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Edited Transcript of AM3D.DE earnings conference call or presentation 28-Mar-19 3:00pm GMT

Luebeck Apr 2, 2020 (Thomson StreetEvents) — Edited Transcript of SLM Solutions Group AG earnings conference call or presentation Thursday, March 28, 2019 at 3:00:00pm GMT

Dear ladies and gentlemen, welcome to the conference call of SLM Solutions Group AG regarding the presentation of the full year results 2018 with Uwe Bögershausen; Dr. Axel Schulz; and Dennis Schaefer. At our customer’s request, this conference will be recorded. (Operator Instructions)

May I now hand you over to Uwe Bögershausen, CFO, who will lead you through this conference. Please go ahead.

Yes. Thank you very much for the introduction. Thank you very much to all of you for participating in our annual earnings call.

As always, I would like to give you a bright overview — very short overview of what happened in the fiscal year 2018. As all of you know, we’ve seen a decrease in revenue by 13% to slightly more than EUR 70 million. So the operating — the total operating revenue increased slightly, so we produced many machines on stock instead of selling it at the year-end. This is what happened in 2018. There are several reasons for that, but we are on a good way to overcome that. I’ll come to that later on.

The new order intake in value terms increased by around 3.8%, yes? So we’re on a very good way to show further growth, we come to that later on when Axel explains, how the leads are developed. But due to that slow revenues in 2018, the adjusted EBITDA is significantly down as well. We are now at minus EUR 7 million. That’s a disappointing result to make that very clear, but we are in the middle of changing the company towards a much better situation.

The first step was mentioned yesterday in a press release. We hired a new CEO, Mr. Meddah Hadjar. We appointed — he is appointed and will join the company from 1st of May onwards. He is well experienced in the field of additive manufacturing. He is coming from GE, yes, and as you know, this used to be our largest customer in the past and a good partner. He was active for oil and gas, power and water and aviation departments. So effectively, he was working for all the departments we sold machines to in the past. So I think, that’s a very strong signal that Meddah is now joining us and puts a lot of confidence in our technology and in the — in our approach.

Our guidance for 2019 shows growth again. We plan to end up with EUR 95 million in revenues, and we are cautious in planning the operational result. We expect a break-even EBITDA.

Share price has developed negatively over the last 12 months. You see that we were hit by many difficulties in our daily business due to the changes that we already implemented and due to that new hire, I expect the situation to improve over the next few months, yes? But this is the situation how it looked like over the last 12 months.

I’m a shareholder as well, so I’m suffering from that development as well, but I’m still a shareholder so I’m convinced and this should underscore my opinion. I’m convinced that the company is undervalued on that level, yes, and that’s why I remain a shareholder in this company.

Shareholder structure is more or less unchanged as well. And Hans Ihde and Elliott are still the main shareholders of the company. Beside of that, we’ve got some institutional investors and DPE, the former private equity partner of the company.

So I’m now handing over to Dr. Schulz and he will explain how the lead — the number of leads has developed and why that’s a strong signal for our future developments.

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Axel Schulz, [3]

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Okay. Thank you very much. Yes, as you can see, from the chart, the lead volume is increased by 70% from last year to this year. This leads progress is very important for us because it shows in average, the development of revenue and order intake for the next 12 months. And the increase of this lead value is a result of implementation of a structured sales prospect management system. And as you can see, from Q1 ’19, the leads increased, this is due to the investment bottleneck from our customer because we have done an accumulation of future projects to be decided in the next couple of months.

What we have seen from last year, the time period from first expiry from the customer to order is now a little bit longer than before. In the past, it was about 3 to 6 months, now it’s about 6 to 9 months. It’s because, we have changed a little bit the target group of our customers from early adopter customer group into a business case customer, but we see this kind of customer as a very high potential group to create for the future multi-machine business.

I’ll now go through the financial highlights. You have to see Page #8. You can see that we have received orders for 92 machines in 2018, it’s a little bit below 2017. Therefore, we have at about 59% of this revenue are multi-laser machines. This is a little bit increase. We are now searching customers for this kind of multi-machine projects. And also we — what you cannot see now here on this chart is that we’ve already started, in 2018, some qualification projects with key customer in order to develop more multi-machine and frame-contract customers for 2019.

Next page. You can see our product mix. We have big 3 types of machines, this is the 280, the 125, the 500. Our workhorse as the year before is the 280 and this drives the bread and butter business. In 2018, we have a — known to you, what was our new SLM 800. It is because of the delay of the call-offs of the frame contracts where the customer with the highest demand for SLM 800, but from now we have activated these call-offs and this will start in the beginning of this year to launch this SLM 800 business for 2019.

After Sales business. It’s about 78.5% of the 2018 revenues were generated by Machine Sales. So 21% were driven by After Sales business. This is an average value in this kind of business. We are trying hard to push up this After Sales business. We’re seeing more, further growth potential. For example in 2018, we expanded the portfolio for further non-machine products, for example ramp up services, consultants for part designs and consulting for process development and the customer to go more in detail into the business case process for the customer.

Now I will hand over to Uwe to explain the EBITDA margin.

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Uwe Bögershausen, [4]

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Yes, thank you very much. So just a quick glance at the EBITDA margin development. And you see that it’s significantly below 2017. Reason for that is very simple, you see that in this slide. In 2017, we have seen a huge impact of Q4 when we sold off inventories that we’ve built up through the year and then sold it to customers in the fourth quarter. In the fourth quarter 2018, we followed a different strategy. Our idea was to sell off the inventory as well, but we got under severe pressure of certain customers who were asking for significant concessions on terms and conditions and discounts. And therefore, we decided not to follow that route anymore and to implement a new strategy from January 2019 onwards. And this is — we call that built-to-order strategy or in other words, we are now — from now on we are chasing cash instead of chasing revenues.

I come to that on the next page as well. Working capital is at an incredible high-level — incredibly high level of more than 80% now, this can’t last any longer. And therefore, we started to implement this build-to-order strategy. This means that we just start to build and we just start to buy actually an order, actually, the raw materials for machine and build the machine after the order is signed and the PO is booked. So this is completely different to the strategy that we followed in 2017. Main reason for that is the increase of working capital and the increase of the inventories. Now from now on, just to mention that again, we concentrate on cash generation and we are chasing cash instead of chasing accountable revenues.

So that’s a huge — that this will have a huge impact on our cash position and operating cash flow development in 2019 and will turn the operating cash flow into the positives again. Just to remind you, we already tried — we already implemented that build-to-order strategy in the first quarter 2017, and at that time, the operating cash flow turned immediately into the positive numbers. So this is something that we want to do in 2019 as well.

So I handing over to Axel again, in order to shed some light on our customer base.

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Axel Schulz, [5]

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Okay. Thank you very much. As you can see 3 charts, the chart #1 is, the number of customer has already increased by 44% the last 2 years. It’s very good for us because we need a basic customer base in order to create also After Sales business and be able to create also — repeat business by using the approach with the multi-machine business. And we have now 82 customers with more than 1 machine, that is our — it is our target to create customer with multi-machine business. So we have doubled the number of customers in the last 2 years.

Chart #2 is — chart #3 is the number of service contracts. We would like to expand our multi-machine business by using service contracts because this is a repeatable business. And we expect also a significant growth in 2019 with service contracts and, I think, we will succeed in this business.

The next page, business split. That is more or less very similar to the business split of 2017. The core regions are still EMEA and APAC. And for this year, we expect more growth coming from America’s this year. The repeat sales and multi-laser sales are the same as in 2017. So nothing — no big surprise for this. And sales by machine type is, as I mentioned before, is 280 followed by the 125. And for the future we expect further growth with our SLM 500. You can see this in our lead prospect that there’s an increase of expiries for this type of machine. Multi-machine sales, we still have 78% sales in single machines, this coming from the historical market approach and we are now trying to expand the multi-machine sales every year. For this year, we see also a significant growth for multi-machine sales.

Coming to strategic outlook. Uwe?

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Uwe Bögershausen, [6]

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Yes, the strategy is under review. As we already said, we are working on this chasing cash strategy. And of course, we will review the strategy, again as soon as Meddah is on board and as soon as we have a chance to discuss certain things and certain aspects of that strategy with him, but the direction is clear now. We want to expand the sales and After Sales capabilities, we need advisory teams focusing on the support of customers in order to ramp up serial production, yes. And of course, we want to refine the machines and I can assure you Meddah is the right guy to support us in these efforts. Yes, he has the necessary experience, the necessary experience not just with the machines, but also with the adoption of the machines in oil and gas, in power and water and in aviation. So that’s definitely the right guy to review our strategy and to find the right measures to get us back on growth track. So that’s why we are so keen to have him on board and to restart the business together with him.

So that’s what we’re working on. And this will lead us to the EUR 95 million in revenue that I mentioned right at the beginning. Of course, yes, as always, our business is still highly depending on Q4, so we’re going to change that, we will try to change that. But for 2019, that’s still true. And we are expecting a break-even adjusted EBITDA, yes, that’s something we are taking as a guideline in order to have achievable results and achievable targets and objectives for 2019. We are pursuing multiple leads on new customers and multi-machine orders to capture the momentum. There are good names, among them, and I think we now took the right measures with the — with that new CEO — we take the right measures to capture those customers and to sign longer term frame contracts with them.

The long-term vision of EUR 500 million with a positive EBITDA margin is confirmed, but the strategy is under review. We don’t mention the year anymore. We will refine that and review that together with Meddah in order to come up with a new mid-term plan and the new long-term vision for the company. We are focusing, as I already said, on long-term frame contracts and collaboration agreements, yes, that’s something we did in the past as well, but I think, we are now in a much better set up with a new Executive Board to be successful in that. And of course, the product mix will include more production-oriented machines and more multi-laser tools.

So that’s our outlook for 2019. Thank you very much for your attention. As always, we are now open to answer your questions. Thank you very much so far.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We received the first question. It comes from Adrian Pehl from Commerzbank.

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Unidentified Analyst, [2]

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So actually it’s [Sirion] speaking on behalf of Adrian. So the question will be on your revenue guidance for EUR 95 million top line. The question is how much is — how much of revenues from this Chinese frame contract effect is in here, and do you apply 100% probability to it? Then you mentioned this damage to SLM 800 tool, can you give us an update here how the client is developing or is he kind of back and also backed into the outlook here? And then as a last one, can you give us some update on the pricing environment. I believe the average pricing is down but probably also due to an unfavorable mix, so what is the current situation here?

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Uwe Bögershausen, [3]

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Okay, thanks for the question. For the China business, for the frame contracts, we have also included the call-offs for the China business for this year, but not in a full value as we did last year. This has a little bit downsize, the expectation for that, but we already — but we still have included this business. For the actual case, the SLM — the damaged SLM 800, we have — we found a solution with our Chinese customer. He already ordered the next machines. So we are back on track again with a delay of about 4 months, which is just accident, but we are now back on track. For the pricing, yes, I know we are a little bit — we have reduced pricing coming mainly from a different mix, from — like from 2017. We are at the — we know that we have — we are a little bit under pressure with price due to the — due to our competition, but we do not feel any big pressures on that.

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Operator [4]

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We’ve received another question. It comes from Thomas Effler of ODDO BHF.

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Thomas Effler, ODDO BHF Corporate & Markets, Research Division – Analyst [5]

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I think I’ve got a question regarding your sourcing strategy. You mentioned that you want to change that regarding more cash oriented. Can you explain probably how you’re going to do that? And you said change from your sourcing partners, do we have to pay higher material prices then or we can read that?

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Uwe Bögershausen, [6]

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Yes, thank you for your question. First of all, how does it look like? It looks like we did it in 2013, 2014 and 2015. In that years, we finalized the purchase order before ordering materials for the machines. So we didn’t have too much material on stock. And to a certain extent, we are going back to that strategy again. In 2016 and ’17 and ’18, we started to build machines and stock, yes, before the PO was actually finalized, yes. And this increased working capital significantly. Since we are now turning back to that built-to-order strategy, we are expecting working capital to come down from that source. This doesn’t change prices. Actually we found ways to have commission inventory at our suppliers. So that doesn’t have an impact on our prices. It’s the other way around, material cost ratio is planned to come down slightly, yes, but it’s planned to come down. Does that answer your question?

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Thomas Effler, ODDO BHF Corporate & Markets, Research Division – Analyst [7]

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Yes. A follow-up question regarding your inventories. From the inventories, how much of that is kind of finished machines you haven’t sold last year and the rest is kind of parts? Do you have a feeling…

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Uwe Bögershausen, [8]

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Yes, well it’s a — the majority of our inventory are finished and half-finished machines, yes, and we are planning to sell at least 8 million — machines in the value of EUR 8 million from that stock. As you know, we will always have a situation that half-finished machines, unfinished goods will hit our inventory, yes, but net-net, the effect will be EUR 8 million decrease in finished goods in 2019. This is the sales value of about EUR 15 million to EUR 16 million.

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Thomas Effler, ODDO BHF Corporate & Markets, Research Division – Analyst [9]

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Okay. Do we see — you mentioned that the Q1 also should be still weak. So we see only then part of that EUR 15 million, EUR 16 million in Q1 or how we can?

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Uwe Bögershausen, [10]

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Yes. Such a change — yes, yes, such a change in strategy always results in a slowdown in revenues. We have to convince customers of that new strategies. And of course, we have to change the habits of everyone in the value chain. So this will have an impact in Q1, yes. So we are measuring the success of that new strategy after the first half, the earliest. And of course, again, I just want to mention that we now get Meddah on board. He is also very experienced and highly experienced with additive manufacturing and selling that kind of machines. So this will probably have some impact on our strategy as well, yes. And factoring all that in, I come to the conclusion that we won’t see results in the first quarter already, yes, but this change in strategy is definitely needed given the high level of working capital.

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Thomas Effler, ODDO BHF Corporate & Markets, Research Division – Analyst [11]

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Okay. So we can assume that, kind of, Q1 should be kind of a comparable basis on the same level like last year or even below last year’s level then?

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Uwe Bögershausen, [12]

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Yes, that — we cannot — I ask for your understanding, we cannot come up with the details right now. There’s — there are just a few days to go, yes, but your overall impression is correct, yes. We are not going to change. We will see a lot of changes and we will see that effect after the first half. Yes, it’s kind of transition phase.

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Operator [13]

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At the moment there are no further questions. (Operator Instructions) We’ve received another question. It is from Carlos Becke of Hauck & Aufh?user.

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Carlos Becke, Hauck & Aufhäuser Privatbankiers AG, Research Division – Analyst [14]

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I’ll take them one by one, if that’s fine. So regarding the concessions that you said you had to make to customers in Q4 of last year and that you refuse to do ultimately, I’m wondering about that, that stock, which I guess, is finished or half finished — sorry half-finished machines. How risky is it, that you will have to give these concessions again during this year if the customer wants to pull them down?

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Uwe Bögershausen, [15]

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I don’t see that risk because the customers have a certain need for that machine, yes. And I don’t want to blame certain customers for weak results or so, but I think, it’s clear, if everyone is getting used to getting discounts then we have to stop that development, yes. This ends — this results in a longer discussion, yes, but I don’t see the risk that we will not sell of those machines. And of course, I don’t see the risk that we have to grant these discount anyway. So that’s nothing we are afraid of.

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Carlos Becke, Hauck & Aufhäuser Privatbankiers AG, Research Division – Analyst [16]

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Okay. Okay. And secondly, linked to maybe these — this as you called it chasing cash strategy, you know, how much has the time increased from — for our customer now that orders versus in the past?

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Axel Schulz, [17]

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Yes, I think the time from first inquiry to order has increased by 50%. In the past it was about 3 to 6-months, now it is 6 to 9 months. The reason is and what I mentioned is, in the past, the customer was technology and experience driven and you also use it for prototyping and for testing, there was not as really a business case behind. Now our customer today and for tomorrow are business case driven, and we have to develop the business case together with the customer until he is major enough to place the order and needs more time. It’s a little bit different sales approach from the past. I think it’s — I think, this is a more sustainable approach, we need to have to go into the customers who want to have this machine for industrialization, for small size and for big serial production for the future.

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Carlos Becke, Hauck & Aufhäuser Privatbankiers AG, Research Division – Analyst [18]

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Okay. I appreciate that. But just so that I get it clear, so if I order a machine today, the time has increased by 50% due to this…

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Uwe Bögershausen, [19]

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No, I think you’re referring to the lead time. And the lead time is — and if you want to compare it to the past, then I have to ask, which past you’re talking about, because if we compare it to 2014, ’15 and the first half in ’16 than the lead time hasn’t changed, yes, it’s still 8 to 12 weeks. We changed that in — yes, we changed that in 2017 and ’18, yes and started to build up inventories in order to be highly reactive, yes. So compared to that, we are now talking about 8 to 12 weeks to produce the machine, yes, after getting the purchase order. And of course, in the past, we’ve had a reaction time of a few days, yes depending on the machine type the customer was asking for.

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Carlos Becke, Hauck & Aufhäuser Privatbankiers AG, Research Division – Analyst [20]

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Okay. Okay. Okay, understood. Then if you don’t mind, I also have a question on the leads because looking at the development of them through 2017 for example, all they did was going up yet revenues and order intake in 2018 only knew the opposite direction. So I’m wondering with what kind of confidence can we look at the leads, especially now in Q1 with around EUR 600 million moving forward.

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Axel Schulz, [21]

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Yes, okay the increase of the leads is due to the different approach of sales force. We have a better system to follow up the leads and to develop the leads from contact into inquiries. We know that there is — as I said, kind of bottleneck for making decisions from such customers. But the lead showed that the SLM is — still be asked for this kind of business cases, but we know that the time from inquiry into order is now a little bit longer. So in the beginning of — the leads are growing faster than the decision of our customer is made now. And so we have a little bit delay in decisions of our customers, that’s the reason why leads are growing faster than our order intake now. I hope that we can turn these leads into order intakes in the next couple of months. Most of them.

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Carlos Becke, Hauck & Aufhäuser Privatbankiers AG, Research Division – Analyst [22]

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Yes, understood. I mean that’s what you said at the beginning, right, that the time to materialization is longer. Let’s hope that, that’s so. I don’t know if this is too many questions, but it looked like I was the last, so if I don’t mind, I have one last one.

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Uwe Bögershausen, [23]

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Yes, never mind.

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Axel Schulz, [24]

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Never mind.

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Carlos Becke, Hauck & Aufhäuser Privatbankiers AG, Research Division – Analyst [25]

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That’s great. No, then it would be about the guidance for 2019. EUR 95 million is still represents, yes ample growth of over 30%. So given the order intake is — well, if you don’t exclude the framework agreement down pretty significantly, and also, the sales in Q1, we have already been told to not expect too much. I’m wondering what do you have in the bag to have confidence to guide for these EUR 95 million, is it a major framework agreement for once that you will be able to sign again or?

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Uwe Bögershausen, [26]

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Yes. We know the reasons why some customers are hesitant to get into those frame agreements with us. And — but I also know that with that new hire today, yes, we will — we started to implement ways to convince those customers, yes. Details will be provided in the course of the next few months, yes, when we refine the strategy, yes. But my confidence is one of the reasons why I remain a shareholder in this company, yes. So you can be assured that we will find ways to turn that good development of the lead values into actual order intake, yes. I’m fully aware that we said that in 2018 already and to a certain extent in 2017, yes. So there is a certain jam in turning leads into actual revenues, yes, but we will overcome that situation with the measures we are taking now and yes, that’s all I can say. I can’t disclose too many details, yes, since we’re still working on it, and of course, we want to double check all of that with Meddah now, yes. But I know that to a certain degree we’re on the same page and after that implementation, we will see a much better — we will see that this jam is to a certain extent relaxed.

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Carlos Becke, Hauck & Aufhäuser Privatbankiers AG, Research Division – Analyst [27]

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Okay. And it is about, if I understood correctly, about a certain thing inside of these agreements that has prevented the customers from signing them? Because you got to understand framework agreement has always been such at the core center of the strategy, right…

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Uwe Bögershausen, [28]

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Yes, it still is. It still is because I think and we think that collaborating closely with customers who are willing to industrialize this technology is key, yes, to get back on growth track, yes. In 2017, we’ve seen some successes in that strategy and it’s not just the Chinese frame contracts, but also the agreements we signed with BeamIT or Divergent. And this shows that we are able to do that, but convincing customers to enter longer term relationships takes more than just — takes a little bit more than that. And with Meddah, we will define a strategy that helps us to be more successful in signing framework agreements with third parties.

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Carlos Becke, Hauck & Aufhäuser Privatbankiers AG, Research Division – Analyst [29]

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Okay. Well, then I’m looking forward to that. Lastly, just a housekeeping one. The SLM Cube or 600, when should we expect again to have it first sold?

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Uwe Bögershausen, [30]

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The first prototype will be displayed at the form next as we announced it months ago, yes. So the first prototype will be displayed at that show. And the first beta testing is done before that.

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Carlos Becke, Hauck & Aufhäuser Privatbankiers AG, Research Division – Analyst [31]

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Okay. But revenues first like proactive selling from…

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Uwe Bögershausen, [32]

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In 2020, yes, after the trade show, we will see the first revenues coming in.

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Carlos Becke, Hauck & Aufhäuser Privatbankiers AG, Research Division – Analyst [33]

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Okay, well, then I think that does indeed finalize all my thoughts and questions.

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Uwe Bögershausen, [34]

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Are there any further questions?

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Operator [35]

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No, at the moment there aren’t any further questions.

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Uwe Bögershausen, [36]

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Okay. So then we finish this call. Thank you very much for your attention. And yes, thank you very much for attending this call. If you have any further questions later on as always, we’ve got an Investor Relations department that is more than happy to answer your questions. So we’re happy to keep in touch with you. Thank you very much for your attention and talk to you at the next earnings call the latest.

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Operator [37]

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

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