Canatu Oyj (CANATU) Earnings Call Transcript & Summary

Hello, everybody. Ladies and gentlemen, dear investors, let me shortly introduce myself because we meet in many cases, for the first time. My name is Dr. Maximilian Slawinski, and I'm since May, the new CEO of Canatu. I'm part of the semiconductor, automotive and new energy industry since almost 2 decades. My first 100 days at Canatu have been progressed and they have just confirmed my hopes to join the company, leading in one of the most emerging segments in the entire deep tech industry. We will present today beside our H1 results, some remarkable achievements the company has been able to perform within the last 100 days. You most probably heard already yesterday about our great news of our recent reactor order from FST. The first, since ours stock, the first since almost 3 years and most important, even ahead our new plan to target more than EUR 100 million revenue by 2030. We will furthermore present today our Polaris program. We published already our management reorganization, and I will go a little bit deeper into this today. We will present our new strategy towards targeting more than EUR 100 million revenue by 2030 based on a focused and fast execution and organically strong, growing and profitable markets. as well also presenting our vision for 2035. A third pillar of our Polaris program will explain our implemented cost measures, securing a disciplined cash management with a streamlined Canatu including headcount adjustments. I believe that today's presented achievements are testimony what Canatu -- what Canatu team is able to improve and transform in a short amount of time. As a result, of energized team willing to win. I hope you'll come to the same conclusion as me. experiencing this company just performing a pivotal moment for future success. So let's start. Where is Canatu already be world class. I think Cana has proven already in the past that we are able to industrialize products and to mass manufacture them based on our dry deposition technology. And I think good examples are about 1 million sensors we delivered in the automotive and defense industry as well as more than 5,000 inspection membranes, fall-free since 2021. This is a strong foundation. We also are short before entering new markets, promising strong growing new markets, in particular, of course, the CNT pellicle market as well as heaters for advanced ADAS systems. Canatu is very strong in industrializing the property tuning of CNTs. And this property tuning is resulting in physical properties responding to the most important challenges of the industries we are targeting. And last but not least, Canatu has established very deep and long-term relationships to global leading companies, which I have to say is in that magnitude, remarkable for a company compared to Canatu's size. Here, the company is already world-class. Nevertheless, that's not enough. and Canatu needs to improve. Canatu needs, in particular, to improve in the execution to hit its commercial ambitions. And therefore, we need to be more focused. We will present today a strategy reducing the complexity of our company, the complexity of our operations. We had in the past too many balls in the air, and we have to catch the most valuable ones. We have to invest all our resources into scalable product road map execution instead of engineering projects. Canatu needs to be in future, more customer focused and less research driven. And last but not least, the allocation of our development resources needs to be based more on commercial metrics. Therefore, we introduced the Polaris program, our transformation program of the company. We already published the changes in governance. We have now 5 people executive management team fully staffed from next week onwards. We recruited Bernd Meier as CMO and Walter Braun, a CTO to experienced international executive with a strong track record in our target industries. We changed the old new business development department more to a fellow office with a stronger focus on our IP strategy. We established new departments to support top line growth, in particular, business development to tackle the OEMs of our end markets as well as new product management functions in the business units. to accelerate that revenue as well as focused strong on productization. The project management will go back into R&D in the future. And last but not least, the business units will have the project ownership of our most important R&D projects. With respect to the strategy, we are clarifying our business models. The Semiconductor business unit will remain a product business in the inspection product line. In the semiconductor manufacturing segment, so the bigger part of the TAM, we will focus to be an equipment and technology provider. The former Automotive business unit, which is now the robotics, mobility and Defense business unit, will be a pure product business with a clear focus on strong growing markets in automotive, robotics and defense. The medical business unit remains a product business. We have prioritized on our road map based on the value we deliver. A strong indicator for this is the euro per square centimeter value. We introduced to evaluate the value our products deliver, and we stopped selling engineering services. In the OpEx adjustment, we are planning to reduce the headcount up to 17 full-time employees. We will limit our yearly CapEx until 2030 to less than EUR 6 million per year. We are introducing the revenue per employee in 2030 as a new KPI, and we will discontinue low-value R&D projects. In the first 100 days, we started to successfully sharpen our company, remaining, of course, an innovation leader and building a structurally high margin business. We will focus in future stronger on top line and scalable top line growth. What remains is our commitment to achieve more than EUR 100 million in revenue by 2030, and we had the vision to grow with more than 20% per year CAGR until 2035. Let me shortly talk about our executive leadership team. This has been restructured. The company is now led by a 5-people executive management team. We could add to the team, Walter Braun and Bernd Meier, two very experienced executives from the semiconductor equipment, semiconductor device and robotics industry. I strongly believe that their experience, their track record and their management skills will improved the company significantly. I also strongly believe that the newly introduced matrix structure within Canatu will increase our resource allocation and resource efficiency and our product and business focus. The business units will in future be internal customers within the company. In particular, owning the business cases and the business unit strategies, while the operational leadership will sustain the executive management and the business unit leaders in their daily work. [indiscernible] remains is, of course, our core. Canatu's DNA is a dry deposition technology. It's a strong competitive moat. And as mentioned, we have proven already in the past with about 1 million sensor delivered in automotive and defense market as well as more than 5,000 inspection membranes that we are able to industrialize and produce products, differentiating products based on that technology. Along the 3 business units, we work in different business models, including manufacturing partners, enabling us to integrate up to OEM level. Our backbone remains our strong patent portfolio, where we will even more aggressively grow the number of patents and families in the future as a backbone also enabling us to commercialize, of course, royalties and fees in the future. Our 3 business units are tackling from different directions, I would say, very hot markets in our society. For sure, the most discussed market and maybe also the most interesting market is the artificial intelligence market. As you know, artificial intelligence is not working without memories, GPUs and CPUs. And and our pellicle technology is a big part manufacturing these devices and boosting the manufacturing these devices in the future. When we think about humanoid robots, we also have to talk about [indiscernible] and sensors, and we are pretty fast LIDAR and other solutions as well as tactile sensors. This is an example when you include who mandate AI, how 2 different business units at Canatu to tackle the same end market. A similar situation we have in autonomous driving. We talk a lot about the ADAS [ features ], but of course, an autonomous car needs also memories, GPUs and CPUs. Also here, again, 2 business units are part of the same end market with different positions in the supply chain. We do successful business already today in the defense market, and we target to expand this. Also here, beside our R&D business unit, GPUs and memories will be important in future [ defense ] solutions and Canatu is, of course, targeting to be part of the semiconductor manufacturing industry. And last but not least, medical diagnostics. Here, we are even integrating up to full solution provider. And again, semiconductors will help in the analysis of diagnostics and improving its efficiency. So it shows our business units deliver from different perspectives to the most important end markets of society without increasing the complexity of Canatu. Let me shortly explain the [indiscernible] just mentioned disciplined portfolio prioritization. I mentioned in the beginning that we allocate in future our development resources, in particular with respect to commercial indicators. Here, you see an example how we will prioritize in future our product road map. You see that we fully focus on the highest C&T per square centimeter value we identified for our most promising products. And on the other side also focus strongly on high growing end markets. As you can see, extreme high value we expect to deliver in the hormone testing market as well, we already proved to deliver an inspection filters. While in the R&D market, we have even a wider portfolio, a wider end market spectrum, an extremely organically strong, growing markets, in particular, when we think about robotics and industrial sensing. About our markets. I know it has been already evaluated a lot of times. And here, I want to highlight, first of all, the semiconductor market. On the right side, you see the advanced node market starting from 7-nanometer and below in the [indiscernible] structure. You see that the 2-nanometer and below segment is just a minority part today. But it will dominate the advanced node market in the future. And here, in particular, is a strong opportunity for CNT pellicles. As these structures demand high NA, high wattage and more number of layers in the manufacturing. A small market today, but with 25% CAGR along the next 10 years, a very, very strong market in that segment in the future. Underlining our growth ambitions, not only until 2030, but even until 2035. A similar picture for the autonomous driving market. The ADAS market is already big today, but dominated by ADAS Level 1 and 2. Just starting is ADAS Level 3 and 4. While our heater solutions might be an add-up in ADAS Level 1 and 2, they become a crucial aspect to increase the safety of ADAS Level 3 and beyond. And again, we talk about the segment growing with almost 20% CAGR in the next 10 years. Again, underlining the just mentioned long-term growth ambition. How does this strategy translate into shareholder value? We just drafted here the most important milestones. We already achieved in the past important milestones in the R&D and semiconductor segment. And we just achieved another very important milestone yesterday with our third reactor order to be achieved. But of course, the next important step in the semiconductor industry will be the qualification of the [ pellicles ] at the device side. That is -- that will be the moment the dry deposition technology, the CNTs based on the Canatu technology will enter the end market. And this, we will have to achieve with our customers as a next big step. In the medical business, we will pretty soon start the FDA pathway. And of course, in the R&D business, we will finish the development of the ADAS heaters and will, in particular, roll them out in the most autonomous car driving systems. With that, I will hand over now to Mikko for deeper dive into the financials.

Thank you, Max. So let's start with the financial highlights of the first half. Our revenue was EUR 4.2 million, which is a low number that we acknowledge. But at the same time, we want to emphasize that our long-term potential and our long-term pipeline, they are intact. We did not lose any business to our competitors during the first half, and our competitive position remains as very strong. Secondly, our gross margin remains on a good level. And this we take as evidence of inherently good profitability of our business. We just need to scale up the revenue. And thirdly, what we want to emphasize is our strong balance sheet. It's debt-free. Our cash position remains good and these are very valuable assets in the growth phase and in the industries we are operating. In connection with the strategy work, what Max just described. We also updated our financial targets. So we continue to aim at more than EUR 100 million in revenue in 2030. But given the markets where we're operating, we are confident that if we reach this, we should target also a high continued growth thereafter. Therefore, we will -- we have a target reaching a minimum 20 percentage CAGR from 2030 to '35. Additionally, given the the decisions what we made during the [indiscernible] process, i.e., that we will operate with [indiscernible] model in the EUV pellicle business and that we will focus on scalable product businesses in elsewhere. We are confident that this growth -- we can make this growth happen in a very resource and capital-efficient way. And that means that we are targeting to reach average revenue per employee of over EUR 400,000 in 2030. And we do see that this can be done with less than EUR 6 million of average annual CapEx from next year onwards. This year, like we have previously also said will be a peak year of CapEx for Canatu. We currently see that CapEx this year will be maximum [ EUR 30 million ], so less than before as anticipated. And this is also a reflection of the change in our strategy. And the reason why we are peaking this year is the investments in the second factory and in the EUV pellicle scanner, which are exceptional investments for a company like Canatu. Then let's dive a bit deeper into the first half figures. Semiconductor revenue was EUR 4.0 million (sic) [ EUR 0.4 million ]. That was a result of lack of new reactor orders. But like yesterday announced, now we were able to close 1 new order, very big and important milestone. And the second big factor there behind this semiconductor revenue was 1 major inspection membrane customer who is working down their high inventory levels. It's not a -- we -- our position in inspection membranes, competitive position remains unchanged, very strong. And we expect that the demand for these membranes will pick up again once the inventory levels get back to normal level. This is also a reflection of the fact our product has been better than anticipated. It has a longer life than what we originally expected and the customer expected. In Robotics, Medical and Diagnostics, our revenue in the first half was EUR 3.6 million, and that was mostly a result of quality engineering projects. There, we had a potential due to make even higher revenue -- but due to the decision to refocus our resources the areas and efforts which we believe will create most shareholder value in the longer term, we did not continue some projects there. And that's kind of a short-term [indiscernible] in what we were trading for longer-term gains. Margins, gross margins remained good, although they decreased year-on-year basis, but that was a reflection of changes in the revenue mix in -- in terms of like profitability potential of these different businesses, there's no changes. Everything looks -- remains good. That said, operating expenses did continue to grow in the first half, and that was driven mostly by continued headcount growth. But now like Max told we are taking measures to -- also on that front. And at the same time, we also increased our investments in the R&D activity, especially on the medical side. And these new premises, meaning new factory also brought some new costs into our P&L. Investments, like I said, were high in the first half and then will be high in this year, but most of they are now done. So first half investments, capital expenditure amounted to EUR 10.5 million. With these investments, we have significantly expanded our capacity and also increased our quality control capabilities in a very meaningful way. Balance sheet cash position remains strong, as Maccelerate said. Then about the outlook this year, like we yesterday -- public information in connection with this reactor order. Despite this reactor order, we do see that this year revenue will decline significantly compared to the previous year, i.e. in '25, EUR 15.6 million back then. Long-term potential remains intact in all business areas. This decline this year is a factor or a result of things progressing. Of course, well, not everything is in our hands. It depends some things on our customers and further on their customers, that's beyond our control. Then obviously, we need to improve our own execution as well. That's what Max already highlighted. And further, like I said, we have made some conscious decisions that we do not continue certain businesses and certain operations, and that will bring some short-term pain this year. But [indiscernible] from the financials. Now I hand over back to Max to conclude.

So to conclude. We presented today our Polaris program. And the Polaris program includes 12 major changes we implemented in the last 100 days within our company. This will be a foundation for the future success I strongly believe in. The company will focus even more on profitable top line growth underlined by the newly introduced CMO department. On the other side, we will improve our R&D execution efficiency with the CTO department as project management lead and business unit as project owners. With these measures, I'm confident that Canatu will succeed in building a EUR 100 million-plus revenue company by 2030 with a vision to reach levels up to EUR 300 million by 2035 based on the just mentioned 20% plus CAGR from 2030 onwards. Thank you a lot.

Now it's time for questions from the audience.

It's [indiscernible] from Inderes. Maybe first about the discontinued businesses and operations. Can you open up a little bit what business have been now discontinued? And what was the revenue, for example, last year.

So the businesses we discontinued a part of the businesses were engagements where we sold a kind of engineering hours. So a project-based business where really permanently our engineers had to execute together with the partners paying for it. But of course, it had a lot of opportunity costs. So -- and these engineers could not focus on [indiscernible] on the product road map execution. And we stopped that activity to be in time or even faster with finishing our product developments and being able to hand them over properly in our manufacturing as we were not so optimistic about the scalability of that approach. About the financial impact I'll leave it to Mikko.

Yes. Like you see and like said, R&D business. That's where most of these activities reside this stopped activities. So it grew still in first half very well with these engineering projects. But obviously, like the revenue mix in there will be like a different going forward.

All right. Now we know the FST reactor order has come in, but how about this another reactor customer and there is the SAT approvals are still ongoing. Can you say anything about the situation? How is it developing at the moment?

So of course, it's not fully in our hands. And at the end, it's part of a bigger supply chain beyond Canatu to have that final approval. We also have to consider that due to the high loading situation, a semiconductor device part, the resources to engineer new technologies are very limited at the moment because A bigger part of the industry is on executing its order book. That's typically not always the best time to implement new technologies. Nevertheless, in the 100 days I've been here, I've seen reasonable progress in that, making me optimistic about that we will conclude that in a reasonable amount of time.

0 What kind of expectations do you have for the 2 FST reactors when those are going to start to generate meaningful recurring revenue for Canatu?

Yes. So first of all, when a customer orders a secondary reactor, that's a strong sign. That's really a commitment that's -- that makes a big difference from my point of view, if a customer is [indiscernible] just having 1 reactor. So obviously, that is already a strong indicator for the [ brokers ]. Our partner FSC is doing in that segment. At the end, of course, again, it ends on their customer with respect to the reoccurring revenue. But from my point of view, that is then a matter of time. But that they're already expanding now in their manufacturing capacity at the end is, of course, a very, very good indicator. And obviously, there is a strong confidence at FST on a pretty soon market introduction underlined by that order.

And how do you see the use of CNT pellicles in low [ NA ] productions? Now you were mentioning that 2-nanometer is the most important one.

For me, there is a triangular. So you have the wattage of the EUV light source. You have the numerical aperture and you also have to think about the numbers of layers per wafer. So -- and there are different ways to realize advanced structures. We have to take into account that is also technically possible, for example, with a significantly larger amount of layers per wafer to have even in the today's standard technologies with normal numerical aperture and more wattage, these advanced structures. And at the end, what the Canatu technology or what the pellicles, the CNT pellicles do is improving the manufacturing yield, which, for example, would be also important when you have more layers, under today's numerical aperture because the yield costs become higher when the number of layers increase. And what CNT compared to compound is advanced is the the nature of being a pure carbon material and at the end, to make structure of CNT is similar to diamond. And that's the most robust material on the planet. And that is, of course, the promise of CNT to be an optically and from the robustness, advanced solutions to today's pellicle standards, metal silicides. But as it is with the change of standards in the semiconductor industry, when you look in the past, it's typically about a decade you talk, and it's not happening overnight. But if it's happening and if it's proving, it goes pretty fast. You have -- you can -- there are many examples in the past, for example, like the switch from [ deep ] to EUV, by the way. When you look how long ASML worked on EUV until it finally became a business that were almost 3 decades, if I'm not wrong. And of course, that patient is always needed when you're in the semiconductor business. But of course, a second reactor order from a customer. This is a very, very big commitment and the company seems to be very, very confident.

Your competitors have also announced some pellicle production of their own. So how do you see Canatu's competitive position has developed this year?

With the second reactor order from FSC, good. And that there are more companies working on CNT is, first of all, good. That's in the Canatu's interest that not 1 company from Finland, but a bigger amount of companies is working on the same material class CNT. Compared to our competitors, I think, in particular, in tuning the properties, which finally result in optics and reliability, our [indiscernible] technology is pretty advanced. So I think we have here a strong technological mode.

And you now don't give any more like long-term EBIT margin target as previously, but can you say anything about your ambition level, if you go to the long term? Is it similar kind of profitability that you were targeting before? Or is it higher or lower?

Yes, I think what we want to say that at this point of the growth -- growth like trajectory, we need to focus on the revenue growth. That's the key thing. The -- our business remains very profitable as evidenced by the gross margins. So like if we just are able to scale the top line, this will be a highly profitable company. There's no doubt about that. And also like -- I think you can like use this new target of reaching EUR 400,000 revenue per employee as a kind of like also indication of our profitability because that's quite a direct proxy of our cost base on this number of employees.

Waltteri Rossi from Danske Bank. A few questions as well. First, you state quite clearly, I think that you focus now on selling reactors only in the semi segment. So what led you to choosing this route compared to the previous kind of dual track.

I think for Canatu, it is favorable and also for its customers, if we choose a path and if we choose the business model, increasing the likelihood making the [indiscernible] position to standard CNT manufacturing technology. And with that decision, we are more or less opening via our reactor technology and the IP behind global access to this. In the alternative scenario, we would be more or less if we would do pellicles, we would be somehow a competitor or some companies which are not this business model will become potential customers. And with that, I'm pretty sure we increase likelihood to make our technology center in this. And our business model, so a combination of reactor sales and then, of course, reoccurring revenues I think, will pay off if it is a standard in particular, and it is the basis for that decision. Of course, it also requires less CapEx, no doubt about that.

Okay. And kind of relating to that, do you know if your competitors are they like all selling directly, basically, pellicles? Or are some of them selling reactors?

I wouldn't know reactor supplier producing membranes for pellicles. I think the companies I have met are integrated up to the pellicle level.

Okay. Then also a question on the second customer. and why they haven't accepted the reactor yet. So basically, -- is there something wrong or something that they're not happy with the customer? Or are they just not going to accept it until they need it? What's your kind of read on the situation?

So as mentioned, first of all, each customer has different resources, investing into a qualification of a new technology. And in particular, if a customer is busy in its operation as an order book is extremely large that can easily prolong these kind of processes. So no doubt about our reactor technology is pretty new in the industry, and there is a lot to learn also by our customers, which then needs to be addressed. And together with the customers, to be achieved with respect to the parameter output. But I'm very confident, as mentioned, that this will finally proceed. It's only a matter of time.

Okay. And one last question, at least for now. Was there any recurring revenues in H1? And what is your expectation on the recurring revenues going forward compared to the reactor price and how much are you selling the reactors for now?

There was many questions in one, but -- so the recurring revenues, what I think you are referring to the -- what we get from reactors, they are still in the future. In a big time, of course, we are like getting some recurring element -- recurring revenues from when we are selling like services and some consumables [indiscernible] reactors, but like, of course, the big thing will be that when these are tend into mass production, this pellicles. And then -- what was the other?

[indiscernible]

That we still like you not disclose.

It's Matti Riikonen, DNB Carnegie. A couple of questions also from me. First, I would like to return to the question which has been discussed already, which is the site acceptance test for the second sold reactor. So you said that you have made yourself some progress towards getting it accepted. So what exactly have you achieved? And what have you done?

So these site acceptance tests are, of course, at the customer side. So you're safe means, of course, where the reactor is -- and these are connected to a list of parameters, which have to be achieved where we made progress. So we could make a mark on some parameters which were not served before.

So is there anything on your side that still needs to be done? Have you completed your part of the work that you can do in this time frame?

Of course, these set criteria are the output of an equipment and what the equipment puts out depends a lot where it's ending, for example, with clean room under which conditions and how it is operated. So at the end, all these criteria are a result of a combined work. So I think it's pretty -- in the sub-criteria, hard to say to isolate this is pure responsibility of Canatu or pure responsibility of its customers. It's always a joint effort.

All right. So if it's a joint effort, and you are basically ready to do your part and have done so in the process. Does it mean that the customer just don't feel the urgency to go through with the site acceptance test because there is no pressure for them to get the production running.

When we think about what the pellicles in general are for they are at the end improving the yield of an already existing manufacturing. That means there is, for example, not a hard time-wise milestone, where with a change to a new technology, you could not start to produce it without pellicles, for example, independent if it's metal silicides or CNT. It's not that the pellicle itself is the enabler to achieve, let's say, 2 nanometer. What it is doing is increasing the manufacturing output. And I can understand also from my experience in semiconductor device companies, when you ramp up a new generation with the lowest possible complexity, for example, may be leaving out pellicles in total in the beginning and then working in the second step on improving the yield. But yes, the customers have the option to decide on their own when they use pellicles or when they switch from one to the other pellicle technology. It will not change the device generation manufactured. So that's good and bad for us. So there is no hard deadline on the one side and also no pressure on the other side. That's true. But generally, I think that is positive that there is no time-wise killer criteria when to reach it. But of course, every day, you are working with the technology, achieving a lower yield. You have a competitive disadvantage because in the device industry, at the moment, everything is about manufacturing output, and that is what a yield improvement does. So I would believe those who manage to use CNT pellicle technology and finally achieve a better yield, has a significant competitive advantage, more profit and more revenue and that is what the GPU memory, in particular, memory, GPU and CPU industry is at the moment all about. So there is a very, very good business case for better yields.

In the risk statements related to the delivery of the second reactor and reactors altogether, you say that there will be a penalty if you don't meet your part of the agreement and the reactor doesn't perform according to the standards that you have specified in the sales agreement. But based on your discussion now, it seems that -- that is not the case. So the only reason that is holding up the site acceptance test that the customer doesn't have the resources enough to make it actually productive, so get it into the production, which signals that there is not such a great hurry to increase production of those pellicles that would be used in the production. So -- or is there any other excuse for this to take longer than -- it's been almost 2 years now since you delivered the reactor. So is it just not interesting for the customer to get it up and running because there is no need for the pellicles?