The Germany-based metal 3D printing supplier, SLM Solutions, reported earnings for the first half (H1) of 2020, showing excellent growth in both revenue and profitability, and a better cash flow profile. The company said it made “good progress” despite the continued economic downturn that the COVID-19 pandemic has created.
However, machine order intake was down 38% year-over-year, and delayed customer projects in key industries, like aviation and oil and gas, resulting in price pressure and a mix of predominantly small machine orders that are causing further headwind on the top-line numbers. Overall, SLM Solutions expects 3D printing technology to become the clear choice for customers across the manufacturing space, in order to de-risk their global supply chains, localize key component manufacturing and create increased flexibility in their processes.
Despite some of the COVID-19 headwinds, SLM Solutions was able to increase H1 2020 revenue year-on-year by 90% to €31.2 million ($37.05 million) and improve EBITDA by 68%, providing evidence of the ongoing turnaround of the company. CEO Meddah Hadjar explained that the COVID-19 situation still limits the visibility of the business but has also highlighted its strength as an agile organization that can adapt quickly to change. Under the assumption that the ongoing pandemic will not further deteriorate, and new broader lockdowns can be avoided, he expects revenue for the full 2020 year to be at least 20% over the previous year.
“The first half of 2020 was significantly burdened by the effects and uncertainties of the COVID-19 pandemic. Nevertheless, we have made good progress with our turnaround at SLM Solutions,” suggested Hadjar. “This applies in particular to the development process for our next generation machine, which has progressed according to plan and will be launched in the week commencing 9 November 2020. We strongly believe this machine will be a game changer for us and the entire metal additive industry.”
Executives said in the H1 2020 earnings call on August 13, that the NextGen machine will deliver a game-changing revolution in the application of metal AM into mass manufacturing, paving the way for AM industrialization. Further explaining that this type of machine will be applicable to all industries that SLM Solutions already serves, but will be very attractive to automotive and aerospace brands.
Management also suggested that one of the challenges for the automotive industry is that AM is more expensive than traditional casting, which is why companies have not opted for AM machines. However, NextGen is poised to unlock many barriers to AM adoption, providing customers cost and freedom to design products differently in the future, and for automotive to adopt AM faster. The company further explained that “we are not aware of any other technology at this level of scale, productivity and size, it is a pretty unique technology in terms of production capability, we are really ahead of the competitors with this product.”
If anything, the results from the first period in 2020 reflected a lot of how business looked during three full months of the pandemic. SLM Solutions’ order intake went down due to COVID-19 related development as many customers were putting a halt on investment decisions. Yet, despite a low order intake, a notable adjustment in company books meant it was able to increase machine backlog by over 30% compared to last year, which provides a strong basis for the second half of 2020.
The order backlog of €19.2 million ($22.8 million) as of June 30, 2020 was still well above the previous year’s level, experiencing an uptick in activity at the end of the second quarter of the year. In fact, the company is taking active measures to improve it. A new process is in place to continuously review order backlog so that if customer down-payment is overdue, there is an assessment of financial health, payment history, and overall deal structure (i.e. public funds). Additionally, if customer cancellation or inability to pay are assessed with a probability of at least 75%, the order is removed from the backlog.
Since implementing the new measure, SLM Solutions removed orders totaling six machines and €5.6 million ($6.6 million) overall value mainly based on customer liquidity concerns despite no order cancellations being received. This adjusted backlog is expected to give investors better insight into future performance.
Due to the prolonged recovery of the aviation and oil and gas industries that typically have larger projects requiring big machines, such as SLM500s and SLM800s, the company sold a mix of small machines mainly to academia and small business, like SLM125s and SLM280s, compared to the same period last year. The unusual mix of machines sold also drove the price pressure. Nonetheless, the CEO suggested that they expect a “healthier mix” in the short term, especially from the oil and gas recovery. As for aviation – one of the key drivers for the AM industry today – Hadjar envisions a long term recovery, but he expects automotive to continue to grow and other sectors recovering sooner to offset the aviation shortfall.
A major driver of the company’s profitability improvements was the increased revenue as well as measures from SLM Solutions’ turnaround program that had a positive effect on costs. For example, the company benefited from a more efficient material cost management leading to improved gross margins. In addition, SLM Solutions recorded positive one-time effects of €1.2 million ($1.4 million) within personnel costs as it benefited from the short-term work program in Germany and the Paycheck Protection Program in the US. Furthermore, travel expenses decreased by €0.5 million ($0.6 million) compared to the previous year due to restrictions related to COVID-19.
Dirk Ackermann, SLM Solutions CFO, indicated that “after a significant slowdown starting in March, we experienced an uptake of customer activities towards the end of the first half of the year. So far, this trend continued in the third quarter. For the remaining second half of 2020, we expect customer activities to intensify and our business to pick up further. With the funds generated in July from the first tranche of our new convertible bond, we believe that we are currently well positioned to steer SLM Solutions through these challenging times and to continue our turnaround.”
After announcing a convertible bond offering on March 26 for total proceeds of €60 million ($71 million) in three tranches, the first tranche with proceeds of €15 million ($17.8 million) closed on July 14. All SLM Solutions security holders were able to participate in the rights offering of the convertible bond 2020/2026, and the entire offering was backstopped by funds managed by Elliott Advisors (UK) Limited, SLM Solutions’ largest shareholder.
In the short term, SLM Solutions does not expect a lot of capital investments from many of its customers, but one thing is clear, metal AM is well suited to offer enormous advantages in terms of speed, cost, and sustainability, and is bound to change the industrialization process currently in place. Although many customers in some of SLM Solutions’ core end markets are facing significant end-market demand weakness and could result in a delay in the application of AM technologies in these industries, there is an increased interest in AM systems as the COVID-19 pandemic forces companies to evaluate changing their manufacturing processes. SLM Solutions expect to play a vital role in new strategies that embrace additive and will revolutionize many industries in years to come.
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