Tekna Holding ASA

OSE:TEKNA

Earnings Call Transcript 2023-Q3

[Luc Dionne, executive]

Hello, everyone, and welcome to Tekna's third quarter results presentation. My name is Luc Dionne, I am the CEO of Tekna, and I am joined today by our CFO, Espen Schie; and by Arina van Oost, Tekna's Vice President for Investor Relations.

I will share the company's business highlights, while Espen will walk you through the financial results. Arina will manage the Q&A session at the end of this presentation. So as usual, if you have any questions, you can post them in the chat during this session. Slide 3, please.

For those who are joining us for the first time, let me briefly introduce you to Tekna before going into the details of Q3. Next slide.

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: 2 in Canada, 1 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 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. Next slide.

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 megatrends, 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 2 of these 4 segments, R&D Plasma Systems and PlasmaSonic, which accounts for 30% of our revenues in 2022, and Additive Materials which accounted for 70% of our revenues. Next slide, please.

Now let's have a closer look at the financial highlights. We are pleased to report the results for the third quarter with total revenues of $9.1 million, increasing 53% over the same period last year. This performance was driven by the Systems segment growing more than 120%, and Materials growing 25%.

We had previously guided on a softer quarter for Materials. We actually ended up slightly better than expected, and our year-to-date revenue growth continues to outpace the additive manufacturing industry with a 35% increase year-to-date.

At the adjusted EBITDA level, we are reporting a significant improvement of $2.2 million over Q3 last year, closing the quarter at negative $1.7 million. This progress is consistent with the increase in revenue we have recorded, the improved contribution margins as well as the reduction in control on our cost structure.

Looking at the order backlog. On September 30, the backlog reached $23.7 million, increasing by 58% from the same date last year. The backlog increase was driven by an order intake of $10.4 million, up from $6.5 million in Q2. So many, many thanks and kudos to all of Tekna team members for achieving these results in Q3. Next slide, please.

We can see the graph here on the left, the trailing 12-month revenue development of the last 6 quarters. The blue-green bars represent the Materials trailing 12 months, and the light green bar stacked, the Systems trailing-12 months.

On the right-hand graph, we have the trailing 12-month adjusted EBITDA, with the trailing-12-month EBITDA margin over the revenue for the same periods. Both revenues and adjusted EBITDA improvement trends are consistent with the increased deliveries and margins generated from sales and operational cost control reported since the beginning of this year.

Now let's look at how each segment has performed, starting with our Systems segment. Next slide, please.

As a reminder, the sales of our Plasma Systems are addressing 2 important needs in the world of research and development. The first application for our systems is a configuration that enables the development of novel materials for energy and space exploration as well as small-scale production of high-value materials.

The second application is the PlasmaSonic segment here on the left. This unique configuration of our Tekna plasma technology is used by original equipment manufacturers and academic research centers to simulate, measure and characterize the behavior of the spacecraft thermal protection materials in atmospheric reentry conditions.

So let me share the highlights of Tekna Systems segment performance this quarter. Next slide, please.

We're seeing continued and strong growth in Systems orders and revenue. In Q3, Systems order intake was $2.6 million (sic) [ $2.8 million ] with an order backlog at the end of September of $10.1 million (sic) $10.1 million. We have reached -- sorry, we have received new orders for 9 plasma machines so far this year, for a total value of $8.1 million, confirming again that the research industry of advanced materials is reenergized and very importantly, I should say, in all geographic areas we are developing.

The contribution margins for Systems year-to-date averaged 64%. So this is quite a turnaround when we compare to last year's 39%. So these results are confirming the strategic importance of the Plasma Systems segment for Tekna. For one, an important cash contribution supporting our corporate development ambitions. The Systems segment benefits our in-house material manufacturing operations with technological improvements, and not least, the vertical integration that spans from systems manufacturing, all the way to powder manufacturing enriches our global offering. It strengthens our brand's international outreach and it enhances our value proposition for customers having a high priority on securing their supply chain. Next slide, please.

So we're now looking at Additive Materials order intake and backlog. Firstly, in Q3, we recorded an order intake for Additive Materials of $7.6 million. This is up 108% from the third quarter last year and 52% up from the second quarter of this year. We see the effect of the order intake here on the graph, with the backlog returning to the levels we saw earlier in the year.

To keep the momentum going, a new atomizer is scheduled to be commissioned by end of this year, and this machine will immediately focus on Tekna's main selling materials. We are also planning on implementing an additional atomizer in the first half of 2024.

So we had a good rebound in the order intake this quarter, and that was driven by materials for the consumer electronics industry, as you have read in our press release earlier. So let me say a few words about our latest development in this specific market. Next slide, please.

Over the last 2 quarters, Tekna materials have marked a significant advancement, recording 2 consecutive orders for powders designed for the manufacturing of consumer electronic components. I'm very proud of this achievement. And this is a market segment we have been focusing on for a few years, but the progress was delayed by the pandemic. So a big shout out to our sales and engineering team, who have persevered on this task and supported our customer in its effort to qualify our titanium powders for this super exciting and promising application.

Examples of the components manufactured with Tekna's powder are shown here on the right side. So we can see mobile on the left image -- on the top of the left image, actually. You can see a mobile phone cases. You can see smartwatch cases and other subcomponents. So these components are manufactured using a technology called Metal Injection Molding or in its short form, MIM.

MIM and metal injection molding materials other than titanium, have been used for many years already. But in the recent years, we have seen an increase in the demand for titanium materials. Titanium materials such as those produced by Tekna for large-scale manufacturing of consumer electronic components, like the one shown here in the images.

In Q3, we recorded our second order for this market at $2.9 million, with deliveries scheduled in 2024. A similar order was received from the same customer earlier in May this year, but this time, valued at $1.7 million. It should be noted that these orders will be fulfilled mostly from material that is readily available in our inventory. This, of course, does not only streamlines the delivery process, but also has a favorable impact on our cash position.

The orders were captured at a competitive price, allowing Tekna to secure a position in the Asian market. And as we continue this trajectory, we anticipate our margins to improve with the global increase in demand for this product.

Lastly, it's important to highlight that this order is for material, consisting of the smaller particles generated from our existing powder production. And why is this important? So we'll see on the next slide.

So this is important because metal powder production processes naturally yield a distribution of small to large particle sizes. Although this range may be skewed differently from one supplier to another, all powder producers face the same reality.

For Tekna, the small and large sizes have the same high quality as the mean size. And they all have the potential of addressing high standard industries. So we have worked closely with a wide range of customers and applications to secure sales of Tekna's entire production output. Next slide, please.

And we're very close to qualifying our powders for application that will utilize 100% of the full powder distribution. We can see on the bell curve here how each powder size matches with a relevant industrial application. 3D printing was the first market developed by Tekna. We can see it about in the middle of the curve here. This industry -- this 3D printing industry actually uses the small, mean and large powder size. As you well know, this is the market that generates today, the most sales for Tekna.

Metal Injection Molding is the latest applications we have qualified. And as discussed in the previous slide, MIM uses the smaller powder sites. Binder Jetting, Direct Energy Deposition and Hot Isostatic Pressing are at earlier development stage for Tekna.

Hot Isostatic Pressing or HIP is of particular interest as it uses the full breadth -- as you can see on the curve here, it uses a full breadth of the powder produced. And it's nice to see that quality of our powder can address a wide range of applications and that we're getting closer to qualifying market outlets with enough volumes for all sizes. Next slide, please.

Here, we have a few examples of parts produced with the methods described on the previous slide. Metal Injection Molding, or MIM, on the top left, you can see again the smartphone and smart watch casing. On the top right, 3D printing. You can see multiple repeats of the same aircraft elevator, and then on the lower side image, you have impellers and spindles produced with the Hot Isostatic Pressing or HIP process. And finally, on the lower right, a capability demonstration part for a rocket exhaust nozzle manufactured with a Direct Energy Deposition or DED process.

So we have now covered our current segments, systems and additive materials. Now a quick overview of the Development segment, Microelectronics. Next slide, please.

As we had highlighted in earlier presentations, the expansion of the MLCC industry players is evident through continuous investment in new production facilities and capacity relocation. Building on that, I'd like to share that over the past 6 months, our Management Board and technical staff at Tekna have been proactive. We've visited several key producers in Asia.

Through these interactions, not only are we gaining a better understanding, but we are also confirming the producers, supply chain priorities, understanding their materials specification and grasping the rationale behind the need for qualifying new supply source.

Now it's important to note that despite a reported slower demand for smartphone in 2023, and that's mostly in Asia, we are very positive about the MLCC industry's outlook, especially with the increasing sales in electric vehicles, smartphones and other electronic devices.

So on this, I'm passing the microphone to you, Espen, for a detailed overview of our Q3 financial performance. Next slide.

[Espen Schie, executive]

Thank you. Good morning, everybody. Let's look at the Q3 financial results. Next slide, please.

I'm happy to report that our revenue increased 53% year-over-year to $9.1 million. This is a strong achievement for Tekna, despite the impact by vacation seasonality in July and August and a great achievement by all the Tekna employees. Year-to-date revenues were 47% over the same period last year.

The Materials revenue was $5.2 million, a 25% increase from the previous year, and our Systems revenue was $3.8 million, a 121% increase year-over-year. This reflects a strong execution on our order backlog.

Our adjusted EBITDA was minus $1.7 million, a significant improvement of $2.2 million from the same quarter last year and a $6.3 million improvement over year-to-date last year. We continue with strong focus on profitability and cash. Next slide, please.

When comparing this quarter to Q3 last year, 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 have shown a strong improvement, particularly within the Systems business when compared to the same quarter last year. Thirdly, we have increased productivity and organizational efficiency. We have implemented several measures to optimize our operations and indirect costs. And finally, we have maintained our cost control efforts, while scaling revenue and managing inflationary cost increases. This remains a balancing act of controlling costs and achieving the growth.

So to summarize the Q3 financial results, we have improved revenues, margins and productivity, all along with our cost control efforts.

Thank you for your attention. I'll now hand back to Luc. Next slide, please.

[Luc Dionne, executive]

Thank you, Espen. So now let's move on to the concluding remarks, starting with how Tekna is positioned to thrive on exciting megatrends along 3 different themes: Systems, Additive Materials and Microelectronics. Next slide, please.

As feedback from the market has shown, our unique IP-protected technology is highly relevant and attractive. And as Additive Manufacturing is gaining ground in an increasing number of industrial applications, we continue, at Tekna, to sell more systems for R&D and production of advanced materials in segments which are not competing in Tekna's current materials segments.

Our plasma technology has also proven extremely relevant for customers involved in the hypersonic and space industry, which is expected to grow substantially going forward, providing steady business for Tekna.

Our ability to deliver reliably high-quality materials positions us well in the relation to the Additive Manufacturing market which is expected to grow significantly over the next years. Our ambition for this part of our business is quite simple. Our target is to at least follow the industry growth and keep our market share. So both our Systems and Additive Materials businesses represent a good, solid foundation for Tekna's growth ambitions going forward.

And in the longer term, we believe Microelectronics will become an even stronger lever for Tekna. As already mentioned, we consider ourselves well positioned as we are in dialogue with the major MLCC players, and they all predict exponential growth and demands towards 2030. We will be there to support them.

Let's see now how this translates into business opportunities in the short to medium terms for Systems and Advanced Materials. Next slide, please.

For Systems, technology for R&D applications and PlasmaSonic wind tunnels from the basics of form, the basics of our offering. The global interest in developing testing and manufacturing novel materials has been reenergized in both industry and academia.

We are seeing new industrial segment emerge. Space tourism, satellite, Internet and networks and strategic defects. There's need for better performing products enabled by novel materials is driving an increase in demand for Tekna's research scale plasma unit. Part of the strong pipeline we have seen has already converted to backlog carrying through 2023 and into 2024.

As informed before, we have identified $300 million worth of PlasmaSonic prospects over the next 10 years. And the pipeline of potential PlasmaSonic orders for 2024, continues developing according to plan.

For Materials, we see a growing Additive Manufacturing market with an increasing number of OEMs now operating at an industrial scale. A further large potential for large volume manufacturing is opening with a breakthrough in use of titanium powders in production for Metal Injection Molding and binder jetting applications. And for Tekna, our increased factory output rate will continue to translate into increased sales throughout the year.

So all in all, we keep a very positive view on the opportunity for our technology and products in the short to medium term. And as mentioned on the previous slide, we believe we are well positioned to continue growth also for the longer term. And now it's time to sum up and conclude. Next slide, please.

Before we move on to the Q&A session, I'd like to take a moment and share again the highlights of the strong revenues and improved profitability we have seen so far this year.

We report revenue growth of 53% and an adjusted EBITDA improved by $2.2 million compared to Q3 2022. Our order intake in the quarter was $10.4 million, with several significant wins in Systems and especially in Additive Materials, where we have recorded a $2.9 million order issued by our MIM customer in Asia. The order backlog, just over $23 million, is supporting a significant revenue growth for 2023 and by Q3 year-to-date. Revenue is already up 47% compared to the same period in 2022.

And finally, we are reiterating a substantial improvement of margins in 2023, which have improved by $6.3 million year-on-year, supported by increased revenue and organizational productivity.

So this concludes our quarterly result presentation. Thank you for your time and attention, and we will now open for questions. To you, Arina.

[Arina van Oost, executive]

Good afternoon, and welcome to this live Q&A session with Luc Dionne, our CEO; and Espen Schie, the CFO for Tekna ASA.

Let's start off with the first question. We saw some social media posts in relation to Formnext this week. How is this important show going for Tekna?

[Luc Dionne, executive]

Yes. Well, first of all, Formnext is the largest additive manufacturing trade show, with the visitors coming from all over the world. It's a great showcase for Tekna. We have like a fantastic booth located at the main entry door of one of the largest hall, so it provides us with great visibility.

But if I had to sum up this trade show for Tekna today, I would maybe say it in one word, it's industrialization. So what we're seeing here in the mainly with regard to the printer manufacturers, we're seeing a larger number -- a growing number of larger printers that would use about -- for each run about 1 ton of -- could use 1 ton of material. So that, I would say, it's the buzzword around the trade show this year is industrialization.

And another thing that we find out very interesting from a powder producer perspective, is that they are not -- there's no new powder producer of any significant size showing up. So for us, it's also telling us that this sort of quality product and positioning we have been developing for the last 10 years is still sticking to that industry.

So it's -- and we also hosted the 3 of our distinguished Board members during the trade show. So all in all, it's very positive for Tekna and for the industry as a whole.

[Arina van Oost, executive]

That is excellent. Can you say something more about the particle size distribution? Is this new for Tekna?

[Luc Dionne, executive]

Yes. Well, I think that's a very good question, and I'm happy to elaborate a little bit more on it. So first, we need to understand that we see that this industry -- I'm talking about consumer electronic alone, that's an industry for Tekna that we see growing profitably. The demand for consumer electronics devices or the powders for this industry, consumer electronics will outgrow the supply by an order of magnitude.

To give some examples, one single customer's needs in the next 5 years is estimated to be above 2,500 tons for these powders. So that's -- we see that the demand for these materials are growing. For Tekna, in the specific case that I have described today, it was a strategic decision to go and capture this order with this single customer. We had the inventory available. We were prepared. We had -- for those who've been following us for a few years already, you are aware that we had started to qualify with some of these suppliers in Asia, almost 3, 4 years ago, so maybe a year before the COVID hit the planet. And it was like this unique opportunity.

The customer already had his own contracts signed, so we were sort of caught into a framework, and we made the decision to take that order and there we go. We have our great -- it provides us with a great way to further prove the fit, the fit of our material with the needs of that industry.

But there's another thing we need to mention here, Arina, is that if we look at it from a broader perspective, we're not only -- for this full scope of powders that I have shared in an earlier slide, we're not looking just at consumer electronics, we're looking at a much broader range of applications for Tekna's powder. And here, I'm talking more about titanium, but we also have other powders for which we are also looking for a growing number of applications. I've mentioned binder jetting, direct energy deposition. But of course, 3D printing alone is a huge growing market, as I mentioned earlier, that is gaining a lot of traction in industrial -- from an industrial angle or perspective.

[Arina van Oost, executive]

Okay. Thank you. That helps. Then in 2021, we've announced the contract with Airbus. How is that developing?

[Luc Dionne, executive]

Well, the contract with Airbus, yes, so that was announced just after the listing of the company in '21. So well, honestly, we all have a large, huge expectations. But for us, we've seen that developing a little slower than we would have hoped or expected at the time. But nevertheless, since that announcement, we have already started to supply back then -- back in '21, '22. We had already started to supply materials to some of the tier suppliers of Airbus, who are actually conducting work for this great company.

And this is -- like, I would say, we have NDAs with Airbus. So there's not too many details that I can share. But I can say that there's been a supply chain qualification process going on with Airbus and their suppliers. Of course, we were part of that qualification, and we know today that, of course, this powder -- our powder is approved for Airbus. And it's moving on. I think it's -- for us, we're just at the sort of beginning or expanding this relation with Airbus.

[Arina van Oost, executive]

Okay. So it's early days in the contract?

[Luc Dionne, executive]

It's the early days of the industrial phase, yes.

[Arina van Oost, executive]

Then I have a couple of questions for Espen. So what is your expectation for 2023 and also more interestingly in 2024?

[Espen Schie, executive]

Thank you for question, Arina. Revenue and EBITDA for '23 are expected better than '22, as we have guided. For '24, we will come back with a much more meaningful update at the next quarter, but I would like to remind the audience that Tekna is positioned in strong underlying markets, and we expect that to continue favorably for Tekna in '24.

[Arina van Oost, executive]

Can you maybe also comment on the quarter-on-quarter development in revenue and backlog [indiscernible].

[Espen Schie, executive]

Yes. So revenue and backlog development for Q3, if you look at this quarter-over-quarter is due to typical seasonality that we see. So despite the strong growth we experienced, we're still small enough to be impacted by summer vacations in July and August, as our main markets today are North America and Europe. So that's effectively 2/3 of the months in the quarter. And keep in mind also that it was the same last year and probably the same next year.

[Arina van Oost, executive]

Can you add some flavor on the lower gross margin within powders compared to the last quarter?

[Espen Schie, executive]

Yes. Thank you for the question. So we have -- the margin is a matter of product mix, and it's also a scaling effect that we have as a total.

[Arina van Oost, executive]

And then Luc, a little follow-up question. Did you say 2,500 tons of titanium powder for one customer in consumer electronics?

[Luc Dionne, executive]

Sorry, Arina, I cannot hear your question. So maybe you need to speak up a little bit.

[Arina van Oost, executive]

Did you -- so we got a follow-up question from someone on your comments around consumer electronics. Did you say 2,500 ton titanium powder for one customer?

[Luc Dionne, executive]

Yes, that's what I said. Yes. I'm going to say that I want to state something on this, however, you will not find that number anywhere in any documentation. So that's private discussions going on. But I think it's useful to understand here, and this statement was to illustrate the magnitude of this market. We show some watches. We show some watch cases. We show some cellphone pictures, but what does it mean in terms of powder size and in quantity.

So the idea here is not to stick to the 2,500 tons, but to have -- to understand that it's a huge market, when you look at almost every person on the planet carrying a cellphone and a smart watch. So that's the idea we have to understand here, and it serves the purpose of supporting the idea that the demand will outgrow the supply for these materials at one point.

[Arina van Oost, executive]

And then they have a reconfirming follow-up question. Is the price in line with traditional titanium powder?

[Luc Dionne, executive]

Price for these materials typically sell for a little lower than traditional materials.

[Arina van Oost, executive]

That is today though?

[Luc Dionne, executive]

Today, yes. Well, of course, we expect that it will catch up. And maybe I can add to that great after question. I was mentioning earlier that we were -- from a broader perspective, there's not only -- for Tekna, there's not only consumer electronics that are using this specific powder that we're selling that industry. 3D printing alone is also using the fine-sized powders that we have delivered.

So of course, we expect that the sales of these powders will also increase in 3D printing, not only consumer electronics. So globally, the margins for that very specific size are meant to grow as we develop in the industry.

[Arina van Oost, executive]

Okay. That helps. I think that clarifies it. All right. I have not received any further questions at the moment. So Luc, back to you. Any closing remarks for the quarter?

[Luc Dionne, executive]

Yes. Well, I think it's been a great year so far. We've -- when we started the year, we already had this vision of improving our revenues and improving our margins. But these things don't happen alone, there's a lot of people behind this. Fantastic team at Tekna, I want to thank them, especially for all the hard work that was done this year. We're keeping up with our ambition growth objectives.

I want also to maybe -- I know we have some customers and suppliers listening to us. So I think we have great business partners, and this is why we're able to achieve these results today. And of course, our investors, thank you for continuing and believing in Tekna. Thank you for the quality of the questions you're bringing every time, and we look forward to the next quarterly report. Thank you very much.