Tekna Holding ASA

OSE:TEKNA

Earnings Call Transcript 2023-Q4

[Luc Dionne, executive]

Hello, everyone, and welcome to Tekna's presentation of the Q4 results. I'm Luc Dionne, the CEO of Tekna. I am joined by Espen Schie, our CFO; and Arina van Oost, Vice President for Investors Relations. As usual, if you have any questions, you can post them in the chat during the presentation.Slide 3, please. I'll take a few minutes to introduce you to Tekna, and then we will go in the details of the presentation.Next slide. 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 main board of the Oslo Stock Exchange since July 2022. Tekna has just over 200 employees globally. We have 3 production facilities, 2 in Canada, 1 in France as well as sales offices and distributors located in Canada, U.S.A., France, China, Korea, India and Japan.In 2023, close to 50% of our sales were generated in North America, 30% from sales in Europe and the balance 15% in Asia and other countries. 39% of our customers are in the aerospace industry, 12% are 3D printer manufacturers, 7% of them manufacture medical implant and devices and the balance, 37%, are in various segments such as academic and industrial research or our distributors of Tekna powders. You can see here on the right that we are serving quite a large base of high-quality customers, most of them OEMs who are themselves leader in their respective markets.Next slide, please. We are engaged in 4 industries, one of which is related to our Systems business and the 3 others to our Materials business. As we see on the left, the growth of this segment is driven by megatrends having significant impact on consumer behavior globally. Space exploration and space tourism, the deglobalization and climate change, digitalization and connectivity as well as demography and health care. Our sales today are generated from 2 of these 4 industries: R&D plasma systems and PlasmaSonics, which accounts for 37% of our revenue in 2023 and additive materials at 67%.Now let's review the Q4 highlight. Next slide, please. Next slide again. We are very excited to report the results we have achieved in the fourth quarter last year with a record top line growth and a significant bottom line improvement. We have delivered on what we said with consistent operational and financial improvement through the year. We concluded Q4 with total revenues of $11.4 million, an increase of 60% over Q4 2022. The revenue performance was driven by both of our businesses, the Systems growing 125% and Advanced Materials growing by 40%.The adjusted EBITDA was short of breakeven by $300,000. This is a significant improvement over the same period in 2023 -- '22, sorry, that was closed at minus $2.9 million. The improvement achieved on EBITDA is consistent with the revenue growth we have experienced during the period, the improved contribution margins as well as the reduction in control over our cost structure that we have implemented throughout the year.The order backlog at the end of the year was $24 million, essentially at the same level as the same date last year. The order intake was $11.2 million, up from $10.4 million, and I'll say a few words on the order intake later in our presentation.Now let's turn to the next slide. Reviewing 2023's quarterly results on the trailing 12-month graphs here with revenues on the left and adjusted EBITDA on the right. Both graphs exhibit consistent operational and financial improvement, aligning with the initial guidance set at the beginning of 2023. And when we projected the revenues and margins then, it was quite ambitious. It's a nice achievement for the team given this was accomplished with a reduced staff base. Closing the year, we achieved a remarkable 52% revenue increase to $40.9 million. The System business revenue raised an impressive 90%, while Materials revenue surged by 36%.We delivered an adjusted EBITDA for the year of minus $3.9 million, improving by $8.9 million from 2022. This performance underscores Tekna's consistent organizational efforts and determination to improve margin and cash availability. We have implemented a meticulous crafted strategy and have executed on the plan right from the outset in January 2023. With the dedication of our team members, we have delivered on the guidance we had provided. So congratulations to all for a well-deserved results.Now let's take a first closer look to a top line growth and what we set out to do in terms of increasing capacity to meet the growing demand. Next slide. In 2023, one of our top priority was to build capacity to meet the growing demand. I think it's fair to say here, mission accomplished. Our Systems business saw an impressive 90% year-on-year top line growth driven by sales of PlasmaSonic and R&D scale plasma units. Materials revenue was also surged by 36%. This is attributable to a successful capacity upgrade and the commissioning of a new atomizer, both improving material availability and reducing delivery times.Our go-to-market strategy to sell the smaller fractions of titanium powders for industrial scale manufacturing of mobile phone and smartwatch frames has shown to be successful. We have expanded our market presence and boosted revenues for smaller titanium particle sizes. This is all good so far, but we have further improvements on the way that you will be able to appreciate this year.Now let's take a closer look at another top priority for 2023, which is improving profitability and cash generation. Next slide. Here, too, we are quite pleased with the results. The adjusted EBITDA improvement from 2022 resulted from the emphasis we have given to organizational efficiency and on chasing operational excellence. We have implemented many cost-saving initiatives, improved plasma system manufacturing productivity, enhanced powder atomizer output, manage inflationary cost, especially on the raw materials and have recovered government subsidies after extending the Canadian Strategic Innovation Fund until 2027. These efforts have led to improving our adjusted EBITDA by $8.9 million, closing the year, as mentioned earlier, at minus $3.9 million. We have literally turned the business around on a very short period of time.I will now move over to our Systems business, which, as you remember, has 2 distinct product lines. Next slide, please. These 2 product lines are shown here, plasma machines and PlasmaSonic. They are the results of decades of research and alliance with the latest technological advances to meet both current and future needs in high-end materials development. The first product line consists of compact and industrial scale plasma systems addressing the development of novel materials for energy, space exploration and small-scale production of high-value material. The second application here on the right is the PlasmaSonic product line. This product line utilizes Tekna's unique plasma technology to simulate, measure and characterize spacecraft thermal protection materials for atmospheric reentry conditions, serving OEMs and research centers.Let me share the highlights of Tekna's Systems business performance for this quarter. Next slide, please. In Q4, our Systems segment saw a robust growth with a $3.9 million order intake, leading to a year-end backlog of $9.4 million. Throughout 2023, we have secured orders with global industrial and academic clients for 12 new plasma machines, which totaled $12.8 million. December saw 4 new orders, including the first sale of Tekna's innovative PlasmaSonic ICPT-15 system designed for material testing and hypersonic program development. The contribution margins for the Systems segment remained strong at 63% for the year, showcasing a significant improvement from last year's 45%. We're seeing continued and strong growth in Systems orders and revenues, and this is good news following 2 years of COVID drought.Next slide, please. Now looking at Additive Materials. The order intake rose by 32% year-on-year, with Q4 order intake of $7.4 million. This is consistent with the previous quarter and demand for our product remains quite high. The order backlog steadily increased from Q2 2023, leading to an order book of $14.6 million going into 2024. Deliveries are expected to accelerate throughout the year, and this will be helped by the commissioning of a new atomizer in Q4 and another one expected to be commissioned in the first half of 2024. And about that first atomizer, it was commissioned in Q4 2023, of course. We are maintaining a strong opportunity pipeline with a number of potential new orders expected to be captured in the first half of this year, including new sales in the consumer electronics industry.So at this time, I'd like to share with you some more insight on how we book our order intake and backlog for Additive Materials. Next slide, please. The table here shows 2 type of orders that can trigger sales, spot orders and call-off orders. Spot orders is that approximately 50% of our sales come from spot orders sourced from both small and large customers, including industrial OEMs. These spot orders often received and delivered within the same period, most of the time will not appear in the backlog. And if you monitor the book-to-bill ratio, 50% of the revenues have quite a weight on that ratio. Of course, we keep a very close communication with these customers, and we do extensive follow-up with them, many of whom seek to secure their supply chain with frame agreements over time.Other half of our sales comprised of call-off orders. These sales arise either from standard purchase orders with multiple deliveries recorded in the backlog or from frame agreements. Tekna holds long-term frame agreements with some major customers. Call-off from frame agreements contribute to the order intake in the backlog, while the volume defined in the frame agreement itself is not booked. A frame agreement will provide good visibility for upcoming orders, combining a binding near-term forecast with deliveries that are typically executed between 3 to 9 months with a nonbinding long-term forecast. I wanted to highlight this point to you because as you can see, the backlog alone is not telling the full story of the sales outlook of Tekna.Now before I hand the -- over to you, Espen, for a more detailed review of the key financial parameters for Q4, let me comment briefly on recent development in the MLCC market. Next slide, please. As we had highlighted in earlier presentations, the expansion of the MLCC industry continues with OEMs investing in new production facilities and capacity relocation. As many of you know by now, we have regular contacts with the MLCC OEMs. In the recent months, our focus has increased on the 2 industry leaders who are showing the most promising outcome in the near term.As it is from the beginning, these interactions allow us and the OEMs to adjust the product and the MLCC manufacturing process through design iterations. One OEM has recently introduced us to their MLCC manufacturing division with whom we are about to share new samples. While we had exclusively worked with the OEMs central R&D group before, this change, we see this as a possible intention by the customer to accelerate the development towards high-end MLCC production. On the other hand, a Tier 2 MLCC manufacturer with whom we have worked in the past, informed us it would for now concentrate its effort in the low-end segment of the market as the demand in that sector continues to expand.So with this, I hand the microphone to you, Espen.

[Espen Schie, executive]

Next slide, please. And good morning, everyone. Let's look at the Q4 '23 financial results. Our sales revenue increased 66% year-over-year to $11.4 million. This is a record quarter and year for Tekna, an excellent achievement by the Tekna crew and our partners. The Materials revenue was $6.6 million, a 40% increase from the previous year. Our Systems revenue was 4.8%, 125% increase year-over-year. This reflects execution on our strong order backlog. Adjusted EBITDA was minus $0.3 million, a significant improvement by $2.6 million from the same quarter previous year. We experienced quarterly variations, yet significant improvements over time. We continue our focus on profitability and cash, having at year-end, $10.1 million in cash and an additional $5 million unused loan facility.Next slide, please. When comparing this quarter to Q4 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 overall financial results. Secondly, our margins have shown strong improvements, particularly within Materials business when compared to the same quarter previous year. Thirdly, we have increased productivity and organizational efficiency as we grow. Operating expense included an FX gain in the previous year and a loss in Q4. We continue our efforts on controlling costs by optimizing the operations, managing inflationary costs or while scaling the revenue. In Q4, we took a bad debt provision of $4 million on receivables due to our joint venture. This is excluded from adjusted EBITDA. This is a noncash and nonrecurring effect, and we expect that contemplated changes will have a positive effect on cash flow going forward.To summarize the Q4 financial results, we have record revenues, improved margins and productivity and strong focus and efforts on profitability and cash. Thank you. I will 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 different themes, Systems, Advanced Materials and Microelectronics. Next slide, please. The long-term outlook of Tekna is very exciting with demand driven by global megatrends. Over the years, we have introduced unique plasma system intellectual property in the market, which positions Tekna as a leader in the field of advanced materials. We anticipate sustained demand for research-scale plasma units in segments which are not competing in Tekna's current material markets, and we foresee growth in larger PlasmaSonic units, aligning with the expanding hypersonic and space industry.The additive materials industry is poised for substantial growth in the coming years. We have built a strong reputation as a trusted supplier of high-quality materials and our goal is to at least match the industry growth while ensuring we maintain our market share. Our business model is resilient. It is characterized by high entry barriers and 80% of our revenues are recurring, which adds to our global stability. The long-term outlook for Microelectronics remains an important upside for Tekna. The company is well positioned with ongoing development with the major MLCC players who foresee significant growth in demand towards 2030.Now let's have a look at the short- and medium-term business opportunities on the next slide. On the short-term, for Systems, we finished 2023 with a strong backlog of $9.4 million, putting us on a solid pace for 2024. We have a strong pipeline going into the year with additional orders anticipated from industrial and academic customers in Europe, Asia and North America. The new orders could include a large-scale plasma unit in the second half of the year. For Materials, the backlog on December 31 was $14.6 million. And as I have pointed out in a previous slide, we expect call-offs from framework agreements to generate new orders later in the year. The material industry remains very dynamic. In light of the ongoing dialogue, we have -- we expect that sales of materials for the consumer electronics to remain strong throughout the year and likely gain traction and better margin at the turn of the first half this year. 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 in 2023.Next slide, please. In Q4 and for the full year, Tekna delivered a strong top line growth and significant bottom line improvement with a remarkable 66% revenue growth in Q4, totaling $40.9 million for 2023, a surge of 52% from 2022. The adjusted EBITDA improved to minus $0.3 million, a $2.6 million gain from Q4 2022. The full year adjusted EBITDA stands at minus $3.9 million, reflecting an impressive $8.9 million improvement over the previous year. In the quarter, order intake reached $11.2 million with notable wins, especially in Systems. A solid order backlog positioned us for continued revenue growth in 2024. Our focus for this year includes sustained margin improvement, leveraging increased revenue and ongoing efforts to enhance organizational productivity. And while some quarterly variations are anticipated, our trajectory for the year remains positive.Going forward, we will have a stronger focus on cash flow. After investment-intensive years, we plan to ease on CapEx for a period. We have a good installed base machine and available machines to be installed and commissioned. We have R&D capability to further increase the output of the machines, and we have high ambitions for sales of smaller and larger sized powder fractions that we expect this will improve cash conversion of stocks.Finally, let me reiterate Espen's message that our cash position remains satisfactory. We have available [indiscernible] facility from our supportive main shareholder, AFK, and we are following a plan to carefully manage our cash position going forward.And with that, I'll hand over to you, Arina, to take us through the Q&A session. Thank you very much.

[Arina van Oost, executive]

Thank you, Luc, and welcome to all of you to the Tekna Q&A session. I'm here with Luc, of course, and Espen. So my name is Arina van Oost, I'm the Vice President responsible for Investor Relations. So Luc, the first question is for you, related to additive manufacturing. You mentioned about easing out on capital investment. How is this going to affect your powder production capacity going forward?

[Luc Dionne, executive]

Thank you. Thank you for the question. Well, since 2021, we have commissioned 2 new powder machines and another one will be commissioned by the end of Q2 this year. So along with these machines, we have also added, as you know, capacity with peripheral equipment, our peripheral rural equipment or what we refer to as post-processing for powders. So based on the projected machine loading and additional improvements that we intend to implement on these machines, we believe that we will have the available capacity to follow the industry market growth. And this is the reason why we say that the intensive capital investment right now, as we see it, is behind us. So of course, if there are -- if we are in a position where we need to scale up for the Microelectronics segment, well, new investments will be required then.

[Arina van Oost, executive]

Okay. Very clear. Espen, then maybe for you more in terms of numbers. What is expected for CapEx going forward?

[Espen Schie, executive]

Yes. 2024, we expect in the area of $5 million to $6 million, including R&D. CapEx is expected to gradually decrease from the level that we have seen in the last few years, as Luc mentioned, and we do expect to reach a level of about $2 million in '25 to maintain current operations, including R&D. And as well, the timing of further growth CapEx will then depend on demand and capacity and as well as a breakthrough in MLCC.

[Arina van Oost, executive]

Thank you, Espen. Let's continue with you because there's a question about the provision that we announced yesterday. Can you elaborate a little bit on this and what it means for us?

[Espen Schie, executive]

Yes. Although it's not an outcome that we had hoped for this business when we started it. It has been a loss-making venture since the beginning and caused significant cash flow. We are working on solving this part and as such, expected changes will improve cash flow going forward. And it's important to mention that this does not affect our reputation in the market. We have a strong position in titanium and aluminum and this strategy strengthens our focus on profitable business and support the growth potential for Tekna. The provision as such for bad debt is a noncash accounting expense and also nonrecurring. So going forward, there is not expected any cost of material value for this.

[Arina van Oost, executive]

Thank you. Luc, a question for you on Microelectronics. So the difference between the MLCC manufacturing and R&D division is not entirely clear. Can you reexplain and comment why you think this can accelerate the development?

[Luc Dionne, executive]

Okay. So I -- if I understand the question is we want to better understand the difference between the R&D -- we're talking about that one customer, the R&D division and Microelectronics, okay. So basically, with this very specific customer, which we have been working on for many years already, all our efforts were conducted with an R&D division inside that big, big organization. And that R&D division is located in 1 city in Asia.And recently -- well, actually, this last quarter, the same customer decided that they now want us to work in addition to the R&D work that, that continues. They now want us to work with the MLCC manufacturing group, which is a separate organization in a separate city. So now what we see is that our development efforts are getting closer to the manufacturing operations, which is, in our view, quite a good news here. And of course, as I mentioned many times already, these customers are very prudent with the information they share. So they did not explain to us directly what is the idea behind this change. But ourselves, we see that as an opportunity or a desire from the customer to accelerate the development.And the -- maybe for probably a more practical perspective, when we work with the MLCC manufacturing organization, these guys have actual production targets, which sometimes are more, I would say, practical and close to reality than theoretical targets that the R&D division could have. So for us, it's -- we see that as a very positive sign coming out from this specific customer. I hope that answers the question.

[Arina van Oost, executive]

Yes. Thank you, Luc. One last question for you, Luc, as well. Any view on the next PlasmaSonic order?

[Luc Dionne, executive]

Well, what can I say on this? Again, it's an important customer that we have been working with for a number of years. And in this developing PlasmaSonic solutions for customers, there's like a long, I would say, design phase where you have to understand what are the customer requirements, what exactly he wants to accomplish with this big PlasmaSonic machine. And then we enter a part where the customer reaches its budget available phase. And with this specific customer, we have reached this budget available and the customer has communicated to us that they are looking for an order sometime in the second half of 2024. So that's the-- I hope that answers the question.

[Arina van Oost, executive]

Yes, that sounds like a very good news.

[Luc Dionne, executive]

Absolutely.

[Arina van Oost, executive]

Okay. I haven't received any further questions. So that concludes the Q&A session for today. We will be in Oslo next week. So the 13th and 14th of February. So please reach out to [e-mail] if you wish to meet us. That's it. Thank you so much from all of us.