Tekna Holding ASA

OSE:TEKNA

Earnings Call Transcript 2022-Q1

[Luc Dionne, executive]

Well, hello. And welcome, everyone, here in the conference room and online. My name Luc Dionne. I'm the CEO of Tekna. Today, I will be presenting our results for Q1 2022, our current strategy, recent developments and outlook.

Presentation should last about 30 minutes, and it will be followed by your questions, if you have any. And the online audience can also pose their questions on the chat.

So now let's turn to the highlights for Q1. So Tekna closed the first quarter of 2022 with total revenues of $6.5 million, that is 17% short from the same period last year, and an adjusted EBITDA of minus $2.8 million. The EBITDA remains impacted as it was in Q4 last year by the lower system sales and the front loading of resources supporting our growth strategy.

The materials revenue grew 5% over Q1 at $4.6 million with 85% of recurring sales. The demand for Additive Manufacturing materials remains strong as it was at the end of 2021. And I'll get back to that later. The material backlog has increased by 54% to $10.8 million, and that, of course, keeps the pressure on our production capacity.

Throughout the year, we plan to increase our materials production by 70%. That will happen between now and the end of this year. So this involves improving our machine performance and hiring staff to maximize our output. Our focus on improving the machine performance will have a favorable impact on staff -- sorry, profitability of each machine that we are operating.

The strategic development projects in Printed Electronics and Energy Storage are progressing well. And that includes the work we are doing with LG Chem in Korea. We have important milestones that are expected in the second half of this year. We are monitoring the segments closely, but the timing of some customers, of course, is a little bit more difficult to predict.

So as we prepare to become part of the main list, the Oslo Stock Exchange -- in fact, I think that we are publishing -- but submitting our application form this week, we have taken steps to emphasize our ESG focus. So of course, ESG is very important for Tekna, for our employees, for our customers and of course, for our shareholders.

Tekna is a resilient company. This has been in the DNA of our company from the invention of our plasma torch back then. The plasma torch operates 94% renewable energy. 95% of the gases that we use in our plasma torch operate in a closed loop. So we basically recycle almost all the gases. And these machines have virtually no wearable parts. So it's a real green technology.

And as we move into our journey, we will continue implementing our vision. That vision is building circular value chain loops with suppliers, customers and our factories that are located near the point of use of our end users.

Now, before we dive further into the Q1 financials, I'd like to share a brief overview of our position and strategy. I think we have many new shareholders, so I'll just take a few minutes there to explain about Tekna.

So Tekna is a world-leading provider of advanced materials. The company was founded in 1990. We have, to date, 200 employees. We are working in 3 production facilities with sales offices, subsidiaries and distributors that are supporting our customers locally in Canada, France, China, Korea, India and Japan.

But what has made Tekna relevant in the market is our technology. Tekna produces the world's finest high-quality micro and nano materials, the core and proprietary technology referred to as the plasma torch, that's the center picture here, that allows us to transform a wide range of materials into industry-leading micro- and nano-size materials in the form of metal powders. This technology, along with highly competent staff at Tekna, is what made us the industry leaders we have become today.

Now, a few words about our revenue segments. So the first segment, which is the largest in terms of revenue today, is the advanced materials. We manufacture materials in the form of very fine and pure powders that are used in various applications.

The second segment is the sales of R&D plasma systems that we sell to institutions and OEMs. This segment is very important because it allows us, for one, to finance a great part of the overhead and research at Tekna. And -- but most importantly, it allows us to continue the research and development and improving our technology.

On the long term, we foresee that the sales of our materials revenue will take more importance and reach 95% of our -- of the company's revenue. Today, it's around 65% of our revenues.

So now let's look at the segments where our materials are sold. The 3 segments where we sell our powders have one important thing in common. The growth is driven by megatrends, introduction of new technologies in everyday life and changes in consumer habits.

If we start with Additive Manufacturing on the top of this chart here, we -- well, Additive Manufacturing, for those who are less familiar, we also refer to it as 3D printing. This is a segment where Tekna is mostly active to date. 3D printing allows for the manufacturing of complex aerospace, automotive and medical parts. One of the big key factors of 3D printing, it also helps you to reduce material waste as we would see in machining and metal casting.

So this technology today is definitely taking over those traditional manufacturing methods, meaning the machining and the casting. It's -- today, it is also the centerpiece of the Industry 4.0 transformation.

The second segment, Printed Electronics, and it's a major developing sector for Tekna today, as you know well, if you had followed us for the last year. In this segment, we produced even ultrafine powders that enables technology advancement of intelligent mobility as well as smaller and more performing electronic devices.

Last but not least, Energy Storage. This segment becomes -- concerns the materials that are used in the manufacturing of rechargeable batteries such as the ones used for electric vehicles, consumer electronic devices and electric grid power storage facilities. In this segment, Tekna is developing a very fine nano silicon material that increases battery energy density. And that will provide longer single-charge driving distance for electric vehicles.

Of these 3 segments, Energy Storage, you can see with the light green color here, has by far the greatest potential on the long term for Tekna. We estimate an addressable market of $34 billion in 2030. Additive Manufacturing in dark blue is a segment where Tekna is mostly active and has an estimated addressable market size of $2 billion in 2030.

The Printed Electronics market size, that is -- the assessment was done by Tekna because that kind of information is not readily available in the market. So we toured all over Asia and every country in Asia. We've spoken with every relevant material consumer in that country, who actually manufacture those devices.

And we managed to estimate the addressable market size by 2030 to approximately $1 billion. So we believe that this number could be higher, depending on how the electric vehicles, autonomous vehicles, Internet of Things will develop in the future.

There's a saying that says that if you understand your customers, you understand the business, right? So an important part of our business at Tekna is to provide advanced materials and materials and technology toward a leading blue chip manufacturing companies. So if you look here, the revenues of our material sales today are mostly generated from Additive Manufacturing, from 3D printing.

1/3 of these materials are delivered to the aerospace industry. 1/3 of those materials are delivered to AM or 3D printing machine manufacturers. And the balance is distributed between medical applications, consumer goods and the car industry.

I want to take a few minutes to emphasize how Tekna has developed an enviable position in 3D printing. From 2015 until today, we have maintained a growth rate of 50% year-over-year in selling powders to that industry.

We have signed long-term agreements with many customers, namely Airbus, as we have published last year, and we have delivered hundreds of tons of materials to that industry so far. And this, as you can see here, has positioned us as one of the top 3 suppliers in the world for some very relevant materials in that industry.

The customers we are addressing today are leaders in their own field. They rely on the availability of Tekna's material to develop their own strategic position in their respective fields.

So as you can see by yourself on this -- on the chart on the right, we have a number of big customer names right there, and they are all -- most of them, if not all of them, in the top list of the Fortune 500. So we're -- something we're very proud of.

But despite how successful we have been, many people asked a question, is the 3D printing, is this going to fly? And I'd like to answer that question with another question.

I mean is there -- are there real issues to solve today? Any of these companies, are they challenged by a growing environmental regulation, by fuel economy, by raw material scarcity? Are any of these companies challenged by delays in the supply chain, by global trade tensions, by reshoring production back to the mainland?

Well, if you answered yes to any of these questions, you answered yes to the first question. 3D printing is flying. It has taken off. It has reached the tipping point.

A few years ago, the 3D printers were like -- more designed like laboratory equipment. Today, these machines are larger. They consume more materials. They are designed to be industrially implementable and scalable.

Now, let's look a little closer at the Q1 financials. So in Q1, Tekna recorded a third consecutive quarter of revenue growth. The materials revenues have been stable, and we expect them to increase progressively throughout the year with the implementation of continuous machine performance upgrades and additional staffing.

The reduction in system deliveries over the same period last year is the consequence of past 2 years travels bans and not being able to meet physically with the customers and conduct those important meetings. And that had, obviously, a consequence on the profitability of the company.

The EBITDA here, loss of $2.8 million, is a good example of that. And of course, as I mentioned earlier, we have hired some staff to engage into the development of our new -- of our programs in Printed Electronics and Energy Storage.

But there's another story behind that, and we have to understand that one very well. The issue we have with manufacturing of advance -- with advanced materials is not the market size. The market is there. It's growing. The issue we had was an issue of capacity.

As you can see here, this is demonstrated by the -- in the light green, the order intake of Tekna grew 69% in the last -- over Q1 last year. And that has propelled the backlog of Tekna up to $10.8 million. That's an increase of 54%. So we want the backlog to go up. But at one point, we want to be able to keep a certain level and be able to deliver the materials to the customers, which has been our challenge since we were facing capacity issue.

On the lower right hand of the screen, you can see that the benchmark, Wohlers, if you're familiar with the Wohlers market study, they have -- that's the gray line there. They have identified the market growth, the market growth of Additive Manufacturing metals being 23.5%. Tekna grew last year 41%. So you see that despite all these last 2 years, issues with the COVID and travel, nevertheless, Tekna managed to keep up and achieve this growth of 41%.

And we have, like Q4 '21, Q1 '22, 2 consecutive quarters with over $6 million in order intake. So basically, the market is there. We have to solve our capacity issue, and we have a plan for that.

I had a call with some of my sales manager earlier this week, and one of them said, last Friday alone, we received a single order of $1 million. That was just one order, $1 million, says, "Well, that's impressive."

But the guy says, "Look, it's -- this is becoming the standard. We see this -- the order size is just increasing and increasing every time. And we see the customers, they want to secure longer-term. They want to secure not just like the next 2 months, but they want to secure 12 months ahead. And even some of them are going into 2023 with their delivery orders, yes, with their purchase orders."

So -- and the other sales manager, 2 other guys said, "Well, look, we're just about to sign 2 supply agreements, one of them with an emergent OEM in the aerospace and the other one with the 3D printer machine manufacturer." So we've got another 3D printing machine manufacturer. This will bring us to maybe more than 50%. Imagine you're selling powders to almost everyone who has a machine that is able to print parts.

So this is where we are. This is how Tekna has grown a position in the Additive Manufacturing industry. So for us, it's pretty obvious that it's not a market issue. It's really a capacity issue. And that is demonstrated by the strong demand we're seeing.

Then -- I've talked a lot about increasing capacity. So let me give you a little bit about how we plan on doing this. So to increase the factory output, we can either increase machine performance or add new machines. Our immediate priority is to work on increasing machine output. We do this, by example, on maximizing the working hours, increasing the fee rate of the equipment and/or reducing unplanned downtime with the machines.

So this, of course, as you can see, has major benefit because you will -- if you work on the machines on improving the performance, you improve your margins. You require less capital to operate your factory. So this is our immediate priority, and we have a plan to roll this out throughout the year.

So for example, since 2015 until 2021, we have increased the machine output by 140%. And now we have a plan in Q2 this year, we will start the implementation phase of new upgrades. That -- those new upgrades will lead to 70% more machine output by the end of this year.

So we had done some preliminary trials. We conclude -- we conducted that in Q3 last year, and the rollout will be progressive throughout the year by taking some machines down at some point and bringing them back into production with those upgrades implemented. So these upgrades are conducted this year on the prime selling material of Tekna, and we will implement those same upgrades next year on the other materials.

And at the same time that we are implementing those upgrades, we have a team that are manufacturing new machines that will be deployed in 2023. And those machines will be deployed in Canada and in Europe, in France, actually.

Now, let's talk about our 2 main development programs, Printed Electronics and Energy Storage. And I'll start with Printed Electronics.

You have seen this overview of the ongoing qualification programs for the nickel 80-nanometer powders that we produce, a little bit technical here. Since last year, some customers have been removed from our chart. Those are the ones that we felt their technology was not up to speed with the nature of the materials we were producing. But nevertheless, the key players, the key leaders of that industry are still on our chart.

When we look at the progress made with the most advanced customers, we see that some of them are experiencing some delays in their own schedule. But all the programs that we had running, are still running. That's the important part. And we expect that for customer #2 and customer #3 here to have some results in May and June.

And I know that last year, I said April and now it's May, June. So I told you it's slipping. It's difficult to predict exactly the timing of those things. A lot of that is going on in Asia. They are still facing COVID lockdowns and stuff like that. So -- but the good news is, that is moving.

In the case of customer #4, discussions are ongoing right now with those customers in Asia -- with that customer in Asia, sorry, to develop a -- or put together a joint development agreement with Tekna to work on a smaller-size material that is similar to the one that we have with customer 2 and 3 here, but this one is smaller.

This is the next-generation material that we will be implementing. And as I told you, this kind of industry for microelectronics, that industry brings you a revenue stream for 20 to 25 years, 30 years, sometimes with the same product, once it's qualified.

Now about our Energy Storage program with our Tekna's silicon material. So why are silicon materials important? And why are they so relevant for batteries? So it's quite simple. The smaller the particles, the higher the energy storage you will get out of them.

Tekna's silicon particles are 10x smaller than any other silicon particles available in the market. Not only they are smaller, but they have a higher degree of purity. This is an area where we're taking a structured and patient approach. Our silicon powder has the potential to be a game changer in the battery industry, not only for Tekna but for all the energy storage industry at all.

So as we go along with this technology, we keep our focus in developing our -- either by ourselves or with partners, a position in the 3 distinct areas. The first one is with raw material suppliers. The other is with anode composite manufacturers. And the third one is with the battery manufacturers themselves.

Very similarly, as what we see with MLCC or with printed electronics, there are some uncertainties in the program. It's very difficult to predict when everything happens. But for sure, we have been able, as you can see, with our raw material, we have been able to demonstrate in test trials that we reached 70% increase in the performance of the battery.

And in early Q3 this year, we will have additional samples coming out and being delivered to a broader range of customers for trials.

In January, I just want to talk about LG Chem a little bit because a lot of questions come about that company, the work we're doing with them. So we're going to reach an important milestone. In January, there was already one -- major one met. We delivered a pilot-scale plasma unit to LG Chem. The unit is in Korea right now, in the LG Chem lab, and it's running. And they are conducting the trials. And they expect to have some results in the year of 2022.

And as a reminder, these efforts with LG Chem, the goal is developing new materials and not silicon. In this case, it's not silicon. It's developing new materials that will improve storage capacity of lithium-ion batteries.

So before I open for questions, let me summarize and share some of the reflections about our way forward. The strategic position we have developed in the industry, makes us a supplier of choice for all companies challenged by global shortage and in the process of remodeling their supply chains. We are living in paradigm-shifting times, obviously. But in our experience so far, our strategy has proved to be relevant and robust.

But why is that? We have aligned our product strategy on fast-growing markets. And those markets are driven by megatrends. We have adopted product and operations strategies that are laser-focused on customer needs. The customer trust in our technology and in our people has led them to long-term supplier agreement signing with Tekna, such as the one that we had with Airbus that I mentioned earlier.

So for us, there's no doubt that the company we have created, the model we have put together of having a strategy focusing on segments that are driven by megatrends, locating our factories close to the customer, having the right technical and sales team to address those customers, was and is still the right strategy.

So where does this leave us? We have clear priorities. For Additive Manufacturing, the market is there and it's growing. It's growing fast. We will increase our sales by increasing our capacity, and that is our short-term priority.

Medium term for Additive Manufacturing, we will be adding more machines. And that will be -- those machines will be added in our factories in France and in Canada. And doing so, we will continue to grow our market share.

By the way, we grew our market share from last year by 3%, and we are just keeping on going steady ahead, doing so. We know for sure that production capacity ramp-up will improve material sales. That, for us, there's no doubt about it.

In Printed Electronics and Energy Storage, the development programs are ongoing, and they will continue to go with some partnerships that we have established with some of the leading OEMs. Midterm, we know that for sure that the market volatility and customer schedules are a little bit more difficult to predict. But our focus and our ambition in developing our position in those segments remains totally unchanged.

We are driving, as we done -- have done last year for Additive Manufacturing, where we grew by 41%. We are driving towards that tempo with 40% to 50% organic growth and 25% EBITDA of the EBITDA margin target in the future.

The timing of the development programs don't always go as scheduled. But the fundamentals, and that's very important for us, the fundamentals of all the segments we are in and we are developing, have not changed.

And we see that the trust -- we trust our strategy, and we expect that in '25, '26 that this transitions towards Energy Storage will happen. And that Energy Storage will become on the long term, our largest sales or our largest segment in terms of revenue.

So this concludes my presentation. Thank you to all for your kind attention. Special thanks to my team, my Tekna team, wherever they are around the world today, to our customers that trust us and to you, shareholders, that put your trust in Tekna. Thank you.

[Arina van Oost, executive]

[indiscernible]

[Unknown Analyst]

I can start with one question here. With regards to the backlog, which has been growing more than sales, is it kind of entirely explained by limited production capacity? Or has there also been a duration increase on the backlog, meaning that you have more orders further ahead? Could you help us kind of understand how -- which of those two effects have been larger?

[Luc Dionne, executive]

I would say that -- well, first of all, thank you for your question and very relevant. The increase in backlog is the result of the two elements you have listed. First, the magnitude of the orders are larger. And we understand today that the customers, they want to secure longer-term deliveries.

And we see that -- I mentioned about some orders we are receiving today, have the latest delivery. It's all scheduled by month. The latest deliveries will occur in March 2023. So we're already building the backlog for next year. That's a good news. We're like 9 months ahead.

But yes, the capacity issue had an effect on our ability to take that backlog down. I would say, difficult to give an accurate number on that. We did not -- sometimes the customer will not tell you, we're placing an order for 12 months because we want to make sure or whatever.

But I think if I had to guess, 75% of our orders today are larger than they were last year. So most of it is probably linked to the fact that the magnitude of the orders is just basically larger.

[Unknown Analyst]

Okay. Perfect. And I mean, the next question is related to the production output increase for next year. Because you talked a lot about kind of efficiency improvements on the current machines. Will that drive the entire increase? Or will you also have additional machines coming online this year?

[Luc Dionne, executive]

There's no machine plant to become online this year. They will come online in early 2023. So the figure that we showed here, 70% increase, is strictly machine performance improvement, just machine performance improvement.

[Unknown Analyst]

Perfect. And if I could just have one last question. You mentioned that you kind of saw some -- maybe some increased risk related to delays in Printed Electronics and Energy Storage. And you reiterated the kind of longer term 40% to 50% growth target, but you also have an old target for [ CAD 300 ] in revenue for 2025.

How should we kind of [ bridge ] those two targets? Should we think of the 40% to 50% growth target, that's kind of what you're aiming, for going forward? If you could just help us bridge that.

[Luc Dionne, executive]

We see that 40% to 50% growth is the floor of our performance. That is what we are committing to do. How the market will develop -- and there's always this little uncertainty that is in front of us, difficult to say. 300 is our ambition, and we'll see how things turn out between now and then. This -- there's not a precise question to close on that.

But the one thing we know for sure is that what we have done in the past 5 years at Tekna, is to create a company that has the ability to grow in the industry, has the credibility in front of the large OEMs. And when we speak with Airbus, when we speak with Boeing, when we speak with Samsung, LG Chem, those are mega companies. And we know that the recipe to win the credibility and the business with these guys, we have it.

And now it's a matter of articulating this, following their development schedule, supporting them in their needs to develop their own products because we understand that there's a lot of new technology being involved here. And this is where Tekna has developed our expertise, in helping them be successful.

And this is why 40% to 50% of growth is this is what we are aiming. And I mean, we'll see how 2025 or 2026 will end up.

[Unknown Analyst]

Perfect. And just one last quick question. I mean, your backlog has grown. I think, it was 54% year-over-year. Could you just comment on -- with regards to kind of the sector split within the backlog, is it -- has all the sectors kind of increased? Or are some kind of industries or sectors constitute a larger part of the backlog this year, compared to last year?

[Luc Dionne, executive]

Backlog has grown in aerospace, definitely. But also, if you remember the chart in Q4 that I have presented, 50% was aerospace. And now I presented that machine manufacturers, the one who manufacture the printers, has taken some shares in our sales. So it's growing in aerospace. It's growing in machine manufacturers, and it's growing in medical. All those 3 main segments are growing today.

[Arina van Oost, executive]

[Technical Difficulty] online viewers. So you haven't mentioned anything about plasmasonic. Do you want to comment on that?

[Luc Dionne, executive]

Yes. Plasmasonic. So Plasmasonic, for those who remember, we have introduced that product line last year. Thank you for the question. So we've introduced the product line, and we have three very significant opportunities that are being developed at this time in -- let me just try to remember, one in Korea, one in U.S.A. and the other one in Australia.

So our vision was, when we started to look at all this space exploration that was going on, was that this industry will require new materials. And it happens that those new materials that are used for that kind of space exploration or space travel, they see the same kind of conditions that our plasma systems can recreate. And we've developed that process for, I mean, like 10, 15 years, we had it in-house.

So it was a matter of packaging that technology, creating a complete portfolio of support or assistance that you can provide to your customers, basically, value-add proposition, and that we have put that together. And we've listed -- I think I already mentioned that numbers but around $200 million of potential orders between now and 2030.

So I mean, I'm not saying we will get all those $200 million, but the idea here is that this market is huge and it's growing. So yes, plasmasonic, three great opportunities. Thank you for the question.

[Arina van Oost, executive]

When will the factory in France be in full operation?

[Luc Dionne, executive]

Factory in France in full operation? Well, today, our challenge with France -- well, not a challenge, but what we are aiming to do in France is first, to operate the factory on 3 operating shifts. So right now, we're running 2 shifts. First step is to bring that to 3 shifts, including the weekends. And we're planning on adding an extra machine next year in the factory. So I don't know if I answered the question, but...

[Arina van Oost, executive]

[indiscernible] Referred to the new factory that we released.

[Luc Dionne, executive]

The new factory. New factory is scheduled to be ready in early 2024.

[Arina van Oost, executive]

Okay. Thank you. How do your current machine productivity projections compare to what you expected at the time of the IPO?

[Luc Dionne, executive]

Machine productivity are slightly ahead of the IPO.

[Arina van Oost, executive]

That's it? Okay. Then we have a question, obviously, about Russia. If we're doing any business there or if we have any supply chain issues as a consequence of the war?

[Luc Dionne, executive]

No. Actually, we have no business going on with Russia. We -- our supply chain does not depend on Russia or any of the countries that are dealing directly with Russia. So we -- from that perspective, we did not have to make any changes. The supply chain for our raw materials was already well secured through long-term supply agreements with our suppliers, either in Germany or Asia. So no issues there.

[Arina van Oost, executive]

All right. Well, that's it from our online viewers. So I don't know if anyone else came up with another question here.

[Unknown Analyst]

Yes. These machines you are talking about, you are operating them? Are you operating them or...

[Luc Dionne, executive]

Good question. Yes, these machines to produce the materials, we are operating them, and we are also manufacturing them. So we own the IP of those machines. We own the know-how. And that's why we're confident about the performance increase that we are seeing because we own the know-how, how to make them more performant.

And it's not something we've sort of decided, like in January, to just increase the performance. We've been working on that for like, I don't know, 1.5 years. We had this program, trying to find the right way to increase productivity of these machines, and that has been tested. And the rollout is starting actually this -- in a month from now.

Any other questions? Okay. Well, thank you very much. Thank you for your attention, and see you to the next quarter.