Tekna Holding ASA

OSE:TEKNA

Earnings Call Transcript 2023-Q1

[Luc Dionne, executive]

Hello, everyone, and welcome to Tekna's First Quarter Results for 2023. I'm Luc Dionne, CEO of Tekna. I am joined today by 2 of my colleagues, Arina van Oost, VP for Investors Relations. And for the first time, I'm pleased to introduce Espen Schie, who was appointed as Tekna's CFO earlier this year. Espen will cover the financial content of our presentation. The presentation should take approximately 20 minutes and will be followed by a Q&A session. For those who have questions, you may post them in the chat during my presentation.

Next slide, please. Before going into the details, I will share a brief overview of the company, the business lines we are operating in and highlights of our sustainability report.

Next slide. Tekna is a world-leading provider of Advanced Materials and Plasma System Solutions. The company was founded in 1990. The headquarter is in Canada, and we are listed on the Oslo Bors since July of last year. Tekna has just over 200 employees, working from 3 production facilities and sales offices. Our 7 subsidiaries and our distributors are strategically located in Canada, the U.S.A., France, China, Korea, India and Japan.

If we look at the geographic distribution of our sales on the left side, the revenues generated in 2022 were distributed quite evenly in North America and Europe, with a small difference in Asia where the COVID-19 pandemic lasted longer than in Western countries. Business activities are now returning to normality in Asia, which is a great news for our staff and customers in that part of the world. On the middle section, we can see that 35% of our sales originate from the aerospace industry, 20% from the 3D printing machine manufacturers, 10% from the medical implant industry and the remaining 35% are sales generated from other sectors such as academic research and materials. We can see here on the right side, the quality of customers we are operating and developing, building a customer portfolio as diverse and valuable as the one we have today is a genuine challenge, but being a trusted partner within their supply chain is even greater faced. Over the years, we have worked diligently to establish trusts on all fronts from exceptional interactions, excellence in product quality and steadfast commitment to on-time delivery.

Now if we take a closer look at the industries we are developing. Next slide. These industries are organized under 2 business lines: Systems and Advanced Materials. The expansion of these industries is driven by megatrends that have significant impact on consumer behavior worldwide. On the left, space exploration and space tourism, deglobalization and climate change, digitalization and connectivity as well as demography and healthcare. 2 of the 4 industries we are currently developing in are generating revenue, which are R&D plasma systems and PlasmaSonics, which account for 30% of our revenues, while Additive Manufacturing represents the remaining 70%. We are also developing in 2 new business lines, Microelectronics and Energy Storage. As demonstrated by the growth projection here, these 4 segments are among the most rapidly expanding in today's economy. I will say more on this later in my presentation.

Next slide. Together with the 2022 annual report, we published several other reports. One of them is the ESG or sustainability report. It has a lot of interesting information, and I hope you will download and spend some time on reading it. But here, I will just share a few highlights. First, I'd like to reiterate our 50% reduction target by 2030 on Scope 1 and Scope 2 emissions. Following from this ambition, we have put in place detailed measurement of our emissions and as you can see, our renewable energy share in 2023 -- 2022, sorry, was 69%, improving from 66% in 2021. Scope 1, which measures direct emission has seen a small 1% increase from 2021, primarily caused by the increasing natural gas consumption for heating after adding a third facility in Canada. We reduced by 19% of the indirect emissions from our manufacturing processes measured under Scope 2. And if we look at Scope 2, only the renewable share of energy consumption is 95%, which corresponds to the hydro electricity used to power our manufacturing operations in Canada. On the upper right side here, our materials production process is quite energy intensive. Therefore, energy intensity is an important performance indicator for Tekna. We are pleased to report that in 2022, we operated at 20% lower energy intensity per kilogram of metal powder produced when compared to our baseline from 2019. Lastly and knowing that both our investors and creditors are increasingly focusing on the EU taxonomy, we have taken steps to further analyze the degree of our alignment with these classification systems. For 2022, we have disclosed our eligibility for the EU taxonomy and climate change mitigation, which is high for revenue, operating expenses and capital expenses as indicated here in the lower quarter.

Now before we move on to the Q1, a few words about recent changes in the Board of Directors of Tekna. Next slide. We're delighted to welcome 2 new directors joining the Board, Kristin and Lars Magnus. Kristin brings over 15 years of experience in the tech industry and has served on several boards. She will serve as an independent board member for our company. We are also pleased to welcome Lars Magnus to our Board. Lars Magnus has served -- has several years of experience at EY and he is currently serving as a business developer at Arendals Fossekompani, Tekna's majority shareholder. Lars Magnus will not be considered as an independent Board member.

Next slide. Now let's have a closer look at where we concluded the Q1 2023. We are very excited to report the strong performance we have achieved in Q1 2023 with all-time high quarterly revenues of $9.4 million. This is a remarkable revenue growth of 44% compared to the same period in 2022. This performance was driven by both our Systems and Advanced Materials business clients, which saw an impressive growth of 53% for systems and 40% for materials. We are pleased to report that our EBITDA improved by $1.6 million over Q1 last year. It is not yet where we want it to be, but we are moving in the right direction. The EBITDA performance was driven by a combination of factors. Firstly, our strong revenue growth and increased contribution margin over last year played a key role. And in addition, we are able to improve organizational efficiency and maintain good cost control, which further contributed to these positive results. Our order backlog has increased by an impressive 86% compared to Q1 2022. We are with a strong order intake of $10.4 million in Q1. This growth reflects the growing demand for advanced materials as well as significant wins and strong pipeline in our systems business line. It's worth noting here that over 75% of our backlog is already committed for delivery in 2023, which supports our previous guidance of revenue growth for the year. And we can see how each segment is contributing to this growth, starting with Additive Materials on the next slide.

The industrialization of Additive Manufacturing continues to drive significant increase in materials demand. The Additive Materials order intake of $5.6 million has helped to sustain a robust backlog of $13.5 million. Looking ahead, we expect the traction for these materials to remain strong throughout the year and higher average selling price over last year. Increasing capacity in Q2 and throughout the year will translate to higher material availability, shorter delivery lead times and increased sales in 2023.

Talking about capacity increase. We are proud to announce that our capacity upgrade program has reached an important milestone with our factory now operating at 70% increased output rate. This was the target we had set ourselves when we started the program in Q3 '21. So kudos to our team members who have conducted these upgrades and machined certifications while managing numerous daily customer priorities. And we had reported earlier, some machines have been operating with the upgrade since last year. So we trust that we have proven the technology, and now it's more a matter of running the factory. In addition to improving individual machine capacity, new atomizers are scheduled to be commissioned later this year and will further increase our total capacity.

Now I'd like to say a few words about our systems lines on the next slide. Tekna plasma machines are enabling the development of novel materials in key industries around the world. The plasma system sales made quite some progress on the same period last year as you can see here with $4.8 million in new order received throughout the period that -- which is increasing the backlog to $12.8 million. We have adjusted the pricing to reflect cost inflation, and we expect the margins to remain above last year's average. We are also excited to see that the PlasmaSonic wind tunnel opportunities are developing according to our plan with an increasing pipeline value. Tekna plasma systems have a wide range of applications including research and development of materials and coatings in the fields of energy and space exploration, medical implants production and a small-scale production of high-value materials.

So we will now move -- go into more details on Q1 financials. Over to you, Espen.

[Espen Schie, executive]

Good morning, everybody. I'm happy to report that our revenue increased 44% year-over-year to $9.4 million. This is a record level for Tekna and I would like to congratulate all the Tekna employees for this strong achievement. The materials revenue was $6.4 million, a 40% increase from the previous year. Around half of these revenues came from spot orders during the quarter. Our systems revenue was $3 million, over 50% increase year-over-year. This reflects execution on our strong order backlog. Our EBITDA was negative $1.2 million, a significant improvement from the previous quarters. Our strong focus on profitability and cash has given results. Finally, as previously announced, we have executed a $25 million loan facility agreement with Arendals Fossekompani, and this will provide us with additional financial resources to support our growth.

Next slide, please. When comparing this quarter to Q4, I'm pleased to report that we have achieved several improvements. First of all, our revenues have improved from both systems and materials, which had a positive effect on our overall financial results. Secondly, our margins have shown a strong improvement, particularly within the materials compared to the last quarter. Thirdly, we have increased productivity and organizational efficiency. We have implemented several measures to optimize our operations and indirect costs. Finally, we have maintained our cost control efforts while scaling revenue and managing inflationary cost increases. This is a balancing act of controlling costs and achieving growth.

So to summarize the Q1 financial results, we have improved revenues, margins and productivity all along our cost control efforts.

Thank you for your attention. I'll now hand back to Luc.

[Luc Dionne, executive]

Thank you, Espen. Now let's move on the concluding remarks, starting with the market outlook.

Next slide. The systems business line maintained its momentum from last year with consistent order intake in Q1. We have a strong order backlog that will carry through 2023 and the pipeline of potential orders for 2024 keeps building up. The Additive Manufacturing industry is fast growing, with a 30% production growth over 2022. We are observing an increasing number of OEMs and service bureaus, operating 3D printing factory at industrial scale. We continue increasing our factory capacity to meet the growing demand, and we expect this to translate in increased sales.

Regarding the new business line we are developing now, starting with Microelectronics. Our development cycle continues with the potential customers we've cultivated over the past few years. In addition, we've recently added 2 new potential customers to our list, which basically means that we're now working with the top 6 global leaders who hold 100% of the high-end MLCC device market share. Very few technologies can actually meet the product requirements for these devices. And this explains why the high interest we see towards Tekna. Finally, the energy storage business line. We continue our dialogue to identify strategic partners, but for the time being, however, our priority is given to the significant opportunities we are pursuing in the industries above.

Next slide, please. Before we move on to your questions, I'd like to take a moment to highlight once more our record revenues and improved profitability that we have achieved in Q1 as well as our priorities going forward. Our revenue grew by 40% to $9.4 million over Q1 2022, and our adjusted EBITDA improved by $1.6 million. We booked strong order intake of $10.4 million, and this is the combined performance of both Systems and Advanced Materials. The target for our capacity increase program has been achieved, and we've focused on increasing sales and delivery of additive materials. We continue to actively pursue opportunities in microelectronics and are, again, happy -- very happy to report that we now have ongoing programs with the top 6 major players of this industry. And last but not least, with the Q1 performance and the strong order backlog we have, we reiterate our guidance and remain committed to this year on improving our operating revenues and margins in 2023 over last year.

So this concludes our quarterly result presentation. Thank you again for your time and attention. We will now open for questions.

[Arina van Oost, executive]

All right. Welcome to the Q&A session for Tekna. We already received a few questions. So thank you, Luc and Espen, for being with us also for this.

So let me start right away for for you, Luc. Good news that you reached the 70% in our capacity plan. Can you elaborate on the next steps to increase our capacity.

[Luc Dionne, executive]

Yes. Sure. So the -- first, I want to reiterate, we're very happy about reaching this milestone. We've started back -- we set this target back in late 2021. I think it was Q4 '21 so it's been a lot of work for my team and the engineering team to get this up. So we're very happy about reaching the milestone. Right now, we are running the factory with this improved performance. And we plan that this is going to be running the full year. We also plan on commissioning new machines later this year. And we will report on the progress with this commissioning of machine later as we move closer to the start date. So I don't know if I answered the question, Arina. Is that good?

[Arina van Oost, executive]

Yes. We'll take it. So what -- we got another question related to this. So what is Tekna's production capacity utilization at the moment?

[Luc Dionne, executive]

Okay. Well, right now, we're running around 70% of capacity utilization, meaning basically that we need to understand that our factories is running 24/7. It's fully operating every day. So the space we have and the capacity comes from the additional machine output we've gained over the quarter and also the -- improving the machine uptime because we still have room to do that improvement throughout -- between now and the remainder of the year. So right now, if I had to -- that number is around 70% of utilization.

[Arina van Oost, executive]

Okay. Then we have a question on the high degree of spot orders. Is the recurring customer share decreasing? Or is there another reason why we have 4 spot orders right now?

[Luc Dionne, executive]

Yes. That's not easy to answer question, but I'll do my best here on this one. It depends on how we calculate the spot orders. So the straight answer to your question is, no. It does not mean that we have a reduction of recurring orders. It has to do with the type of the order that comes in. So if we have an ongoing contract with a customer and he's just placing orders on that contract, open -- it's an open order actually. Well, we don't call this a spot order. But if the same customer comes back from, let's say, a year ago or 6 months ago with a single order that we need to deliver on, well, that is what we call a spot order. So no, it does not mean that we are reducing the number of recurring orders. However, there are some new customers joining Tekna every now and then. So it could be -- there could be some addition of new customers in the process.

[Arina van Oost, executive]

Okay. Then for microelectronics. When can we expect further progress with the 6 companies we are collaborating with. Could you give some flavor of the magnitude of these customers?

[Luc Dionne, executive]

Magnitude of these customers, well, first of all, they are among the largest company in the microelectronic world. So we haven't -- never disclosed. One day, I really hope that we'll be able to disclose who they are. But right now, it's just imagine who are the largest players in that industry, mostly located in Korea and Japan. The progress, we are still in the phase with them, a different progress stage because some just the 1 that has just started, we are evaluating the product with them. And while others, we are tuning our product, it's like a little bit of a back-and-forth progress we're doing, adjusting our product to their needs, while they are themselves tuning or adjusting their own process to build these new high-end MLCC. So we're anywhere between initial stage evaluation to -- we even have some of them that are currently printing some, not printing -- sorry, assembling some small devices. So it's quite a wide range of progress we have here.

[Arina van Oost, executive]

Okay. The next question is for you, Espen, and you're muted. What should we think about cost going forward, both in terms of gross margin, OpEx and G&A. Do you expect further improvement in gross margins throughout the year and also a falling OpEx revenue percentage? So...

[Espen Schie, executive]

Thank you for the question. We guide on this year with improved revenues, margins and profitability over last year. We can expect some quarterly fluctuations. Q1 shows the first results on these metrics, 44% top line growth, $1.7 million improved EBITDA since last quarter. And a breakeven point will come as a function of our revenue scaling and cost control. So I think this should be the sort of guiding for this answer.

[Arina van Oost, executive]

Okay. That was the last question I've received so far. I think that's it. Luc. Do you have any final closing remarks for us?

[Luc Dionne, executive]

Yes, absolutely, absolutely. Arina. First of all, I want to thank all the -- everyone who took the time today to listen to our webcast. We're very happy about the results, great results we had in Q1 this year. As I stated, in terms of profitability, we've made some good progress. We're not there yet where we want to be, but we're certainly heading in the right direction. Certainly happy with the magnitude of the order intake and I think we've made some calculations. And over the last 6 months, it's $26 million of new orders that came into this company. So it's a great -- it reflects very well on all the efforts that this team is putting together. So given all these elements together, the magnitude of the backlog and the spirit and the dynamic we see in the market, we definitely reiterate the guidance we had given last year about our improving operating revenues and margins in 2023. And keep in mind, as we also mentioned in the presentation, about 75% of the backlog we have is already committed for deliveries this year. So we're on the right way, and thank you so much to all the employees of Tekna that are operating worldwide for us every day. A lot of these great results this quarter, you have their credit for achieving this. So thanks, everyone. And again, thank you, everyone, for listening to the webcast today. And we'll speak to you in a few months.