Tekna Holding ASA

OSE:TEKNA

Earnings Call Transcript 2023-Q2

[Luc Dionne, executive]

Hello, everyone, and welcome to Tekna's second quarter results for 2023. My name is Luc Dionne. I am the CEO of Tekna. I am joined today by our CFO, Mr. Espen Schie, who will share the financial content of this presentation; and by Arina van Oost, Tekna's VP for Investor Relations. We have prepared material for approximately 30 minutes, and we will follow with a Q&A session. If you have any questions, you can post them in the chat during the presentation.

Slide 3, please. Before going into detail, let me share a brief overview of the company. Slide 4. Tekna is a world-leading provider of Advanced Materials and Plasma Systems Solutions. The company was founded in 1990. The headquarter of the company is in Canada, and we are listed on the main board of the Oslo Stock Exchange since July of last year. Tekna has just over 200 employees working globally. We have 3 production facilities, two in Canada, one in France as well as sales offices and distributors strategically located in Canada, U.S.A., France, China, Korea, India and Japan.

If we look at the distribution of our sales on the left side, the revenues generated in 2022 or distributed quite evenly in North America and Europe, with a small difference in Asia where the COVID-19 pandemic lasted longer than in the 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 1/3 of our sales originated from the Aerospace industry, 20% from 3D Printing Machines Manufacturers, 10% from the Medical Implant industry, and the remaining 35% are generated from other sectors such as Academic Research.

You can see here on the right side, the quality of customers we are supporting and developing. For years, our company has been dedicated to building a reputation for delivering quality products and being a dependable supplier. We have consistently prioritized establishing trust in every aspect of what we do from outstanding customer interactions and unparalleled product quality to our unwavering commitment to timely deliveries. The relationship we have forged with our customers stand as a testament to our success in achieving this mission.

If we take a closer look at our market segments, Slide 5, please. Tekna is engaged in 4 segments, organized under 2 business units: Systems and Advanced Materials. As you can see on the left, the growth of these segments is driven by mega-trends, having significant impact on consumer behavior worldwide, space exploration and space tourism, deglobalization and climate change, digitalization and connectivity, as well as demography and health care.

To date, we have sales generated from two of these 4 segments. R&D Plasma Systems and PlasmaSonics, which account for 30% of our revenues in 2022 and Additive Materials at 70%. And we are venturing in two promising segments. First, in microelectronics, we're actively collaborating with potential customers in developing new products. I'll say more on this later. And secondly, in the Energy Storage sector, we have developed a breakthrough technology that produces nano-silicon metal, a game changer for enhancing electric vehicle and other powered electric device performance. we're just setting our foot in this market. So there's plenty of exciting progress ahead.

Slide 6, please. Now let's have a closer look at Q2 performance highlights. Slide 7. I am pleased to report our all-time high quarterly revenues, a trend that continued into the second quarter of 2023. Our total revenues reached $11 million, representing a growth of 45% compared to the same period last year. This growth was fueled by an impressive 66% increase in systems revenues and 37% increase in materials revenues. These increases have been driven by strong demand, numerous successful bids and a successful capacity expansion in our Materials division.

We are also proud to report a significant improvement in our EBITDA, closing near breakeven at minus $600,000 compared to minus $3.2 million for the same period last year. This financial performance reflects our continuous revenue growth, improved contribution margins generated from the systems business and the clear effect of our organizational efficiency and cost control measures.

Looking at our backlog, we see an increase to $22 million, 19% above Q2 of 2022 with an order intake of $6.5 million. This is a slightly lower order intake than in Q1, but it's within the normal variations we see from quarter-to-quarter. But this said, our backlog continues to support our previous guidance of revenue growth and margin improvement in -- for 2023 in both Materials and Systems.

Slide 8, please. Now I'll say a few words about our Plasma Systems division. Since the start of the year, we have successfully converted a strong pipeline into firm orders for 8 plasma machines totaling $6.2 million in sales. At the end of June, the order backlog stood at $11 million, and we have added an additional $2 million in July. We have also made great progress with opportunities in PlasmaSonic segment with over $110 million in budgetary quotes delivered to industrial and academic research centers. We are now witnessing a segment that is strongly reenergized following 3 years of COVID-19 restrictions.

Tekna's Plasma Systems have a wide range of applications, including research and development of materials and coatings in the field of energy and space exploration, medical implant and small scale production of high value materials. But more importantly, the system -- the segment provides knowledge and technology that allows us to continuously improve our Advanced Materials segment.

Now let's move on to Additive Materials. Slide 9. We continue to see a strong demand for Additive Materials. Tekna recorded order intake for $5 million in Q2, in line with previous quarters. The order backlog reduced partly due to normal variations and also because of the increased machine output that reduces delivery lead time. We expect the demand for additive materials to remain strong in 2023 with average selling price 3% to 6% above 2022. We are very happy to report that the titanium metal powder production factory has proven reliable throughout the quarter operating at 70% more output. New atomisers are scheduled to be commissioned on Tekna's main selling materials by the end of the year. The increased output and new machines will further increase our capacity translate to higher material availability and ultimately increase sales.

Slide 10, please. On this slide, I would like to highlight 2 cases. When combined with metal additive manufacturing, these cases hold the potential to capture sizable market share from traditional molding machine part production. The first case pertains to the binder jetting process. Through a collaboration effort, TriTech Titanium Parts, a United States company, was able to develop the world's first titanium bio jetting printing process. This achievement was accomplished with Tekna's titanium power, and it is the proof of concept for now.

The second case involves a significant order we have received. In this case, a customer intends to use Tekna's titanium powder for metal injection molding to manufacture at scale, components for personal, wearable and electronics, such as smart watches. The value of the order received is $1.7 million, and we have started to deliver on it in June. The growth potential for binder jetting and metal injection molding is significant. They allow for the manufacturing of smaller and more intricate components at a much higher rate and lower cost than traditional milling process.

Now that we have covered our 2 current segments, Systems and Additive Materials, I will update you on progress achieved in developing our position in the multilayer ceramic capacitors, currently known as MLCC. Slide 11, please. MLCC devices are these tiny little components that are just a few millimeters small and use in everyday electronic devices. There could be up to 1,000 of them in a cell phone and up to 10,000 in an electric vehicle. The nickel powder such as the one produced by Tekna is applied in very, very fine nano-scale layers with over 1,000 layers stacked one over another. It's because of the fine size of these layers and the required purity of the nickel that very few companies have the ability to use this material. And we will see why this is important in the next few slides.

Slide 12, please. The MLCC market is quite exciting. The demand for these very small devices is growing exponentially, and it's driven by major industries, such as consumer electronics, electric vehicles, 5G networks and connected objects. The industry analysts estimate that this market will grow 10% every year, reaching $1 billion by 2030. There are just a few companies that have the competence to either manufacture MLCC devices or to develop the manufacturing methods for producing them. Tekna. Tekna is diligently working with the top 6 of them who control 100% of the high-end MLCC device market, and the logos of these companies are shown here on our slide.

Over the past 2 months, we have delivered our latest generation of nickel samples. These companies are at different development stage, either conducting technical assessment of our material or running R&D scale trials on actual MLCC devices. Another interesting fact about this industry, and perhaps I could have started with this one is the fact that there are today companies, including Tekna that manufactured -- that mastered the technology and industrial know-how to produce the very pure and nano-metric sized nickel powders required by this industry. The two other companies are shown here. One is located in Japan, SHOEI Chemical and Guangbo is located in China.

The context for Tekna making significant inroads in this industry could not be better. In addition to being one of the very few having abilities, global supply chain issues and geopolitical tensions create the necessity for these companies to secure alternate sourcing options. So for all these reasons, Tekna seized this market as a significant potential upside for our business case. Now let's go to our comments on the financial performance as spend on Slide 13.

[Espen Schie, executive]

Good morning, everyone. Let's look at the financial results for Q2. I'm happy to report that our revenue increased 45% year-over-year to $11 million. This is another record level for Tekna beating Q1. And I would like to congratulate the tech employees for yet another strong achievement. Materials revenue was $7.6 million, a 37% increase over the previous year. Our Systems revenue was $3.4 million, a 66% increase year-over-year. This growth reflects execution on our strong order backlog.

Our EBITDA was negative $0.6 million, yet a significant improvement from previous quarters. And year-to-date, the EBITDA was negative $1.8 million, that's an improvement by $4.2 million year-over-year. We continue with strong focus on profitability and cash improvements.

Slide 15, please. When comparing this quarter to Q1, 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 financial results. Secondly, our margins were stable overall and with strong improvements in Materials and Systems were lower compared to Q1, which reflects the assembly phase of significant projects we have in backlog.

Thirdly, we have again increased productivity and organizational efficiency. Some of this gain was, however, partly offset by a loss on FX this quarter. To summarize, we have improved revenues and productivity with scaling along our cost control efforts. This remains a balancing act of controlling costs and achieving growth. Thank you for your attention. Back to you, Luc. Slide 16.

[Luc Dionne, executive]

Thank you, Espen. Moving along the concluding remarks, starting with the market outlook. Slide 17, please. The Systems segment is strongly reenergized. We see a growing global interest in developing, testing and manufacturing novel materials for new emerging industrial segments and products in space tourism, satellite Internet and networks, strategy, defense and so on. In the PlasmaSonic segment alone, we have built an opportunity pipeline of nearly $300 million. We have delivered budgetary quotes for these opportunities, adding up to $110 million where half of them either have their budget approved or are in the process of budget approval.

The Additive Materials segment is seeing growing at 30% annual average until 2030 with an increasing number of customers operating at industrial scale. Without a doubt, the breakthrough mentioned earlier using titanium powders in production for metal injection molding and binder jetting applications offers significant potential for large-scale manufacturing. With the capacity expansion achieved in Q2, coupled with the new machines set to be commissioned later this year, we are ideally positioned to further grow our sales this year.

Slide 18, please. So to conclude on our performance, I am absolutely thrilled to share again that our revenue grew 45% in Q2, and our adjusted EBITDA have improved a solid million compared to the same period last year. Our target for the capacity increase of titanium materials has been reached, and our top priority remains, of course, to leverage these new volumes available and increase our sales. We have recorded order intake of $6.5 million with several significant wins, especially on the Systems segment. Like last year, the summer vacation in our main markets will affect the company's revenue in Q3 compared to Q2.

Nevertheless, the order backlog we have, is supporting a significant revenue growth, and we are reiterating our guidance for a substantial improvement of margins in 2023 compared to 2022. So on these notes of a strong top line growth and bottom line improvement, I want to express my most sincere gratitude to Tekna's employees and business partners. The performance we have seen from the start of this year is phenomenal, and you should be proud of what we have accomplished as a team. Thank you again for attending this presentation and for your kind attention. We will now open for questions. To you, Arina, for the Q&A session. Slide 19.

[Arina van Oost, executive]

Hi, good afternoon, everyone, and welcome to the Q&A session for Tekna Holding ASA. My name is Arina van Oost. I am responsible for Investor Relations at Tekna. We've received quite a few questions. So let's get started and see how far we come with the questions today. So first question is for you, Luc. Do you see the demand slowing down?

[Luc Dionne, executive]

Good question. No, we don't see the demand slowing down. We keep on -- we have a very strong backlog roughly $11 million for each segment. So the demand is strong. The pipeline for both Systems and Powders are very -- we have a very high confidence on those pipelines. And actually, we expect to make some future announcement for systems later this quarter.

[Arina van Oost, executive]

We have a follow-up question on that. So can we give some flavor on what we expect for the rest of 2023 and 2024 in terms of order intake?

[Luc Dionne, executive]

Well, we don't guide on the future orders intake. However, we certainly reiterate our previous commitment of increasing the revenues for 2023 and improving our margins.

[Arina van Oost, executive]

Of the current backlog of $22 million, how much do you expect to convert into revenues for the rest of 2023?

[Luc Dionne, executive]

Very good question. It's right now, roughly, I would say, difficult to guide for the rest of the year. But what we can say definitely is that the revenues from this year are expected to increase over last year. As well as, as I said earlier, improving the margins.

[Arina van Oost, executive]

Then we have a question about our relationship with significant Aerospace players, like Boeing and Airbus. What is the actual relationship that we have with them? And how will we achieve substantial and recurring revenues from these 2 companies?

[Luc Dionne, executive]

Well, first thing, with Airbus, we've previously announced that we have a supply agreement with this company. And we also previously announced that with Boeing we have been selected as their supplier for Additive Materials. Both of these companies are working on developing products, qualifying products and we do have some regular sales to them since those announcements were made to them or through their suppliers. Well, I don't know did I answer the full question. It was a long question.

[Arina van Oost, executive]

Yes, it's really when do we expect to have substantial and recurring revenues from these 2 companies. So when do we expect them to go to industrial scale, I suppose?

[Luc Dionne, executive]

I think we cannot make any commitments on that. Those are the customers' information. But definitely, we have recurring orders delivered to both of these companies.

[Arina van Oost, executive]

Tekna is collaborating with TriTech, this is referring to our announcement of this quarter. When will this product be ready for market and result in significant revenues?

[Luc Dionne, executive]

Great question. Well, first of all, I think I just want to reiterate how major this announcement was with developing a process using titanium -- Tekna's titanium powder to qualify -- to do the proof of concept for using titanium powder in a binder jetting process. So that's the key message here. However, this is still at the very early stages of the development. We don't have any schedule for sizable orders with this process.

However, I also want to add that we also mentioned about metal injection molding, which is in other technology that is using Tekna's titanium powders. And for that segment, we are having regular sales and deliveries. And we've made an earlier announcement of $1.7 million size order for one single customer, which means that this is an actual industrial scale process. And we expect to have others of those deliveries in the future.

[Arina van Oost, executive]

So just to have a follow-up question on that. So how long does it take for a proof of concept to become an industrial -- in industrial technology, let's say.

[Luc Dionne, executive]

Great question. It depends on the application. If it's a medical application, it can be 2 years. If it's aerospace, it can be 3 years. But if it's I would say, usual day-to-day use product with no specific standard, it can take just a few months. It's depend on the end application. So there's not a precise answer for that.

[Arina van Oost, executive]

Okay. But the TriTech Solution could go quite fast then.

[Luc Dionne, executive]

It could go fast if it's day-to-day application with no specific standards to respond -- to meet.

[Arina van Oost, executive]

Understood. Then we have a question about PlasmaSonic, because we're talking about a good pipeline. But when are we expecting a next order for PlasmaSonic?

[Luc Dionne, executive]

Well, we are currently fulfilling one major order. I think we've announced that above or about $8 million that was announced last year. We don't have any other orders scheduled for 2023. Those are large, very significantly large orders typically, the cycle goes from 1 to 3 years by the time the customer identify his needs, develop some requirements, go through the bid cycle. So it can take between 1 and 3 years. So we did not make any announcement yet or give any guideline on when this could happen. But we're very confident in the pipeline we have for these large orders. And hopefully, we can close that one next year.

[Arina van Oost, executive]

Then a very general question. What can you say about 2024 and your expectations on the different segments and overall? So maybe for microelectronics and Energy Storage, that's probably the general direction.

[Luc Dionne, executive]

Well, the general direction is that the industry that we are operating are all growing. I mean, Microelectronics is growing. Aerospace is growing. The need for Additive Manufacturing doesn't stop. There is a clear transition of manufacturing applying Additive Manufacturing as a new method for Manufacturing parts. So the megatrends that we are serving on are still there. Nothing has changed in the fundamentals of our business case. So in our view, 2024 is going to be another year that will -- that should follow the same trend as 2023.

[Arina van Oost, executive]

Do you want to say something specific about Microelectronics and Energy Storage?

[Luc Dionne, executive]

Microelectronics. Well, in what sense? In the sense of the market?

[Arina van Oost, executive]

For next year. So what do we expect?

[Luc Dionne, executive]

Right now, Microelectronics, definitely, this is a product that is under development with some customers. We are in an iterative development cycle with them. It is taking more time than we had expected. Not just because of technicalities, but also because of all the pandemic we've been through. So that has slowed down a lot of development last year. But the good news is that right now, we are working with the top 6 leaders for the last 2 years with them developing in this iterative development cycle. And we're confident that this relationship will continue until we have qualified at least one customer. But we're not giving any guidance on when this could happen. We did it in the past. We had some -- like based on customer information, we had some reasonable motive to give some guidance, but now we are more cautious about that.

[Arina van Oost, executive]

Do you want to say something about Energy Storage or for now that's off the table?

[Luc Dionne, executive]

Well, Energy Storage, I can say that we have developed a good process using Silent Gas. It's quite unique in the world right now. the way that we are able to produce nano-silicon, which is below the threshold of -- sorry, for the technicality here but below the threshold of 150-nanometer, at below that size, you don't have any swelling issue. So it's a great product. However, at this point in time, we're just -- we're focusing on our current segments, Systems and Additive Materials and also developing the MLCC or the Microelectronics segment. We are still open. If a customer calls for nano-silicon. We will listen and discuss with them. But for now, focus is on current segments and Microelectronics.

[Arina van Oost, executive]

Thank you. Then we have a financial question. So I guess that's for you, Espen. We received a loan from Arendals Fossekompani of $25 million. And in the question, it assumes that, that is for increasing our production capacity. So can you explain what the loan was for? What we're using it for?

[Espen Schie, executive]

Yes. So the loan generally then is for all the needs that -- so it's not only for the production capacity. But to answer that specifically that we do expect in 2023, about $10 million of CapEx, of which that would be around half or between half and 2/3 for production capacity.

[Arina van Oost, executive]

Okay. I think we have one last question. So either of you -- I can take the question. What do we mean by the seasonality of sales that we have referred to for Q3? So I don't know, Luc, do you want to take it?

[Luc Dionne, executive]

Well, basically, what we intend to see here is that the -- in the U.S., the market slows down for the full month of July, basically, and the same thing happens in Europe in August. So both of these months are typically lower activities in it, either deliveries or orders. And last year, I think we had informed the market about it, but after the fact, and this year, we just wanted to be more open on what this could be for Q3.

[Arina van Oost, executive]

Excellent. I think that concludes the questions that we have received so far. So with that, this also concludes the webcast for Q2. Thanks, everyone, for attending, and for the good questions, and we look forward to meeting you in one-to-one meetings later today or in Q3, which will take place in November. Thank you.

[Luc Dionne, executive]

Thank you.