Kromek Group plc (4KM.F) Earnings Call Transcript & Summary

Good afternoon, and welcome to the Kromek Group plc Interim Results Q&A session. [Operator Instructions]. Before we begin, I would like to submit the following poll. And I would now like to hand you over to CEO, Arnab Basu. Good afternoon to you, sir.

Good afternoon, and good afternoon to everybody that is joining, joined us. Hopefully, you've all had a chance to see the recorded webinar and -- which we used to sort of convey the results and the opportunities that is in front of us. So I've got Claire Burgess, our CFO, with us. And together, we will try to answer all your questions that you have.

Fantastic. Arnab, Claire, if I may move on to the question. And the first one here reads as follows. You have stated that circa GBP 4.8 million in CBRN orders have been received year-to-date, with half still to be delivered in H2. Given the H1 CBRN revenue, was GBP 4.3 million, can you clarify if the GBP 2 million post period debt draw was specifically to purchase the long lead components for this GBP 2.4 million remaining backlog? If so, does the cash from these deliveries settle the revolver by the end -- by April year-end? Apologies.

Thank you. I'll take that one. So at the year-end, negotiated a GBP 6 million revolving credit facility with HSBC Bank, and that is to support the working capital of the business. The working capital of the business, we've got the Advanced Imaging, and we've got CBRN. CBRN side is a relatively short working capital period. And although some of that drawdown will have been to support the CBRN side of the business, predominantly most of it will be to support the Advanced Imaging side, which has a much longer working capital period. The revolving credit by nature is revolving. So during the year, the facility will get paid down. I don't expect that to be at the end of the year because as the year goes through, we are ramping up our production on Advanced Imaging. So I do expect some usage of that facility to continue.

Perfect. Thank you. Next question. Firstly, congratulations on the acceleration of Kromek over the last 18 months. I have great confidence in Kromek over the next 5 years. I support the underpromise, over-deliver approach. That said, with large deals taking years to mature, investors need some sense of pipeline health to gauge process. How can you give us a clearer picture of pipeline without compromising your disciplined approach?

I think that's a great question. And we do acknowledge that often, it is the type of customers we have and the relationship we have and the strategic nature of product introductions and so forth makes it difficult for us to convey everything that we want to convey in an ideal world. But hopefully, the conversations we are having, like this, is going to help in conveying some of the messages and hopefully, that will help you understand where we are going from where we are today. So let me just characterize the broader market a little bit, and hopefully, that will give some context and some understanding. So the adoption of CZT in the Advanced Imaging segment, which is primarily the Medical Imaging segment, which is CT -- dominated by 2 modalities, CT and SPECT, are accelerating. And that is pretty evident by new product introductions that are happening in the market over the last 5 or 6 years. And certainly, we are seeing the acceleration of new product introduction utilizing CZT, that has happened even in last year. So let me talk a little bit about the SPECT market. So 2018 was the first product that GE introduced in the SPECT market with their 670 NM. And that was really the first -- very first full-body imaging system or the mainstream imaging system with CZT that was introduced. And since then, both GE and Spectrum Dynamics, which -- with whom we have a stated contract of $57 million, have continued to introduce new products throughout the last periods. And of course, last year, the enablement contract with Siemens is, of course, for SPECT. So pretty much majority of the market has now stated their interest and demonstrated through product introduction that CZT is becoming more of a mainstream sort of detector, replacing the conventional detectors that exist in legacy systems today. So we have seen real tangible take-up of CZT through GE, through Spectrum Dynamics and laterally through Siemens' enablement program in that market. When I look at the CT market, it is going through exactly the same kind of transition at the moment, although a couple of years behind the adoption sort of cycle of SPECT. So Siemens Healthineers introduced NAEOTOM Alpha, the first photon-counting system with two CZT-CdTe detectors. That was back in 2023, and then expanded their portfolio over the following year. And now last year, just in 2025, 3 other companies, including Canon, has come out with either soft product launch or really new product introduction in the market with CZT, in their CT systems -- photon-counting CT systems. So we are seeing not only one company really introducing product, there are a number of companies starting to introduce products. And in this market, of course, we are working with everybody at the moment who does not have access to an internal supply chain, like Siemens Healthineers and CT does have. So we look at this market as a total market opportunity by 2030 of about roughly $400 million of CZT requirements by 2030. $80 million to $85 million of that is required in the SPECT and about $320 million required in the CT market. Now we have access to about 40% of that $400 million CZT requirement by 2030 in these 2 markets that we can supply into. And as the only independent commercial supplier of CZT, we have a pretty good strategic position to really capitalize on that demand that is coming through. So the -- where we are today to where the market would be in 2030, which is roughly requirements of $300 million or $400 million of CZT, with us having access to about 40% of that market, we are seeing a real opportunity that will enable us to grow pretty aggressively over that period. And that's where we have set that medium-term target of GBP 60 million revenue with a 30% EBITDA during our Capital Markets Day last year. So what we can say here is that we are working with all our customers. Our customers are either really accelerating their products and getting better market share, like Spectrum Dynamics, with Siemens Healthineers in the SPECT market, and our stated customer that we announced, the Tier 1 customer in 2023 in the CT market and also the other players that we are working with, and we are going to see continuous introduction of new products, continuing that journey of adoption of CZT in this market here on. So it's not a question of if, it's a question of how fast in terms of CZT adoption. So hopefully, we would be able to come back to the market on a regular basis over the next few years to provide a more clearer picture in terms of as and when products are launched, as and when the ramp-up happens, as and when we are expanding in these markets. So I understand the challenge. I understand the information gap that some shareholders are feeling in terms of where we are today to how we are going to achieve that growth. But -- and we will be looking at every possible ways of conveying and addressing that information gap that we understand investors feel we have. These conversations are important, and we'll be continuing to have that so that we can paint a picture, we can articulate, we can frame the opportunities, and we'll be continuing to do so going forward.

Fantastic. Thank you, Arnab. The next question has 2 parts to it. The first one being how much spare CZT production capacity does Kromek currently have left to service new Tier 1 OEMs without requiring significant fresh CapEx? Second part, how does the Board view Kromek's role in the ongoing consolidation of the medical imaging supply chain? Is the priority to remain independent?

Look, I think the capacity question is a very relevant question. If you recall, back in 2019, when we announced the Spectrum Dynamics contract, we actually invested GBP 10 million in expanding capacity. So today, we run 174 CZT production furnaces. That's our total stated capacity. We don't, of course, run at 100% utilization of that at the moment. But we -- so we do have some spare capacity to start to service some of the early contracts that during the ramp-up, the early phase of the ramp-up of the contracts we already have from new customers, such as the supply contract we have with Siemens Healthineers on top of the enablement contract we have, which was $37.5 million. The contract, which is we announced in April 2023, which will be -- which had a sort of a development phase and then a commercial phase, we are rapidly approaching that commercial phase. So we'll be able to start serving some of that contract with the capacity we have got. But if I go back to my numbers of that 40% of a $400 million market requirement in 2030, we will have to go through a pretty steep expansion of capacity. But we have made it very clear, and we have demonstrated within the structure of the Siemens contract that as we need capacity to facilitate and supply into this market, we wouldn't be stressing our balance sheet or asking our shareholders to really fund that. The CapEx will be structured within supply contracts, such that the funding actually comes through that supply contract, rather than us having to bear the burden of the CapEx that is required. So I say these numbers and so to get to that market demand, we would be looking at between eight and tenfolds increase in furnace numbers over the foreseeable future, over the next medium term. So it is a significant expansion, but we also have a plan of how to fund that growth, both from working capital needs through debt and the revolving credit facility that Claire has put in place, but also in the CapEx form of within the supply contracts, how we are structured. To answer the second part of the question in the consolidation in the medical imaging, I mean, we have seen that this market has acquired. If you go back to 2008, GE acquired Orbotech, which was -- which currently is their internal source of supply for their SPECT detectors of CZT. Acrorad was -- the Japanese company was acquired by Siemens in 2010, 2011. That really is a primary source for CT detectors, photon-counting CT detectors for Siemens Healthineers. But at the same time, Siemens licensed technology from us for their SPECT detectors, which have 2 certainly different flavors of CZT. And then Canon acquired Redlen in 2021. So this has been a market which has been acquisitive, and we have remained independent in there. We have remained a player where we are able to serve 40% of the market and go through a tremendous growth phase. And our focus is very much to serve that market as an independent listed business in the U.K. to -- and grow and capitalize on that significant market need that is articulated and visible to us in the current year -- in the future years. And that growth ramp will be actually reasonably going on for the next 10 years as the market reaches maturity in terms of adoption of CZT. So we have got a long way to grow. We have got -- we can build a really, really interesting and long-term growth business in Kromek here in this particular market segment alone.

Fantastic. Thank you. Next question is, administration costs at circa 50% seems high. What is the breakdown of these costs? The company has done well to achieve the Siemens contract and other potential areas going forward.

Okay. Well, first and foremost, admin costs, I believe, are about right for the future growth of the business. As we grow and as the revenues grow, the administration costs will not grow in line with that growth. We're at the stage now where we are fully focusing on value from our overheads, making sure we've got the right overheads in place to sustain the growth. Within that, we've got a lot of valuable people. We've got -- well, the majority is people, I think, as we go forward. The business is well placed to grow. What I'm not going to do at this stage is cut those admin costs any further. I think they're at an appropriate level. But as we grow the revenue, those admin costs as a percentage of revenue will start coming down.

Thank you, Claire. Next question we've got here is, it is great to consistently hear about progress. But over the 5-year period, the share price is down. Why is that?

Thanks for the question. Of course, 5 years back, we had -- the whole world went through COVID, and that affected a large number of businesses, overwhelmingly large number of businesses in U.K. and around the globe, and we were no exception. So we had a pretty difficult time around COVID. But what we have continued to do through that period is really focus on the areas that matters, focus on development of CZT, winning those customer contracts, getting embedded within their customer supply chain, within the CT and the SPECT market. And that's what is coming through in 2023, the Tier 1 contract, the 2025, the enablement contract with Siemens. So we have continuously developed that business. On the other side, we have developed significantly on the CBRN side as well as we have won very important framework contracts within the U.K. Home Office frameworks, within our relationship with Department of War, our relationship and the contracts with Department of Energy, and our presence in Ukraine is a testament of how we have continuously built building blocks as we have gone through that last 4 years. As a business and as a management team, we are focused on building the business. We achieved profitability. We delivered profitability. We said we are going to grow sustainably in a profitable way over the next years, and we are focused on delivering that. It is also pleasing to see that the share price has moved in the right direction. And over the last 6 months or so, it certainly has moved up. But as we said, there's a tremendous growth opportunity on a profitable basis for this company in the coming periods and years, and we will continue to execute. And hopefully, the market will provide -- recognize that value and deliver value to our shareholders.

The next question is on dividend. When will the Board look to a dividend?

Look, we are a technology company. And as our stated strategy, we -- part of our stated strategy on top of the mainstream strategy of really focusing on organic growth and delivering organic growth, both on our AI side and on the CBRN side. We also have stated that we would look at bolt-on M&As. But all those bolt-on M&As will have to be done based on a self-funded basis. And so as and when we have got spare cash and capacity on the balance sheet, I think we will invest in building the business and building the value within the business, and that's where we -- our money is going to be focused in the foreseeable future.

Thank you. The next question, they note, "I'm a non-scientist. Does CZT ever lose its potency?"

Interesting question. I don't know what exactly the potency bit mean, but I'm guessing the question is about what's the expected lifespan of a CZT detector. A CZT detector is a room temperature semiconductor, which doesn't degrade with time, particularly. It's a very stable detector, and that is one of the advantages of Siemens as CZT detector, a robust solid detection system works at room temperature unlike what is there now. But the general life expectancy of a medical scanner where our detectors go into is roughly between 7 and 10 years. So the replacement cycle is roughly 10 -- 7 and 10 years. So we serve that market. And so effectively, you can say the expected useful life of our detectors is roughly in that order of magnitude.

Thank you very much. Next question we've got here is, we have recently seen significant investment from high-profile city veterans on the open market. While the management recently exercised options, we haven't seen an open market purchase from the Executive Board in some time. Once the current close period ends following these results, should shareholders expect to see the Board's personal skin in the game increase to reflect the inflection point you have described?

Well, I'll start with this one, as it does involve Dr. Basu kind of directly. I think first and foremost, as most of you know, I joined the company in May this year. The executive directors on the Board have never taken any money. They never sold any shares in this business. They have been diluted over time, but they've never sold any shares. In terms of share investment, Dr. Basu exercised some options, I think, as the question refers to last year, but also the exec team at the time were entitled to cash bonuses, and the execs remaining in the business, both invested those in options over shares. That's beneficial to the business because it retains cash in the business. They could have taken cash and gone out into the open market, but this twofold, keeping the money in the business kind of is beneficial. And then the other announcement that we did around the time of the AGM, that both the executives and the non-executive directors who took wage increases, took those in options as well. So they didn't actually take the cash benefit. So I think as an outsider coming in and anew, the Executive Board and Non-Executive Board are putting the skin in the game and investing in the business alongside other shareholders. I don't know if you've got anything else to add there.

Just to add again, I mean, this is primarily about the executives rather than non-execs. But if you go back, there's been investments from the non-execs and shares buying by the non-execs on a reasonably regular basis. Execs have also bought shares in pretty much every fundraising that has happened. So I and whoever, the other execs at that time, has purchased shares. So yes, I mean, there is an ongoing commitment. I've been in this business for 23 years. And as Claire rightly points out, I have never sold a share, but we have continuously put money where our mouths are.

Perfect. Thank you. Moving on to another question we've got here. Kromek has transitioned from a cash burning, R&D-led business to a profitable, licensing-heavy model in H1. How should investors think about the long-term balance between high-margin licensing, scalable product sales and internally funded R&D as business matures?

That's a great question. And it's kind of -- it's very reflective of -- well, allows me to explain how the business is moving forward. We completed the Siemens enablement contract, which was a $37.5 million licensing contract. That revenue is going to get recognized over the 4 years of the contract. The majority of that recognition happened in the first year, financial year 2025, which was $20.5 million, about GBP 16.5 million. We've recognized about $11 million, GBP 8.3 million in the first half. From here on out, I expect that licensing revenue to be spread relatively equally up to the end of those 4 years for the balance. As that tails off, the underlying business will grow in line. Market expectations are set very carefully as we work out. And as that licensing revenue tails off, the underlying business grows. I think the growth prospects of the Advanced Imaging business is very, very strong. I think there's still growth prospects of the CBRN business to go through as well. The business overall, we don't disclose margins at the individual division levels. But on a balance, historically, our gross margin is about 55%. So I think we've got a healthy business to go forward as both segments of the business grow going forward. I don't know if you've got anything to add to that.

No, not really. I mean it is going to be a product-led business. The licensing revenue has given us a bridge from where we were in 2024 to where we are today. But ultimately, that underlying business is growing, and that will continue its growth journey. As I said, in the medium term, when you look at the -- just the Advanced Imaging segment opportunities, that alone is sufficient to really drive that growth on a profitable basis going forward.

Changing topics here. Airports across the world are installing luggage scanners, including Heathrow recently. Are you supplying any of these as you have mentioned the scanner product before?

Look, we are working with baggage screening companies, multiple baggage screening companies. We cannot confirm or we don't disclose where our technology goes into. But we -- that -- although that's a very rapidly changing market, our overwhelming focus at the moment is capitalizing on the medical imaging market where we have got a very good, firm strategic position on the supply chain in the SPECT and CT. So our growth sort of strategy is not based on the luggage screening or the baggage screening market. Our growth strategy is firmly footed in the medical imaging market, which is sustainable, predictable month-on-month growth over the next 10 years.