Tekna Holding ASA

OSE:TEKNA

Earnings Call Transcript 2024-Q3

[Arina van Oost, executive]

All right. Welcome, everyone, to Tekna's presentation of the highlights of the third quarter 2024. I'm joined here today by our CEO, Luc Dionne and our CFO, Espen Schie.

We have prepared a short presentation of about 15 minutes. And afterwards, we'll take your questions and hopefully have some interactive discussion about Tekna. The questions can be sent to investors at tekna.com, or you can use the Q&A section on Investorweb.

With that, I hand over to you.

[Luc Dionne, executive]

Thank you, Arina, and hello, everyone, and thanks again for joining us today for our third quarter results for 2024. As I will share with you today, we concluded the third quarter with mixed results, declining revenues from our Systems segment, a marginal increase for Advanced Materials sales and on a more positive note, an improving EBITDA over last year. Before I jump into the details, let me say a few words about Tekna.

So next slide, Arina, please. So Tekna is a world-leading provider of Advanced Materials and Plasma System solutions. The company was founded in 1990. The headquarter of the company is in Canada, and we are listed on the Oslo Stock Exchange since July 2022. The company has just over 180 employees with 2 production facilities in Canada. As well, we have offices and distributors located here in Canada, in the U.S., France, China, Korea, India and Japan.

As you can see on the little graph down here, 48% of our sales at the end of last year were generated in North America, 37% in Europe and the balance in Asia. And then just a little less than half of our sales go to the aerospace industry, as you can see in the middle section here, 12% to 3D machine manufacturers. So this number, as you will see later, could drop in percentage point this year. 7% to the medical industry, 5% to consumer electronics and the balance, 37% are sales going to the various segments such as academic and industrial research.

You can see on the right side of the slide that we are serving and targeting quite a large base of high-quality customers. And as I mentioned earlier, a good number of them are leaders operating in the aerospace industry.

Next slide, please. Tekna is engaged in 2 business lines: Plasma Systems on the left and Advanced Materials. The System business line represents more or less 30% of our revenues into specific market segments: R&D Plasma Systems and PlasmaSonic wind tunnels. Here on this picture, you can see an R&D size Plasma System. And on a later slide, I will show you later, I will tell more about the PlasmaSonic wind tunnels and the potential that has for Tekna.

One of the key applications for our Plasma Systems is to produce Advanced Materials in the form of very fine metal powders. We have developed customized configurations of these systems and we use them for our exclusive production of Advanced Materials in 3 rapidly growing segments that we see here under the Advanced Materials business line: additive manufacturing, microelectronics and energy storage.

The production of materials serving the additive manufacturing segment is fully industrialized and it has generated 2/3 of Tekna's total revenues last year. Materials for microelectronics are at various development stages with selected prospective customers, and it represents a significant potential upside for Tekna. The energy storage, we have developed quite an interesting IP portfolio of both processes and materials. But for now, the commercialization of this -- of energy storage is paused for now.

So next slide, please. So about the revenues for the quarter. So the total revenues for third quarters -- third quarter, sorry, amounted to $7.6 million, declining 16% over the same period last year. The quarter results are marked by 43% lower revenue recognition in our Systems segment and by a 5% increase of Advanced Materials sales.

The trailing 12 month for revenues closed at $38.9 million, showing a small improvement of 7% over the same period the year before. So we had anticipated the effect of the summer break on our revenue, and that for several of our customers. But as I will explain on a later slide, we have seen a more pronounced correction from one very specific group of materials customers in Additive Manufacturing.

Next slide. So despite lower revenues in the quarter, our adjusted EBITDA improved from last year to minus CAD 1.4 million. The trailing 12 month also improved by CAD 0.5 million. And as communicated in Q2 this year, we have taken ambitious measures to improve the company's profitability. These measures include a 15% year-on-year reduction in head count as well as the implementation of several product cost savings and operational productivity improvements. These measures are expected to yield $2 million in cost savings throughout the second half of this year, with some of them extending into 2025.

An important focus -- next slide, please. So an important focus was given to cash management and cash flow in the first half of this year, and this will continue going forward. The net cash from operating activities in Q3 was negative $1.2 million and taking advantage again this quarter from an important reduction of working capital of $1.1 million.

The capital expenditures in the quarter amounted to $0.6 million, ending the year-to-date period at $2.2 million. And as a result, our CapEx guidance for the year is reduced again this time from $4 million to $2.5 million. The cash balance at the end of the quarter was reduced by $1.7 million to $7.6 million.

Next slide, please. So as I mentioned earlier, we had quite low material sales in Q3. This was partly due to summer holidays but also because we saw a more noticeable correction from one specific customer segment in Additive Manufacturing.

On the graph here, each bar represents the percentage change in material sales across the different customer segments we serve. The light green bars show the sales variation for Q3 over last year while the dark green bars reflect Q3 year-to-date changes. So since the beginning of the year, as many of you know, capital investment in the additive industry has been somewhat limited. A lot of investments got pushed back, which led to fewer sales of new 3D printers in the market. And as a result of that, sales of Tekna powders to this specific segment were down 74% in Q3 over last year.

That being said, the industry, as we can see with the other bars here, the additive industry is still seeing solid growth. For example, we've seen 25% quarter-over-quarter sales increase in aerospace and defense and an impressive 35% growth in the medical sector, all this in, generally speaking, quite difficult year globally. So this metric is -- also indicates to us that despite lower sales of new printers that the machine utilization rate in the field is rising. And it's also a sign that the industry is gaining maturity.

One other point that is worth mentioning from this graph here, while sales to consumer electronics segment were somehow flat in Q3 compared with last year, we are actually seeing a 60% increase in year-to-date sales in this very specific segment.

Next slide, please. So as we look ahead, Tekna's ambition for long-term growth in Advanced Materials remains strong. This is supported by our solid track record of historical sales and our leadership position in the industry. We're seeing sustained demand across key industries, as I mentioned, particularly in aerospace and defense and medical sectors. And of course, there's no doubt in our mind that the sales for 3D printers will resume in the market. It's just a matter of time.

Globally, we're seeing several growth drivers that align with our strategy. There are a clear shift toward more efficient manufacturing technologies and product across industries. And on the top of that, the supply chain constraints and trade tensions continue to favor -- and that's an important point here, given the recent elections in the U.S., it continues to favor manufacturing, reshoring and adoption of alternate manufacturing technologies, such as, of course, 3D printing.

So for Tekna, specifically within the Additive Materials space and space for Additive Manufacturing, we're setting ambitions, but achievable targets. And we're planning to gradually ramp up both sales and production capacity, aiming for $70 million in revenue by 2027. And the best part of that is we can achieve this with limited CapEx need.

In the near term, we're confident that growth will continue on a positive trajectory and as it has done since we set out on our journey as a world leading supplier for Advanced Materials globally.

Next slide. So now moving on to the systems and microelectronic business areas. And in these segments here, we see a significant potential for business upside. Our PlasmaSonic product line is well positioned to benefit from global trends set by the accelerating development in space and also hypersonic flight programs. So far, we have built a quite a robust pipeline of system opportunities and that pipeline is valued at over $300 million today, and we have a potential order expected as soon as 2025.

You can see here on the right, this is an example of what a midsized PlasmaSonic unit looks like. And we haven't spoken much about that in our last meeting, but this one here that you can see, it makes about 10-meter in length, and it is used by our clients who acquired these machines to test for hours multiple samples of space shuttle grade materials under extreme conditions while they simulate high-speed and temperatures observed during atmosphere reentry of space vehicles. And we're talking about simulating 30,000 kilometers per hour and 10,000 degrees centigrade inside this unit. So that's, I would say, we call that pretty hot stuff here at Tekna.

And on the microelectronic side, we're seeing strong progress, more specifically with multilayer ceramic capacitors development. Preliminary test results from the nano materials we've supplied have met a significant portion of the key characteristics that are sought for next-generation MLCC applications. The trials are continuing, and we're optimistic about the potential of this market, specifically for advanced capacitors that keeps on developing.

So with this, I conclude my presentation. Thank you for your kind attention, and I pass back to the microphone to you Arina.

[Arina van Oost, executive]

Thank you, Luc. And yes, we've already received quite a few questions also ahead of the meeting today. And we'll start with you, Espen, because there's quite a few questions on our financial situation. So do you have a timeline for us on when we're going to reach profitability?

[Espen Schie, executive]

First, I want to confirm this remains our highest priority. We are cautious to guide specific on timing, but you may appreciate that we are implementing a cost reduction program. This reduces the breakeven and a little bit higher revenue than what we have seen in this quarter. I think -- the combination of this will close the gap.

[Arina van Oost, executive]

All right. So for now, we need to -- we do work hard to get there. We have launched this profitability program with cost-saving measures. Can you say something more about that also on the effect it will have on 2025?

[Espen Schie, executive]

Yes. So in Q2, we communicated in the quarterly report a cost reduction program of $2 million cost savings in the second half of 2024. This involves a margin improvements. It was operating cost reduction and staff reduction. Specifically, where we are deep into sort of finding savings on recurring and nonrecurring items. Recurring meaning gas, utilities, packaging, general spending, reduced stuff. Year-over-year, we have reduced that by 15%. We also have temporary measures such as reduced travel and also other spends that we can either postpone or prioritize differently or altogether avoid or we find different solutions for it. That's on the profitability side.

On the cash side, I would like to just communicate firmly again that we are continuing to reduce the working capital. We have reduced it to $1.1 million in the year. And -- we had $1.1 million in the quarter, sorry, and also reduced the CapEx levels to levels that are very limited compared to what we have in the previous years as the previous year has invested to establish this level we want to be at. So this low CapEx level, we also expect to continue for the foreseeable future.

So. Yes. Maybe just want to mention on the CapEx side, the reason why for the foreseeable future also quite low is that we have 2 systems that we have built already, but we have not installed them yet because we remain more flexible when we need to install them to capture the market demand so that when we see that the market picks up, we will be able to take advantage of that by installing these machines with very limited CapEx as they are all already built, plus we will be able to be very quick to do so. So here, we have a big advantage, I think.

[Arina van Oost, executive]

Thank you. Very extensive answer, but I think our listeners will appreciate that. Then one more for you on our guidance for the fourth quarter and 2024 as a whole. Can you say something about that?

[Espen Schie, executive]

Yes. So that's -- for the fourth quarter, we're not necessarily so specific on the numbers. But I would say that for the full year, we expect it to be in line or similar to 2023. For CapEx, we have been very specific and that we expect the full year to end at around $2.5 million, excluding these contracts subject to IFRS 16.

[Arina van Oost, executive]

All right. Luc, a lot of questions also for you. So let's get started. Let's -- one additional question on outlook, but the longer one. Given the current market conditions, how do we reach the $70 million by 2027, which we have kind of announced in Q1?

[Luc Dionne, executive]

Yes. Well, first, despite everyone recognize that 2024 is quite a difficult year in many industries. But when we look at the specific results of Tekna, I mentioned about aerospace and medical, we see that we have seen quite some growth in that area. So for Tekna, this target -- the future target will build up organically with the current segments we are developing. And there's no doubt, as I mentioned, that the sales of our powders to AM machine manufacturers that will come back because interest rates are coming down. We've seen that.

We -- and by the way, the sale of these machines haven't stopped. There's -- some are still being sold out there. Some players are doing very well actually. And we're catering to 12 of those machine manufacturers. So we're in strategic position in all these 3 key segments to grow organically and maintain our ambitious target of $70 million. And the nice thing, as Espen mentioned, that we have the equipment already available to reach this target, most of which -- most of the equipment required to reach this target -- 2027 target.

[Arina van Oost, executive]

Yes. All right. You kind of answered the next question, which is how the higher interest rates and limited capital are impacting our customer segments? So it's really the printer manufacturers, right, that are affecting us currently?

[Luc Dionne, executive]

Yes, definitely. And I think we will not mention enough that when we look at how 2024 behaved for our other customer segments, it's -- they have started to use more of their existing machines on their production floor. So that, for us, is a sign -- an important sign, I would insist that on -- its maturity building up in that specific industry.

[Arina van Oost, executive]

Now -- so -- and you don't really see any impact for Plasma Systems, right, from these high interest rates?

[Luc Dionne, executive]

Well, a lot of those systems were selling through government to government agencies. So it's not a key influencer right now for these sales.

[Arina van Oost, executive]

All right. Thank you. Then, of course, the returning interest in our consumer electronic customers. So are we just having any indication of a further large order coming for that?

[Luc Dionne, executive]

Yes. Well, first thing is that we're still delivering on last year order. For -- so for the one who have been following us, last year, we secured an order that basically created a backlog for 100% of our production for this year. And right now, for next year, we are negotiating with more than one customer to secure the sales for next year.

But we're -- this is still on a positive trend for Tekna. And the metal injection molding, which is the industry using these powders, are finding more and more usage for our powders with their technology. And you mentioned about -- we talked about smartphones, watches, and there are also a lot of them -- of those components that goes to the medical industry as well, like small medical tools that we can -- we start seeing being manufactured from Tekna's quality powders.

[Arina van Oost, executive]

So next question, with a 62% reduction in order intake for Advanced Materials, what measures are we taking to stimulate that demand and improve our order volumes for the coming quarters?

[Luc Dionne, executive]

Yes. Well, first thing, this reduction in order intake happened in Q3. So of course, it was a very low summer to say the least, right? But we see that this -- it's already recovering. The rate of order intake has, I would say, more than doubled since the -- in volume has more than doubled since the start of Q4. So we see this very positively. We have been, of course, very active in trade shows in the U.S. all year long. And also upcoming Formnext -- for you guys in Europe who are listening to us, we will be at Formnext in November in Frankfurt. So come and see us at our boot if you want to hear more about Tekna. And of course, looking at what actions we are taking to close down the -- or improve our sales in Q4.

Needless to say that we are monitoring on an almost daily basis, every opportunity we have in our pipeline and specifically the ones that are targeted to be closed and invoiced by the end of this year.

[Arina van Oost, executive]

Thank you. Yes, I can certainly confirm that everyone is very busy making sure that our Q4 is going to be better.

[Luc Dionne, executive]

Yes.

[Arina van Oost, executive]

All right. Let's see here. We have another one. Yes. Yes, it's a very current topic. The elections yesterday in the U.S. So obviously, with Mr. Trump in the White House, do you expect that, that has a favorable effect for Tekna?

[Luc Dionne, executive]

Yes. Well, I mean, I think that, as I mentioned, we have a pipeline of over $300 million of opportunities, most of them for our PlasmaSonic business segment, I would say, product segment. So I mean, for us, -- and those opportunities are not only in the U.S. Many of them are in the U.S., but we also have some of them in Europe and other in Asia. So I think if we need to look not just what's happening in the U.S., but globally, what's happening. But it's not just the -- because we tend maybe to make a relation with defense, but a lot of these activities are related to space exploration and hypersonic flight, and those are developing globally. A lot of them buy companies like the one here by Elon Musk. So -- and we can name others, Virgin Galactic, Blue Origin, SpaceX and so on.

So a lot of these activities are not just government motivated, but also privately motivated. For us, it's -- we see that as a very strong potential upside for Tekna. And we think with the latest election, we see this just a more favorable effect on that global pipeline.

[Arina van Oost, executive]

Thank you. Then we got a question about microelectronics. Obviously, a very interesting upside potential for us for the future, and a lot of our investors are following this closely. So can you give a little bit more color on what is happening there?

[Luc Dionne, executive]

Well, I think I've mentioned a lot of it during my presentation. There's not much we can say because we have very strict boundaries for communication in this field. But I want to reemphasize that, first of all, this process with the customers, it's an iterative process where we make, on our side, progress in our development. We submit our development to our customer mix -- is on -- well, the customers make their own progress with their own development on their end. And we move progressively towards a final mutual functional combination of products.

That being said, the -- I would say the latest, I would say, achievement is the fact that we have delivered the last product, or samples we have delivered, meets a significant part of the requirements of that industry. And right now, we are in the phase where we are going to deliver -- get some results of the latest samples that will be delivered later this year, and we'll get the feedback next year. So I cannot say much more than that right now on this field or on this product.

[Arina van Oost, executive]

Okay. But it's moving forward and...

[Luc Dionne, executive]

Yes.

[Arina van Oost, executive]

So it's definitely slower than we all wanted, but we're getting there.

[Luc Dionne, executive]

Yes.

[Arina van Oost, executive]

Then also another current question. The Boeing situation is obviously resolved, but did that affect our Q3?

[Luc Dionne, executive]

Well, I mean, I cannot comment specifically on the activities of Boeing, but we need to look at the entire aerospace and defense industry, how that has been moving for Tekna. And we've seen -- I've mentioned about 25% growth year-on-year, Q3 to Q3. So despite a slow quarter and even a slow year, our sales for that segment have been growing 20%, 25%-ish. So -- but this being said, we're very happy that the Boeing and their employees have come to an agreement and that activities will start -- will resume with this important player in the additive industry.

[Arina van Oost, executive]

All right. So I think that concludes the questions that I have received so far. It's nice to see that we're getting more interaction from investors. Any final words from you, Luc, before we continue our Q4 efforts?

[Luc Dionne, executive]

Well, I know the team here is all pumped up looking in Q4, preparing for 2025. The backlog for next year is already building up. We have many great opportunities ahead of us in additive manufacturing, the PlasmaSonic field as well as, hopefully, in microelectronics as well next year. But moreover, I think this team here has been very dedicated to improving our cost base, cutting on our -- improving our organizational efficiency, focusing on improving the product cost and more -- and improving our liquidity position.

So all kudos to Tekna employees and our customers all around the world that are supporting and being very actively open with us in developing our business. So thanks a lot to everyone. Thanks to our audience today, listening to us, and we look forward to the next chapter, which is -- will be in early next year.

[Arina van Oost, executive]

Excellent. Espen, you have some final words maybe for our Norwegian listeners?

[Espen Schie, executive]

Thank you so much for listening in. We have done this one also a little bit in the evening this time. So it's to try to see if we catch further audience. And if there are any feedback and things like that, we are also happy to take that at email.

[Arina van Oost, executive]

Very much agree with you, yes. So the investors at tekna.com is always available for your questions. You can also continue to post questions on the investorweb.no Q&A section, and we'll be answering you in writing. So thank you for joining, and we'll see you next quarter.