Business model and technology

SLM Solutions AG is a Lübeck-based manufacturer of 3D printers, machines that create three-dimensional objects. There are various ways to do this. SLM has specialized in “selective laser melting”. This technology is primarily used to create metallic objects. SLM is a mechanical engineering company with a single production site in Lübeck and eight sales/service subsidiaries in North America, Asia and Europe.

There are various 3D printing processes, but in the industrial area, i.e., those that can process materials with high degrees of hardness while enabling maximum freedom of design, the following three so-called powder-bed fusion (PBF) processes are the most important:

Selective laser melting

In selective laser melting, the material to be processed is deposited in powder form in a thin layer on a base plate. The powdered material is selectively melted by a laser beam and forms a solid material layer after solidification. The base plate is then lowered by the amount of a layer thickness and powder is applied again. This cycle is repeated until all layers have been melted. The finished part is cleaned of excess powder, machined as needed, or used immediately.[1]

Laser sintering

Laser sintering is closely related to laser melting, but differs in that the powder is only fused together, not completely melted. The degree of densification can be varied by temperature, which can be controlled both in the build chamber and with the laser.

Electron-beam melting

The major difference from the previous processes is the energy source. The powder bed is not processed with a laser, but with an electron beam. In order for the electron beam to interact with the powder, the material to be processed must be conductive, which is a certain limitation compared to laser-based processes. Ceramic parts, for example, are not feasible.

A key component in PBF 3D printing is having the right powders available for printing. Part of the business model, in addition to the delivery and maintenance of 3D printers, is therefore the supply of powders. For its latest generation of machines, SLM now also obliges its customers to buy its powders. In addition to the immediate economic rationale of achieving a “lock-in” effect with customers, the company also looks to deliver a high-quality overall production setup. The physics of 3D printing are complex and require enormous fine-tuning. It takes an iterative process to achieve the desired quality of the part. When customers source their powder from third-party manufacturers, they may not meet the exact specifications of the SLM machines, which has led to dissatisfied and churning customers in the past.

The market

3D printing as a so-called “additive manufacturing” process has three major advantages over classical subtractive manufacturing, which suggests various areas of application. (1) Since large parts of the powder can be reused, the material loss is much lower than, for example, in turning and milling. If waste products from subtractive processes are recyclable at all, they must first be remelted. (2) Cavities can be directly imprinted in complex components, which enables considerable weight savings. (3) Shapes can be created that would not be feasible at all using traditional processes.

In addition to all kinds of experimental application areas, the aerospace industry, the automotive industry and the medical technology sector are therefore particularly suitable users of 3D printing technology.

The 3D printing industry went through a “hype” period from 2012-2016, which was mainly driven by research institutions and industrial R&D departments. However, this initial wave leveled off as first-generation printers failed to compete against traditional manufacturing methods from a cost perspective.

Today, big users of metallic 3D printing include companies such as Ford, GM, Blue Origin and SpaceX, which are ordering entire fleets of printers. Tesla and Porsche are also currently experimenting with the technology. It’s hard to predict how widespread 3D printing will eventually become, but industry reports such as the Wohlers Report 2020 suggest that the market volume should increase more than tenfold to $146 billion over the next decade.

The PBF market is dominated by SLM and two other German companies, EOS and Concept Laser. Perhaps the most prominent competing technology to the PBF process is called binder jetting. The key twist is that a binder is added to the powder to be processed and cured. The process is versatile and fast, but less precise and currently unsuitable for critical aerospace parts. A leader in metal-based binder jetting is US-based Desktop Metal Inc – an MIT spin-off, which recently went public via SPAC.

Company history

Selective laser melting as a technology and SLM Solutions as a company find their beginnings in the mid-1990s at the Fraunhofer Institute in Aachen. Dr. Matthias Fockele and Dr. Dieter Schwarze were involved from the beginning, the latter is now head of research at SLM. The first commercial SLM machines result from a cooperation between Fockele & Schwarze Stereolithografitechnik GmbH and the British Mining and Chemicals Product Ltd. (meanwhile merged into a Canadian materials group called 5N Plus). In 2008, a business unit manager at MCP named Hans-Joachim Ihde succeeded in buying out what is now SLM Solutions as part of a corporate restructuring. In 2014, the company IPO’d as SLM Solutions AG. Barely two years later, GE made the strategic decision to occupy the 3D printing landscape and on September 6, 2016, published a takeover offer for all shares of SLM Solutions at €38 per share, which corresponded to a valuation of nearly €700 million. The takeover failed because activist hedge fund Elliot Associates, which had bought a sizeable stake meanwhile, tried to push for a higher price. GE didn’t want to play and decided to settle for two other 3D printing companies, Arcam Laser from Sweden and Concept Laser from Bavaria.

Following GE’s failed takeover attempt, significant operational weaknesses at SLM started to show. The company seems to have been trimmed in anticipation of a corporate takeover; sales had been prioritized over the research pipeline, controlling and corporate processes. Dissatisfied customers, a crumbling order book and cash burn followed in 2018 and 2019. The market cap fell from a high of nearly €900 million in January 2018 to a low of just over €100 million in March 2019. In 2018, the founder and major shareholder Hans-Joachim Ihde stepped down as chairman of the supervisory board and behind the scenes the company began to restructure under the leadership of activist Elliot. 

Why now?

New owners bring a new management…

At the beginning of 2019, another activist shareholder, ENA Investment Capital, joined the party and the work behind the scenes slowly became visible. The first big change occurred on May 1st, when Meddah Hadjar started his position as the new CEO. Meddah spent 20 years with General Electric and was most recently responsible for leading Concept Laser. As SLM’s new CEO, he brought considerable knowledge of competitors and their products; his decision to jump to SLM speaks highly of his belief in SLM’s technological potential.

In June 2019, SLM further recruited René Magnus to the supervisory board. Magnus was CEO of GE’s “other” 3D acquisition, Arcam Laser, for 17 years. The CFO and COO roles have also been professionalized with Dirk Ackermann and Sam O’Leary, two young, dynamic GE alumni.

…and the new management releases a new product

From the very beginning, the new all-star team focused on the development of the “Next Generation” printer, which would be presented in a launch event on November 10, 2020 despite all the adversities caused by the pandemic. The NXG XII 600 represents a quantum leap for the entire 3D printing industry with its 12x laser setup and a build chamber of 600x600x600mm. One of the first parts to be unveiled was a complete engine housing measuring 560x650x367mm, which was printed in 21 hours. The massive reduction in printing time combined with enhanced functionality paves the way for 3D printing to be integrated into real industrial mass production. We understand that SLM has achieved a technological lead of at least 2-3 years over competitors.

 

Numbers

The business generates €66 million of sales (LTM June 2020), no profits, and is valued at €380 million market cap. As can be seen from the table below, SLM has consumed cash every year. The revenue base is still too low to support the fixed cost structure of roughly €50m, but management is confident in strong future sales growth driven by the company’s technologically leading tools.

The investment community lost faith in SLM’s management team as sales fell and losses mounted in 2018 and 2019. The market cap plummeted form €900m to €100m. With the new management team in place going in 2020, sales and earnings began to recover — even before the release of the game-changing NXG XII 600, which will not book revenue until later this year. With SLM pivoting on the brink of profitability, investor confidence is being restored after years of disappointment.

SLM is an “adult” venture capital situation with significant strategic valuation components not reflected in the current valuation. Profit-based valuation multiples are not yet applicable. On EV/Sales, SLM is valued at 4.4x 2021 sales and 3.3x 2022 sales. This is low compared to the best public comp, trading at 40x sales. Desktop Metal Inc. is expected to generate just under $20 million in revenue in 2020 and foresees growth to $80 million and $170 million in the following two years. The company’s market cap is $3.6 billion.

GE’s 2016 takeover bid for €700 million is another valuation anchor. However, back in 2016 GE could only have priced in the theoretical potential of SLM’s technology pipeline. As of today, that potential product has since been tested and just went to market. That should count for a premium. Even so, SLM’s value today is 46% lower than the 2016 bid.

Despite years of cash burn, the balance sheet does not present an undue risk to the investment case. As the corona crisis evolved in 2020 and automotive and aerospace customers delayed orders, anchor shareholders — led by Elliott Associates — backstopped SLM via the issuance and subscription of convertible bonds. SLM has €52m net debt, comprised €78m gross debt (mainly convertible bonds) and €26m cash on hand. In addition, SLM has €45m of undrawn borrowing capability via committed but unissued convertible bonds. Assuming full conversion of all the convertible bonds, the total outstanding shares would increase from 19.8m today to 28.7m or +45%.

End game

What’s the end game at SLM? The base case is increased sales as capital goods volumes accelerate in the post-pandemic economic recovery, a corresponding pivot into profitability, the restoration of investor confidence in the new management team, and a gradual re-rating of the shares. In an upside case, a strategic takeover could be in the cards:

Concentrated ownership with aligned goals. The largest four shareholders control 70% of the capital. The chairman of the supervisory board, Thomas Schweppe, is a representative of Elliot Associates. Both Elliott and ENA manage funds that are dedicated to crystalising gains within foreseeable timeframes. Their coordination and cooperation could deliver a painless and inexpensive de-listing of the company.

Technological lead. Given SLM’s technological lead and current valuation, the most logical strategic investors could easily take-over SLM. In a wildcard scenario, even one of SLM’s giant aerospace customers might consider securing the technology.

[1] We couldn’t explain it any better than Wikipedia

 

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