Tekna Holding ASA

OSE:TEKNA

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Luc Dionne, executive]

Hello, everyone. I hope you are all enjoying a nice and warm summer. Thank you for joining us today, and welcome to Tekna's Presentation for the Second Quarter Results of 2024. I am Luc Dionne, the CEO of Tekna. And I am joined today by Arina van Oost, Vice President for Investor Relations; and by Espen Schie, our CFO.

Unlike our previous webcast, today's presentation will follow a brief agenda, and it will be followed by a Q&A session as usual. For those who have questions, you may post them in the chat during my presentation.

Next slide, please. Our total revenues for the second quarter amounted to $11.2 million, improving 2%, over the same period last year and 30% over Q1 of this year. After a slow start in the year, materials segment is showing some recovery in Q2, mainly with materials up 35% from Q1 at an all-time record of $7.8 million. The trailing 12 months on the right side. Trailing 12 months for revenues closed at $40.3 million. This is slightly above Q1, and it reflects a transitory slowdown that was observed across the additive manufacturing industry in the first half of the year.

Next slide, please. The adjusted EBITDA for Q2 was minus $1.5 million, down $0.9 million from last year. While the adjusted EBITDA improved from Q1, the trailing 12-month trends remain below our expectations, and it's marking a decline in performance for 2 consecutive quarters. The losses in Q2 are explained by a one-off loss of $0.5 million in contribution margin from working capital reduction measures taken to improve our balance sheet and $0.6 million following the termination of charge-back to our loss-making joint venture. These charges are now fully assumed by Tekna.

Although some of our customers are entering the industrialization phase, the additive industry is still in very early beginnings. So this causes some volatility in material sales, a lack of transparency in supply chain and low predictability. So in this context, strong measures were initiated last year and continued throughout this year to improve our cost base and lower our breakeven point. I will share more on this with the next 2 slides.

Next slide, please. So an important focus was placed on cash management and cash flow in the first half of this year, and this will remain a priority moving forward. The net cash from operating activities in Q2 was negative $0.5 million and taking advantage from $2.9 million reduction in working capital in the second quarter. The working capital reduction was driven by cash conversion of smaller and larger powder fractions. So while this reduction improves our balance sheet, it has temporarily affect the margins for materials.

The capital expenditures in the quarter were $0.9 million, ending the first half of 2024 at $1.7 million. As a result, our CapEx guidance for the year is now reduced from $5 million to $4 million. The cash balance at the end of the second quarter was reduced to -- by $0.7 million to $9.3 million.

Next slide, please. In addition to focusing on cash management and cash flow, we have implemented measures to reduce our cost structure. These actions are expected to result in approximately $2 million in savings by end of 2024. While some of the measures are onetime adjustments, more than half of them will be recurring and yield increased savings over the coming years due to the volume effects.

We have revisited many areas, including optimizing the sales mix, discontinuing the sales of low-margin alloys and reducing the production cost. This was done either by improving the machine performance or reducing utilities and manufacturing supply expenses.

Furthermore, we have taken actions on overhead staff, which is down from 219 in January to 203 today, and we have streamlined many indirect expenses account. So these measures were necessary for Tekna to reduce its vulnerability to volume fluctuations and build a more resilient company.

Next slide, please. I will conclude this presentation with a few words on our outlook, starting with systems. The pipeline of prospective systems projects for the remainder of the year and the midterm is strong, in particular, with some opportunities for PlasmaSonic systems and $2 million of new orders recorded in July and earlier this month.

For Advanced Materials, we expect lower activity in Q3 as usual with July and August vacations in North America and Europe, but we remain focused on improving our revenues over last year in this segment. We have built a strategic position in the additive manufacturing industry. We are renowned for the quality of our products, and the fundamentals of the industry are strong. And for this reason, it continues to reinforce our growth vision.

In microelectronics development, the trials of Tekna's nano material for next-generation MLCCs continues. And we expect feedback from our prospective customers later this year.

From a profitability and cash flow perspective, we have implemented a solid cost reduction program, with concrete deliverables leading to $2 million in savings this year and further reducing our breakeven point. Along with these cost savings, reducing the working capital and limiting our CapEx remains our key priorities for the balance of the year.

We recognize that our growth and margin development has not always followed a linear trajectory over time, but we are confident in our strategy. And our outlook remains positive.

On this, back to you, Arina.

[Arina van Oost, executive]

All right. Good morning, and welcome to the Q&A session. We've already received some questions, and we'll start with our CFO, Espen Schie. Some questions for you on the profitability program. What are the key components of the profitability improvement program? And how will they specifically contribute to the adjusted EBITDA?

[Espen Schie, executive]

Yes. Thank you so much for the question. On the profitability improvement program, we are expecting improvements on production margins. So these are coming from production cost improvements, improving utilities such as gases as well as manufacturing supplies. Furthermore, we are implementing savings on indirect costs. And here, we anticipate those reduce operating costs. These measures on the cost side, we then expect a $2 million positive contribution from these actions in 2024 and more than half of this to be recurring also in 2025.

[Arina van Oost, executive]

All right. So how confident are you in achieving the cost savings for this year? And what about next year?

[Espen Schie, executive]

Profitability and cash remain high on our agenda. These measures now, this means we are accelerating the improvement measures we started over a year ago. We are confident that these cost savings can save a total of $2 million over the next 6 months and with full effect in Q4. We also anticipate the substantial recurring cost savings from these measures then continuing into 2025 and potentially leaving full year savings of the same measures.

[Arina van Oost, executive]

Excellent. Looking forward to that. You've worked very hard on the working capital. Can you explain how you have improved it so much?

[Espen Schie, executive]

Yes. We have started a comprehensive improvement program starting of this year, which, in Q2 alone, delivered $2.9 million reduction. This involves reducing, among other things, also inventories, which did impact our margins by $0.5 million in this quarter on the cost side of the margin equation. These involve measures and processes to improve our balance sheet, our cash flow despite some temporary effects on the margins due to the cost side.

I just want to emphasize that the development on our prices remain healthy and stable. In addition, we are also improving processes and follow-ups on other working capital items, such as receivables and also the payable side.

[Arina van Oost, executive]

So that obviously helps our operating cash. How do you see our cash position going forward?

[Espen Schie, executive]

We are confident with our cash position. Keep in mind here that we are working on improving all cash drivers. So improved profitability, reduced working capital and substantially reduced CapEx from previous years.

[Arina van Oost, executive]

All right. Then we're switching to you, Luc. We have a question about the litigation case. Is the judgment final? And how does this affect your powder operations?

[Luc Dionne, executive]

Okay. Thanks for the question. Well, first, let me say that the ruling was highly in favor of Tekna. The judgment is not final in a sense that the parties have the right to appeal from this decision until September 9. But with this ruling, we -- Tekna continues to have freedom of operation and sales of our advanced materials for additive manufacturing globally. So right now, how is this affecting our operations? We can continue to operate freely with our IP.

[Arina van Oost, executive]

Excellent. Then referring to your comments about the additive industry slowdown. What's the situation exactly? And how is this affecting Tekna's powder sales for the remainder of the year?

[Luc Dionne, executive]

Yes. We have reported about this in Q1 and again this time. Well, we had noticed then a slowdown of our sales for Advanced Materials, specifically sales going to 3D printer manufacturers. This was also raised by some industry analysts at the time. And they pointed out and we also point out from our -- what we hear from our customers that the higher interest rates were not very favorable for capital equipment investments.

But on the other hand, the analysts also noted an increase in machine utilization rates. So our -- we'd say the operating time of these machines within the existing base of 3D printers already in the field. So more operating time means more powder usage. So we start to see that utilization rate going up. And that was reflected in this quarter with our Advanced Materials sales picking up 35% in the second quarter over the first one. So we believe -- looking forward, we believe Q3 will be a little slower due to vacation time, but things are picking up and will continue to pick up later in the year.

[Arina van Oost, executive]

Thank you. Then obviously, this year, we have a lot less plasma system order intake compared to last year. So what are the reasons behind this lower order intake? And what does it look like for the rest of the year?

[Luc Dionne, executive]

Yes, well, we had expected lower sales in the first half of systems. It's a very cyclical business. It's not a business that you can easily predict the cycle, but like this first half, we sort of knew that after like a strong year last year, we sort of predicted a lower volume of activity but -- in the first half.

But our pipeline of opportunities right now is quite strong. We've seen it with 2 orders that just came in, in July and August, and we see more orders coming in, in the second half that will continue to come in, in the second half of this year.

[Arina van Oost, executive]

Excellent. How significant -- so in the report, we refer to PlasmaSonic order that we had last year and that, that influences our backlog -- the comparable with the backlog this year. So how significant was that one PlasmaSonic in those comparables?

[Luc Dionne, executive]

Yes. Well, that specific unit was sold to just below CAD 10 million -- around CAD 9 million. So it has -- it does have a significant impact on the revenues in 2023. So we can see that when -- '24, when you don't have this kind of large system that fills your order book for the year, it makes you a little bit more vulnerable. So last year, it was about 25% of the revenues generated in the year for 2023.

Mind you, we're still -- this pipeline for PlasmaSonic system is still very healthy. We have some hot opportunities developing in many, I would say -- in at least 3 countries, and we're quite optimistic about the future for this product line.

[Arina van Oost, executive]

All right. And then we got a question about the joint development agreement with LG Chem. Is there any news on that?

[Luc Dionne, executive]

Joint -- LG Chem, yes. Well, just as a reminder, this, I would say, joint development agreement for Tekna, we had supplied a plasma system that was specifically configured for LG Chem trials. And that -- those were aimed for LG Chem to develop a material that could be used in manufacturing of batteries, rechargeable batteries. We are -- we still have this confidentiality agreement. We cannot say too much about it. But the trials that they have conducted were not inclusive, unfortunately. And LG Chem has terminated this program.

So in the framework of that collaboration with LG Chem, our role was to supply machines, industrial machines, if that had turned out to be positive. It was not to supply materials or energy or any nano materials to this company. It was more industrial-size plasma that were, by the way -- not those machines were not related to any of the current products of Tekna or any future products of Tekna.

[Arina van Oost, executive]

Exactly.

[Luc Dionne, executive]

Does that answer your question? Yes?

[Arina van Oost, executive]

Yes. Yes. Then we have one last question on microelectronics. So when do we foresee to see any benefits from this endeavor -- program?

[Luc Dionne, executive]

Yes. So microelectronics, just to say a few introduction words here. First of all, this is a program that we consider as an upside to our planning. So there's no -- they are not -- we see them coming in sometime maybe next year. But for now, we don't -- we're not planning on those in any of our forecast.

But in terms of results, we have sent some samples throughout the year to the customers. Those samples are under evaluation. We've pointed out earlier that it was an iterative process with each of these customers. So we're still in the iteration cycles. But now those trials are conducted in industrial environment. We expect that some results had become available in the -- in Q4 early -- late Q3, early Q4 this year.

[Arina van Oost, executive]

All looking forward to those results.

[Luc Dionne, executive]

Yes, absolutely.

[Arina van Oost, executive]

So I don't see any further questions coming in for now. So I think that concludes our Q&A session for Q2. Thank you for joining us today. Please consult the published half year report for more details. Today's slides and also the webcast are available on our website, tekna.com. Enjoy the rest of your summer. Thank you.

[Luc Dionne, executive]

Thank you.