right. Okay. On the formnext fair, as you rightly said, you're showcasing the build parts from your new tool rather than new tool itself, which was clear to me. On the other hand, I was wondering when you go there in a couple of days. Actually, will there be, let's say, new features on the 500s and 280s that you're going to present? Anything new which you want to share?

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

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Yes. We will present our latest 500, which is our latest multi 4 laser product that has significant improvements versus the previous model.

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

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But rather on processes or anything else in terms of, let's say, build speed, in particular?

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

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Yes, you'll see both. You'll see build speed related to processes, but also you see hardware changes and features with the 500.

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

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All right. And 2 final questions actually. I mean, just assuming that you would get some orders around formnext or, let's say, significant amount of orders. Do you think you are capable of shipping them still in 2019? Or would you rather, on the other hand, I mean, you could rather prefer as 2019 as pretty much a transition year anyway. To move that into 2020, but just to get your thoughts around that, if that happens, finally. And then last question -- yes, sorry.

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

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My intention is if it's -- from a current inventory, we will try to ship it this year. It depends on the lead time. So there's no reason for me to hold on to it. So if it's the new product the upgraded product like what we're going to show at formnext, there could be shipment early next year.

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Adrian Pehl, Commerzbank AG, Research Division - Head of TMT and Consumer [16]

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And just you referred to changed go-to-market approach. And obviously, since Dr. Schulz left the organization quite some months ago. I was wondering whether it has actually been the source of your success, i.e., the change in the go-to-market approach in Q3 for the sequential improvement. And having said this, would you expect this to bear even more fruit in Q4? Should we expect kind of an acceleration? And if you want to share that information with us, at least qualitatively, could you give us a sense on how October has been so far? For you guys?

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

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Yes. Yes, Adrian, we, obviously, on the commercial side, we're still looking to hire a head of sales, and that's still ongoing. And we are currently vetting -- we have, obviously, interviewed quite a few people, and we're still looking. It's a selective process that we need to spend a lot of time on. We still have a lot of work to do in this area in terms of creating a broader marketing image and branding that's still ongoing, still in the works. In terms of the type of discussion we are having with the customer is a different level of discussion. It's a much more mature, much more deep in terms of understanding and not a transaction, but in terms of joint partnerships and understanding future pipelines of the customer. And the discussion of the quality of the pipe lead or the pipeline. And that type of lead that we are seeing is healthier in terms of the quality and much more reliable.

In terms of -- we -- obviously, we are doing our best to accelerate all of these. How much of it will bear fruit will -- to be seen. But we really want to focus on building a quality pipeline and quality partnerships and not to do anything that we regret later on.

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Operator [18]

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The next question is from Uwe Schupp, Deutsche Bank.

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Uwe Schupp, Deutsche Bank AG, Research Division - Small and Mid-Cap Analyst [19]

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Yes. Three or maybe 4 left for me. Firstly, just on the general mood in the market. Obviously, we saw the slowdown over the last couple of quarters or even years maybe by now. How should we think about the market sentiment right now and ahead of formnext. Obviously, we will be much smarter probably in 3 weeks' time from now, but let's say from your current feeling, should we expect an order improvement for you guys in coming quarters even without the new tool that will be hitting the market sometime next year. In other words, what is -- yes, the general customer mood, if you will, would be the first question.

Secondly, back to the Chinese orders, just so that I get it totally correct, we should really forget about them. They are basically gone? Or do you see some residual chance that at least some of them may be recovered and customers may be coming back after, I don't know, maybe they understand the product even better or whatever? And then lastly, on the financials for the year. Obviously, we understand you haven't given an updated guidance, but just from a mathematical perspective and really kind of coming back to Adrian's earlier question. Should we assume all the backlog is for shipment? So the backlog that you have at the end of September is for shipment this year? And then kind of what amount of orders do you expect to come really at formnext and what amount do you realistically expect to be shipping? Obviously, the question stems from the fact that in the past, you last, obviously, before your time, but it was quite a heavy lifting that you had to do, that the former management had to do in getting all these tool orders out back then. And more often than not it, it wasn't really successful.

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Meddah Hadjar, SLM Solutions Group AG - CEO & Member of Executive Board [20]

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Hopefully, I'll try to answer them and if I miss something, just remind me. The market that we currently see, as I have alluded to earlier, is that it's softer than anyone expected. And given our position, it's a really good position for us because it gives us time to set the organization and build what we need to build. The foundations to be ready for the next wave of growth. Overall, I think my recent experiences or discussions with the customer in the last few months alone have been very, very positive. So we have some good discussion, good traction, a significant number of customer visits in terms of building that relationship and building that trust and building their confidence back in SLM. I feel good about it. And I feel very positive about it. And that's really good for us overall. Does it mean short term, we'll see how that plays out. It depends in terms, like I said, one of them is the customer willingness to go forward and another is their capital intense investments that if they are ready for it or not, that depends on that time line. So if it meets within certain budget within certain dollars with certain time frame, then it's good. If not, it gets pushed out. So that's -- but the discussion is good. On the Chinese frame agreements really to me, it's irrelevant anymore. It's really -- I don't really see it as something that will -- it's a discussion we have with the customer. We will always have a discussion with the customer. The customer is at the center of our company and it will always focus on the customer and we continue to talk with them. It doesn't mean we're not talking to them, we'll talk to them. And when -- if and when the opportunity will materialize, we'll process it as a separate PO as a separate order. And will be a normal PO processing or normal order processing. And whether we -- the frame agreement contracts from Chinese, they were done. Majority were with resellers. So it's very difficult for me to sell reseller A and B is going to acquire those machines, as we stated in the previous year's contract because now I have direct contact to the customer. So I know that ahead of time probably anyway. So the dynamics change for us, and the strategy has changed. And now we are going directly to the customers. We work with the resellers, as usual, but they are partners more than a customer at this stage.

On the financials, I think we -- on the backlog, we should be able to ship at least a majority of it, unless something happened in terms of manufacturing issues, but we plan on shipping it. There's no doubt about that. And we're going to try to ship as many orders that we get. As I said to Adrian earlier, if the order comes in from current existing inventory, would love to ship it. So it depends what comes in from current inventory, what comes in from new machines that the customer would be asking for.

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Uwe Schupp, Deutsche Bank AG, Research Division - Small and Mid-Cap Analyst [21]

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Right. And then just one follow-up on the 2 SLM 800 that you shipped or received an order -- actually have forgotten that. I hope you can maybe help me in the quarter. Is there any more coming? Because I understand the ASP is obviously much, much higher on that. And also the end market for those 2 would be interesting to know.

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Meddah Hadjar, SLM Solutions Group AG - CEO & Member of Executive Board [22]

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Yes. So the 2 SLM 800 were ordered in Q3, and it will be shipped in Q4. That's the plan. We do see additional discussions with some other customers on this product. And without going -- giving you explicit details, there is ongoing discussion with customers, both in Europe and in the U.S. on this.

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Uwe Schupp, Deutsche Bank AG, Research Division - Small and Mid-Cap Analyst [23]

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Can you give us an indication on the end markets? Energy or automotive or whatever?

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Meddah Hadjar, SLM Solutions Group AG - CEO & Member of Executive Board [24]

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So the automotive and aerospace.

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Uwe Schupp, Deutsche Bank AG, Research Division - Small and Mid-Cap Analyst [25]

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And do you have other SLM 800 on inventory?

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Meddah Hadjar, SLM Solutions Group AG - CEO & Member of Executive Board [26]

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Currently, we do have finished 2 finished goods, 2 finished SLM 800 in inventory. And these ongoing discussions will help quite a bit with our inventory as -- I know the discussion we had last quarter. There were some concerns around writing off these machines. We seem to be doing a good traction here in terms of moving these forward. So keep knocking on wood, we continue our progress forward, then we should be in the right direction here.

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Uwe Schupp, Deutsche Bank AG, Research Division - Small and Mid-Cap Analyst [27]

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Well, that certainly sounds encouraging. Can you remind us, lastly, on the ASP of the SLM 800.

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Meddah Hadjar, SLM Solutions Group AG - CEO & Member of Executive Board [28]

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So the 800 it depends. There's quite a bit of accessories with it. I think the machine price is in the range 2 million, 2.5 million. It depends on what you get with it. So because it's -- the accessories are quite intense because of the size of the machine. And if you just take the machine by itself without the accessories you're looking at somewhere around 1.5 million in that range. By the way, just over the last -- I know I didn't talk about when we're expecting. But at this point, we're not doing any forecast. So we'll skip that question.

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Operator [29]

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As there are no further questions, I would like to hand back to you, Meddah.

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Meddah Hadjar, SLM Solutions Group AG - CEO & Member of Executive Board [30]

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Okay. Thanks, everyone. Really, it's been a great 6 months so far and a whole lot of work, of course. But really, I feel great about the next staff that's come in here to help me and help the business, reshape very great stuff to come. And look, hopefully, I'll see you guys at formnext or either at the formnext itself or the event. And until then, have a great day, enjoy your evening. Cheers.