Tekna Holding ASA

OSE:TEKNA

Earnings Call Transcript 2021-Q4

[Luc Dionne, Chief Executive Officer]

Hello, and welcome to this presentation of Tekna's Fourth Quarter 2021 Results. My name is Luc Dionne and I am the CEO of the company, and I am joined by Arina van Oost, Vice President of Investor Relations. I will walk you through the presentation, then there will be a Q&A session at the end. You are welcome to submit your questions throughout the presentation.Before I start with the presentation, and as we are closing the year 2021, I want to express to all of Tekna's employees and customers globally, my most sincere gratitude for all the hard work and the great results we have delivered together this year. Some time and for many of you, under very unusual stressful conditions, tight schedules, sometime at home with children, I heard barking dogs, cat on the keyboard and even sometimes birds quacking, I'm extremely proud to present these results on your behalf today.Now without further delay, let's move to the highlights of the quarter. Next slide, please. Slide 3. Q4 was a superb quarter for materials in many aspects, with revenues of CAD 4.6 million, up 25% from Q4 last year and this, despite CAD800,000 of orders that customers ask Tekna to hold and deliver in Q1 2022. The materials order intake reached CAD 6.6 million, boosting the annual order intake for materials to CAD 19.8 million, this is 46% increase year-over-year and resulting -- these orders were resulting in an annual sales run rate in the range of CAD 19.8 million to CAD 26.4 million, which is basically the order intake from Q4 multiplied by 4. So we had a target of CAD 22 million last year in 2021. So we're very excited about this performance.The materials order backlog going into 2022 is at CAD 10.2 million. This is an increase of 46% year-on-year, and it reflects a strong market led by aerospace and medical that is emerging from COVID. The systems revenue on the other hand were down 62% year-over-year. Despite all the hard work by the engineers and the logistics teams to find alternate parts and suppliers, we ended up with execution delays and this is mainly why the total revenues were limited -- of the total revenues for the quarter were limited to CAD 6 million. And just to be clear, however, those are delays in manufacturing, not orders lost. In fact, the order intake for the systems segment in Q4 was quite good at CAD 2.5 million, and that raised the system backlog going into 2022 at CAD 5.1 million and Tekna's total backlog to a record CAD 15.3 million. So it was quite a good end for the segments in Q4.The adjusted EBITDA at minus CAD 3.3 million, consequently suffered from the downfall of systems revenue and lower system gross margins. We foresee that the COVID situation could keep impacting us on the short term. And despite the challenges we faced this year, again, in the global economy, Tekna exceeded many strategic targets. The quality of the customers, the long-term agreements we have signed early in the year confirmed that we are on the path to achieve our 40% to 50% organic revenue growth.A quick look at the events that happened since the year has started. With strong confidence in our products and the market we aim to up-list Tekna on the Oslo Stock Exchange this year. We have signed a lease agreement for a facility in France to consolidate all of our European additive manufacturing powder production activities. And I'll get back to that point and the 3 others after. We have met a first project milestone with LG Chem, as scheduled. And on the ASG side, Tekna became a signatory of the United Nations Global Compact, and we are on track to receive one of the most demanding quality system certification, the medical ISO 13485. Those were the results that happened just after the end of Q4.Next slide, please. So let me say a few words about Tekna for those who are joining us for the very first time. Next slide, please. Tekna was founded in 1990. Our headquarters are in Canada. We have over 200 employees now. We operate 3 production facilities in Canada and in France and 2 research facilities. We have sales and distribution offices in many countries around the world, and this allows us to maintain short delivery lead time and serve our customers in respect of their culture and priorities. We have a fantastic base and growing base of over 200 blue-chip customers operating in the field of aviation, space, medical and microelectronics.Next slide, please. As you can see here, Tekna is developing in 3 multibillion-dollar market verticals, additive manufacturing, printed electronics and energy storage. Our mission is to provide very fine metallic powder solutions of various sizes to all industrial leaders operating in these segments. There are 2 common and remarkable attributes to these industries. For one, the growth is driven by megatrends. Restructuring of global supply chains, environmental regulations, accelerations of conversions towards electric transportation, growing demand of interconnected objects, 5G and so on. And the second commonality is that there are just a few producers of materials capable of competing in each of these fields and Tekna is one of them. For Tekna, this translate in fast-growing markets and substantial market shares.In the case of printed electronics, our powders are used in the manufacturing of multilayer ceramic capacitors, also called MLCCs. The MLCC devices can be as small as the size of the tip of a pen. And in a cell phone, if you own a cell phone, of course, you could have up to 1,000 MLCC in one single cell phone. In the case of energy storage, we produce silicon powders that are used in the manufacturing of anodes for rechargeable lithium ion batteries. And I'll let you figure out how big this market can be for Tekna in the coming years.Next slide, please. Now let's have a look at the key developments for each business segment, starting with the additive manufacturing. Next slide, please. As I said earlier, for additive manufacturing, 2021 ended on a high note with CAD 4.6 million in materials revenues for a year total of CAD 19.8 million, which increased 46% year-over-year. CAD 3.3 million of new orders received in December alone were for our Consumer Goods segment, and I'll talk to that on the next slide. And the Q4 results are led by strong material sales in aerospace, which represents 50% of our sales as shown on the pie chart. It's also interesting to note here that consumer good is now 10%. Those -- the consumer goods for your reference is what we use to refer as consumer electronics for those who followed us before. So consumer goods are now 10% of our material sales.If we look at the progress made in Q4 on some of our large OEM accounts, that's the bottom left side of my slide here. We are on schedule with the Airbus supplier qualification process and powder deliveries under the long-term agreement as we expected this year. Tekna was registered in the qualified supplier list of a European engine manufacturer that we cannot disclose sadly and this registration is within the scope of the 5-year supply agreement that we had announced mid of 2021. In addition to this, we are making consistent progress in developing the automotive industry with OEMs in France, U.S.A. and Korea. And this adds also to our existing Japanese and German automotive customers.Next slide please. This slide here is to provide you with some data to appreciate how the Additive Manufacturing segment is developing for Tekna and why we are so confident in how it will develop in the future for Tekna. The bar chart here represents Tekna's revenue growth in each industry we sell -- where we sell additive powders. The dark colored bars represent growth achieved in 2020 over [ 2021 ] and the light colored bars, the growth of 2021 over 2020. In the consumer goods or consumer electronics on the right hand of the chart, Tekna's powder is used to manufacture small components for smartwatches, for cell phones or virtual reality glasses and so on.As you can see here, the sales for Tekna are developing exponentially. In fact, nearly half of the purchase orders received in December, and that's like just over CAD 1.5 million, half of the purchase orders received in December were for this sector alone. And you can see that that spike at the 1,000% growth. So it was a major order for Tekna. Aerospace sales -- this is on the right side of the graph bar here, aerospace sales grew 16% and 41% respectively. So this sector -- this sector -- sorry, continues to drive Tekna's top line, and we expect the long-term agreement signed in 2021 to generate sizable orders in 2022 and in the coming years.Machine manufacturers, here we are referring to sales made directly to manufacturers of the treaty printers every time they deliver a printer to their end user. You will notice here that sales in this segment were just 8% of the total material sales in 2021. This is likely an indication. We'll have to confirm that when the statistics become available a little bit in a few months from now, but for us, it's an indication that there were lower sales of printing machines in the industry last year. It doesn't mean that we're selling less powder. It's because we see that more and more user are owners of printers are actually running more of their machines. And this is why we can see the volumes going on in many of the segments we operate. So in this sector of 3D printer, we have -- Tekna has a strategic position because we are an independent material supplier. We have direct sales or ongoing qualification with 12 out of 17 relevant machine manufacturers. So we are confident that in 2022, we will be back to our historical figures.Now the automotive sector, very exciting for Tekna as you can imagine. So sales of materials for these sectors has nearly doubled in 2021. What is more interesting, however, as I pointed out earlier, is the consistent progress we have made lately with the automotive industry leaders in France, U.S. and Korea. Yes, so these 3 countries, these series of OEMs in those countries are adding to our existing customers in Germany and in Japan.Last but not least, the medical sector, where Tekna's powders are used to manufacture medical devices and implants. This sector is showing 44% growth year-over-year despite all -- the small slowdown in 2021, we see here, which is a direct impact of the global pandemic. We expect the sales of Tekna's titanium materials in this sector to continue to accelerate in 2022, and the reason why this segment will become major for Tekna, along with consumer goods is, what we are seeing is that there is a growing concern at the ruling bodies in U.S.A. and Europe, like the FDA and so on, they have growing concern with the use of cobalt chromes, alloy that were used historically to manufacture medical and little implants, cobalt chrome alloys will be replaced by titanium alloys in the future. And this is where Tekna's sales will be -- continue to increase in that field.Next slide, please. Now this is just a slide to share with you our setup in -- that we will have in Europe, actually, it's just a few minutes from our current factory in Macao. So on the lower right side, what you can see here is the picture of the wall plant. On the top, you can see like too little yellow arrows, those are the buildings we are leasing under the contract now.And the large building under the white arrow is where we can have -- we have the first right of refusal to lease that sector to allow for future expansion. In total, this -- what we are leasing today will bring -- allows us to add 1,500 tons of powder manufacturing capacity. And this -- the idea here, what we want to achieve is to offer our customers the possibility to have a 100% European supply chain. So this means that we will have -- we will buy the raw material in Europe, transform it in Europe and sell it in Europe in a closed-loop system. So we are strengthening our end-to-end supply chain resilience for customers, we are reducing our carbon footprint globally while improving on our margins because there will be less transportation of materials, of course, we are paving the way for fully traceable closed materials recycling in a circular economy. This is a major, major step for Tekna going forward.Next slide, please. Now a few words about the key developments in printed electronics. For those who aren't familiar with the table here, this is Tekna's list of active opportunities in the field of multilayer ceramic capacitors that we are pursuing to qualify nanopowders. The customers with a green star are the market leaders, and they share over 90% of the market we are addressing. The columns in the table show the various steps from the identification of the customer on the left side, way up to signing a supply agreement on the right side. The time needed from one step to another vary from customer to customer. For some of them, it started a few years ago already. The green cell means a completed step, yellow step in -- a yellow cell is a step in progress, and red is an opportunity that we are no longer pursuing at least at this time. The progress made during the quarter are identified with the Q4 symbol.Now despite the changes we see in the table, the qualification is developing quite positively. And we're still on track to secure a first customer this year. The qualification work with customer one is a leader in the manufacturer of MLCC, who was put on hold simply because their factory is running at full capacity, and they cannot allocate manufacturing resources for qualification at this time. Customer 2 has moved up one step in the last quarter. We have added a new customer. You can see down on the left side. We have added a new customer this time in China. If you recall, the last time we had customer 11 added from Taiwan, now this one added from China. So these latest additions are further supporting the fact that technology adoption may be starting outside of Korea and Japan, who are the leading countries of the MLCC's market we are pursuing.Regarding the customers in red, now, the customer 5, if you look at it, customer 5 is the MLCC paste manufacturer. We were exploring the possibility of providing them with material that would match their paste process. This customer's process was not compatible with ours. It should have -- would have required investment exclusively made for them and would have taken us off track from the leading OEMs. So for this reason, we decided to stop these efforts well -- well, I mean, say, for now, at least, we'll see if we get back to them later.For customer 9 and 10, on the other hand, we're just not -- those customers were just not manufacturing the MLCC devices of the sizes relevant to our materials. So we just -- for now, we just stop, we'll wait if they ever start developing those MLCCs, of course, we'll get back to them. We don't leave our sight from that for sure. To sum up this slide, we keep our bearing on achieving the growth strategy in this very promising segment. We have entered in support of that, we have entered a lease agreement to set up industrial pilot production in Canada with up to 25 tons of powder capacity annually. And this site is large enough and it has a possibility to allow us to scale up to 50 tons if needed quickly.Next slide, please. Now about energy storage. What we want -- what we emphasize here is how Tekna is developing its position in the lithium ion battery supply chain. From raw material supply of nanosilicon or [ anode ] composite up to the development of manufacturing of various battery materials with OEMs. If we take number one, if we look at the progress made in each segment of the value chain, we have achieved -- that's on the top right section, we have achieved a 70% improvement in energy density during the first round of independent testing of silicon samples produced with Tekna's plasma process. It's important to note here that these samples are as produced silicon. We have not tailored them nor modified silicon in any way. So it's out of the machine product. The purpose of the test was to provide Tekna with an initial data point to appreciate how battery performance improvement we could achieve with our silicon compared to traditional batteries made with traditional graphite add-ons and 70% as the first trial is quite impressive.And now the point number two, we are proud to lead an effort that will bring together a major provider of natural graphite and a graphite silicon composite producer. The aim of this joint team effort is to develop and provide battery manufacturers with ready-to-use high energy density anode materials. The technical due diligence of this little consortium here is due to be conducted in the second quarter of 2022. At least to start in Q2 2022.Now about the point number 3. So -- and that's our current efforts that we have discussed in previous presentations with LG Chem. So a milestone was reached in January with the approval of the pilot scale unit plasma system manufactured by Tekna that is dedicated to the joint research work that will be conducted at LG Chem Innovation Center. The research work is scheduled to commence in early March and will focus on developing new materials that will improve the storage capacity and the cycle stability of lithium-ion batteries. LG Chem team members have demonstrated high class and skills, along with Tekna and a solid and very fruitful collaboration is continuing to emerge between both companies.Next slide, please. And next slide again about the financials. So we recorded total revenues of CAD 6 million in Q4. This is a decrease of 17% from the previous year, but we increased our year total revenues to CAD 26.8 million, which is a 22% increase over 2020. The systems revenue were down 62% year-on-year due to COVID issues that created order execution delays and led to total revenues of CAD 6 million for Q4. The materials revenue, however, increased 25% year-on-year in Q4 and 35% over 2020. The total orders on hand at the end of the year amounted to CAD 15.3 million, which is obviously a record order intake for the backlog for Tekna and that CAD 15.3 million included CAD 10.2 million of material, which is an increase of 46% from the same time last year.We have a very atypical gross margin and adjusted EBITDA in Q4. But when you look at the fiscal year 2021, that is along our expectations. As I mentioned earlier, the gross margin and adjusted EBITDA were severely affected in Q4 from the lower systems revenue and higher foreign commissioning cost of our systems. So the COVID restrictions forced us to outsource some of the work, mainly in this case, the commissioning work of our systems to foreign local consultants. The adjusted EBITDA is at minus CAD 3.3 million in Q4 2021 and compared with Q4 2020 that included in -- in Q4 2020, sorry, there was a sizable amount of COVID-related government subsidies for production, labor and overhead. That obviously boosted the Q4 2020 EBITDA.If we exclude the Q4 performance that was heavily influenced by COVID, fiscal year 2021 adjusted EBITDA is according to the expectation and is aligned with our growth plan. The impact of COVID is still being felt in our systems factory, and we expect that this could continue over -- still a short period of time for Tekna.Next slide please. And next slide to the reiterated mid to long-term ambitions. So have no doubt for us, our vision of growing this company and achieving the mid to long-term ambition remains our main focus, and we are on this path to achieve it. What the numbers are telling us mainly for materials -- for our material business side, the level of activity that we have seen ending the year in December, like CAD 3.3 million in orders only that month and then we're seeing the same, very similar momentum keeping up already in Q1 2022. So there are no doubt in our mind that 40% to 50% organic revenue growth per year is our achievable target.Next slide, please. The key takeaways from this presentation. First, materials order intake and backlog are at record high and I would add the volume of activities in the materials business is definitely at record high. We see positive market indicators for all business segments, additive manufacturing, microelectronics and energy storage. We are ramping up capacity and productivity quickly and industry OEM recognized Tekna for our quality and customer service, with the large OEMs, Airbus, Boeing and all the automotive industry that we are developing now. So with all this, we are reiterating our mid to long-term targets. And in 2022, our aim is to list to the Oslo Stock Exchange.With that, I want to thank you for listening. And if you have questions, they are welcome. You can ask them to Arina or send them to the text message to Arina, and she will forward them to me. Arina?

[Arina van Oost]

Yes. Thank you, Luc, for that presentation. So we have already received a few questions, but I'm going to start with my favorite topic since I'm also responsible for sustainability. Since you mentioned the UN Global complex, are you planning to publish a sustainability report over 2021?

[Luc Dionne, Chief Executive Officer]

I love this question. So yes, of course, you -- we are preparing the ESG report over 2021. And we want to make sure that we meet our stakeholders' expectations, investors, customers and employees expect that Tekna to be a leader in this field. So definitely, we are -- we will be publishing our own ESG report this year.

[Arina van Oost]

All right. Moving on to the next question. How are you increasing the production capacity?

[Luc Dionne, Chief Executive Officer]

So what we're doing, we have 2 ways to increase production capacity. The first one, of course, is to improve the performance of the existing machines that is ongoing right now. We have a task force of engineers and scientists working, implementing fixes that were developed by our research and development.

[Arina van Oost]

Another question that has come in. Can you tell us a bit more about why the material sales to machine manufacturers are at 8% only, while all the other sectors have grown?

[Luc Dionne, Chief Executive Officer]

Okay. Well, the full answer to this question will come when the analysts of this industry published their figures, but what we see right now, what we suspect as the most probable and reasonable cause or justification is that likely 2021, there was a lower level of printers sold or, I would say, delivered to the industry. And because our sales in that sector occur only when a machine is sold, then there's a cause and effect here that we noticed. So this is the reason why we think that it has lowered. However, I really want to point out that I mentioned that we have like about 12 out of 17 machine manufacturers that we are qualified or are qualifying right now. Well, all those machines that are already in the field, we -- that 8% does not concern all those machines. And we have regular orders for the end users operating these printers every day. So -- just makes those things.

[Arina van Oost]

Okay. Next question, given the weak system sales in the second half of 2021, do you see any downside to risk to your previously communicated systems sales projections for 2022 and beyond?

[Luc Dionne, Chief Executive Officer]

Well, the first thing I want to point out here is that I think I've mentioned that, but the -- what we've seen in the second half of 2021 were not actually orders lost. It was the current orders on hand that have seen some delays. So all this work is still available for Tekna and we will generate the revenues out of it in the early Q1 and continue obviously, in Q2 of this year. I don't know if I'm answering the question, Arina, maybe you want to restate it. Was that the...

[Arina van Oost]

Yes, it was really what was happening with the system sales projections. So whether they -- whether we hold them for 2022 and going forward?

[Luc Dionne, Chief Executive Officer]

Okay. All right. So let me continue to expand my answer. Sorry about that. So first thing, in Q4, we had CAD 2.5 million of orders that came in for the systems. So of course, that segment for us is still very strategic. And on top of that, we have launched last year, our plasmasonic product line. And that product line is -- when we look at the -- already the existing pipeline of opportunities, when we look at the 5 to 10-year horizon, we're talking about a 200 -- over CAD 200 million of opportunities for that segment alone. So no -- I have no doubt that this little slowdown that we are seeing in the second half of 2021 is for us, it's a little bump in the road. We see that segment of systems that will continue developing well supported by our plasma sonic strategy in the years to come.

[Arina van Oost]

Could you comment on the gross margin for powder sales in the quarter?

[Luc Dionne, Chief Executive Officer]

Gross margin for powder sales in the quarter, they were up to our expectations in the 40%, 45% range, depending on -- even up to 50%, depending on the materials sold. So there was no issue with material sales in the quarter. What really draw down the gross -- the average gross margin is the issues we had with the system. So definitely, the gross margins for the powders are healthy and will remain healthy. And actually it will improve as we move on because all these improvements we are implementing on our systems actually increase -- will be increasing our margins.

[Arina van Oost]

Then some questions around LG Chem. So if you can elaborate around the milestone and what the implications of that particular milestones are?

[Luc Dionne, Chief Executive Officer]

All right. So that's -- LG Chem, there's not much I can say about that contract everyone. You know that I've been very prudent in what I disclose. But what I can say here is that in this agreement in this joint development agreement we have with LG Chem, one of our contribution is the supply of a very sophisticated plasma system. And that milestone was about having the LG Chem folks here in our factory approving that the systems that we -- the system we are delivering to them matches their expectation. And that is the key milestone that we have met. So that system matched the expectations. It has been shipped. It's on its way to Korea, and it will -- the joint development agreement efforts will continue as soon as it is commissioned in their factory.

[Arina van Oost]

Do you want to say something about the next step with LG Chem?

[Luc Dionne, Chief Executive Officer]

Well, I mean, the next step is joint development agreement work, research work that will continue. So I cannot disclose more. But what I can say is that the aim of this agreement is to develop materials that will improve energy, density and cycling stability of lithium-ion batteries. So that's the aim of this agreement. So I cannot say more. I apologize for that. I'd love to say more, but we're very prudent. LG Chem is an important partner with us and no way we want to -- I'm missing an English word here, but we don't want to harm that relation.

[Arina van Oost]

Understood. Do you expect powder orders from consumer electronics on the same level as December going forward?

[Luc Dionne, Chief Executive Officer]

Yes. So in December, just to give a short story here, 2 things very important happened for consumer electronics. The first one is we delivered in December a quite large order for that segment. So about 2.5 tons were delivered to customers in that quarter. In addition to that, we received an extra order for deliveries that order was called 5 tons for deliveries during 2022. And those delivered -- sorry, during the year of 2022. And that is like for us, it's the start of this -- the growth of this segment. And we expect, obviously, this order was for one customer. So we know that there are many additional customers in China. So we see that it will continue to develop throughout the year. Now it's difficult to say at what rate. From the conversations we had before, we mentioned about 3 or 4 key users of our powder. And with this order, we're achieving at least one of those -- and mind you, it's the largest of all 4. One of those customers, we just -- we can check in our box.

[Arina van Oost]

So maybe a follow-up question. Do you expect then that December order intake, is that an indicator for what's going to happen in 2022?

[Luc Dionne, Chief Executive Officer]

Yes, I want to be careful here, but I don't want to -- you said Q1 2022.

[Arina van Oost]

No, for 2022 in general.

[Luc Dionne, Chief Executive Officer]

Okay. Yes, yes. Well, I don't have that full crystal ball. But one thing I can say is right now, as we speak, the volume of orders coming in have never been this big. I mean -- and it's not just the number of orders, but it's the size of these orders -- for those who've been with us following us from the beginning, we started with some very small orders of 50 kilogram, 100 kilogram, but now the orders we're starting to see coming in are in the orders of magnitudes of tons, 1 ton, 3 tons, 5 tons like I mentioned earlier. So yes, this volume of activities is certainly really promising to what is going to happen in 2022. So it's -- I'm confident all the team here is gearing up for a 40% to 50% increase in our sales of materials. The systems we're improving productivity. We have some other systems in the manufacturing pipeline already. So yes, I mean there's no doubt, I think that it's a long answer, but the bottom line here is that 40% to 50% growth is our goal, and this is what we're on path to achieve.

[Arina van Oost]

Well, I think that's an excellent way to close our Q&A session. Since I don't have any questions anymore, but it's also a very promising message. Do you have any closing remarks to finish up?

[Luc Dionne, Chief Executive Officer]

No. Well, I said it a few times, we -- Tekna is a great, fantastic company. Tekna, the employees, our customers, our quality people, we work with the largest OEMs in the world, be it in additive manufacturing, microelectronics and energy storage, as I pointed out earlier, this is way ahead of us. When we look at the Q4 numbers, maybe it's -- it can play into our mind. But just remember that this growth path is ahead of us, and we are building into it. We have all the necessary team members and customers to achieve that. So I really look forward to share with you the annual report and the Q1 2022 results in our next webcast. Thank you very much, everyone.