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

Thank you very much for those who have taken the trouble to submit questions in advance. We will begin the webinar with Arnab and Claire responding to those questions. Thank you also to those who have taken the trouble to watch the presentation. And should any questions arise from that, please do feel free to submit questions in the chat function, which Arnab and Claire will pick up at the end and respond to after they've responded to all the questions that have been submitted in advance. So thank you once again. I now have the pleasure to hand over to the Chief Executive Officer of Kromek, Arnab Basu. Arnab, over to you.

Good afternoon, everybody. Thank you, Harry. I'm Arnab Basu, and I've got Claire Burgess our CFO. Thank you. So we will straight go into the questions. So I will be reading out the questions and then either Claire is going to answer it or I am going to answer it. So the first question, what are the revenue expectations for FY '27.

Thank you. So our revenue expectations are consistent with market expectations and the consensus. We have 2 brokers is GBP 30.3 million.

What top line growth rate should we model for the next 3 to 5 years?

Well, so as we articulated to the market last year, we expect to get to GBP 60 million of revenue in the midterm, which for us means 2030, '31. And the curve of that growth part is dictated by our customers and their growth plans. I will start to share a trajectory of that from the half year, but we're very, very comfortable with that $60 million by 2030, '31. Now that is in the end story. We will continue to grow after that point well into the 2030s towards 2040 as our customers grow their portfolios as well.

GBP 60 million you meant.

$60 million.

The next question is -- you said that you expect 2027 to be in line with market expectations. What does that mean?

Okay. Sorry. So as I articulated, we've got 2 analysts that follows our house broker Cavendish and one other and what we do is we look at both of those and average them, and that's the consensus market expectations. So for 2027, the consensus market expectation is GBP 30.3 million.

The next question, Cavendish forecasts 2027 revenue of GBP 30.5 million versus GBP 27.1 million. Given the license revenue falls in 2027 to GBP 1 million, that implements a growth in nonlicense revenue from GBP 13.9 million in FY '26 to GBP 29.5 million. That would be a massive acceleration over the year already strong 36% growth in 2026. Where does that growth come from? That's a great question. Thank you. Yes, I mean, we are seeing growth from both sides of the business, as we indicated in our final year presentation to the market. The acceleration is coming from both advanced imaging, where we are starting to see the existing customers ramping up their revenue, but also we will be starting to see some of the revenue coming from the Photon Counting CT of the PCCT market, which are the larger of the 2 medical imaging markets that we actually serve. So we are starting to see a layering effect of existing customer growing but also new customer from the Photon Counting CT starting to generate revenue in addition to our regular customers within that advanced imaging business in bone mineral densitometry and other applications. But the real driver is the effect the CT revenue. On the other hand, in CBRN, if you recall, we made an investment in growth and building our commercial activity, and we appointed Michael Stephenson as a Director of Commercial and Strategy. And under him, there has been a team building, which is really looking at building channels in the market. And although traditionally, we had a lot of our revenue coming from the U.K. and the U.S., a lot of the near-term pipeline we are seeing in that market is starting to develop in -- within the other NATO countries, some parts of Middle East, but also in some parts of Asia. And that all together is really what the -- that growth is going to be driven by. So both the advanced imaging, which is reaching a point of growth through a number of customers really starting to accelerate their market entry points and their material take-up but also the general growth within the CBRN that we are seeing through investments in the market in the commercial term. So yes, we are pleased with the growth that we are experiencing, and we will be continuing to grow in these markets in the coming years as well. The next question, can you give more meaningful guidance for FY '27, but more importantly, suggest how things will be significantly better in FY '28. Look, as Claire just said the FY '27 guidance is out in the market, which is a revenue of GBP 30.3 million. But as in the previous question, the underlying business, which excludes the Siemens enablement program is growing significantly. We have indicated what our midterm growth would be. But as again, Claire said, that GBP 60 million in the midterm with a 30% EBITDA. And as the numbers for the following years, are going to be coming out as guidance over the next months. And so you will start to see the trajectory of how we go from here to that GBP 60 million, which we feel very comfortable with. Will the Board commit to providing a greater order book visibility? Could chromic disclose aggregate contracted backlog, expected delivery periods and the proportion of current year revenue covered by firm orders separately for advanced imaging and CBRN. Again, thank you for the question. First of all, we completely recognize that investors and shareholders need for more clarity, more granular details about where we are going from where we are. In some cases, we are restricted to saying things because of commercial sensitivities on our customer side. But 2 things -- one thing that we do, we do provide the visibility chart around January when due to our sales cycles and for that particular year which is generally aligned to the announcement of our half year results. And there, we categorize those in various categories in terms of contracted in terms of one, but which have not yet contracted and pipeline. So we provided a reasonable amount of granularity in terms of both the segment itself for that particular year. Our 2 segments, the nature of orders are quite different, as you would know. So the advanced imaging, we make OEM component-level products, which are typically imaging sensor or imaging detectors that goes into OEM systems, whether in medical imaging, security screening or industrial imaging. There, generally, our order profile is much more multiyear. So it takes a long time to get designed in. But once you're designed in, like the Spectrum Dynamics contract, it was a 7-year contract. But in reality, once you're within OEM you're there for the whole life cycle of the product, which can often be 20 years. So generally, the visibility of advanced imaging and the stickiness of customers within that market is quite long. In terms of CBRN, it's a different kind of business. We provide handheld radiation detectors to a range of customers, including military border security forces, first responder community, nuclear power plant operators. There, it's generally -- it's a tender business or it's a direct order business, which we received through distributors. And typically, those orders ranges from receiving of an order and delivering in a very quick succession within a month or two to some of those tender business getting delivered over a few months or maybe a year. So the nature of business is quite different. The visibility as a result of contracted revenue are slightly different. We ultimately will get to a point where we start to disclose the total order book. We're not there yet. But what we provide is that clarity in terms of visibility of an annual number by category of -- in each segment, and we'll continue to do so. But just to add that for this year, we have reiterated that whatever -- what the market consensus is of GBP 30.3 million, we remain very comfortable and confident of delivering that. So the next question is, can you specify the number of years of orders you have? I think it's -- I kind of covered it in the previous answer a little bit. But typically, the long-term contracts are within our AI division. So in -- within the advanced imaging division, it's really where we have the OEM relationships. And typically, we work with an OEM for a long time, we get designed into the system, and then we provide detectors on a monthly basis to that particular OEM as products get commercial. And typically, those order sizes can be -- length can be anywhere between 3 and 7 years. But in reality, as I said, the total lives, we will provide detectors for the total life cycle of that product which could be 20 years in here. So it's -- it varies in many ways, even in a long-term contract. We will have purchase orders for a year which means we exactly know what we are going to ship every month to up to 3 years. So we know exactly what we're going to ship for the next 36 months. Generally, they will be on an upward curve and particularly in SPECT in CT. We are gearing up for ramp and in conjunction with our customers. And we are in an exciting place where -- how that ramp looks like. So it's really on advanced imaging side. It's those long-term contracts built on real strategic relationships and on CBRN side, it's much more -- it's a government contracted short-cycle order once we win and deliver. The return on capital employed has fallen during the year and the customer -- and the company struggled to convert profits into cash. What are the principal reasons for this deterioration? Claire, do you want to take that?

Yes. Thanks, Arnab. So looking at the return on capital employed, our EBIT fell in the year as expected, which is just a reflection of the product mix our high-margin licensing revenue, we have GBP 10 million this year, I mean to the year April 2026 compared to GBP 16.5 million in the previous year. However, the margins of the underlying business are being maintained are improving, and we're continuing to keep a tight handle on those overheads. Looking at cash, the advanced imaging division has a really long working capital cycle, whilst we work to manage this through the availability of the banking facilities and the cash invested in the business. It will continue to grow as the advanced imaging business continues to grow. We manage it very, very tightly. I have arranged a HSBC facility to help us work through that. And that will all be funded within the facilities that we've got.

Looking forward, what is the operational gearing assuming the company can continue to grow sales?

So our fixed cost base provides us a really solid platform for future growth. And there will be a modest increase as sales grow, particularly on the advanced imaging side, much less so on the CBRN side. But this will be significantly below the rate of growth of revenue. So hopefully, that answers the question.

The next question what steps are the company taking to get paid faster to improve the 150-plus debtor days? It's probably one for you as well.

Okay. And so I'm not sure where you've got the 150-plus debter days because the average credit period across the group, taken on the sale of goods is 55 days. I suspect that the 150 plus days mentioned here takes into account the swing in the enablement agreements. As we've discussed previously, the revenue from the enablement agreement is recognized in line with accounting standards. But then the cash comes in line as the contract milestones get delivered. So at the end of 2025, we had a creditor at the end of 2026. We recognized approximately $35 million of revenue against receipts of $32.5 million. So we've then got a debtor at the end of the year. And I think that's where the 150 days is coming from the enablement agreement. It was set when we negotiated it and the recognition follows accounting standards. And so consequently, we work really hard to maintain our debtor position. We work with our customers, all our customers. We have a lot of very, very large customers, and we work with them to manage those debtor cycles.

The next question, how quickly will your Photon Counting technology generate cash profit and how will you take global market share from Hamamatsu Photonics? I think this is referring to the transition of Photon Counting CT from conventional detectors to CT detectors and Hamamatsu provides some of the components for silicon photo multipliers or all photo multipliers into that market, which performs part of the detection system in there. So the decision of change of technology from conventional detection system to Photon Counting detection systems have been in play for the last decade or slightly more. If I go back to 2010, Siemens' acquisition of Acrorad, which is the other CZT company based in Okinawa, was really the first market indication of companies, the Tier 1 companies making that choice of going Photon Counting. It has taken years to mature. And these things are done very, very carefully. So it's actually not us replacing Hamamatsu itself because Hamamatsu and us have 2 different sets of technologies. It's the end market, which is deciding to change from the old technology or the current incumbent technology of conventional scintillator-based detectors into CZT-based detectors. And that's where we lead, and we have a unique strategic position within that market of being the only independent supplier of CZT remaining in the Western world. So it is a change that is already happening. I mean, inspect, I think it's much more visible that change going from GE's number of product introductions since 2018, replacing their conventional detection systems, sintilated-based detection systems into CZT detection system. Of course, spectrum dynamics in that market is 100% CZT detector-based products inspect and now Siemens' enablement program gives clarity to that technology direction. Similarly, in Photon Counting market for CT. It's -- Callon's acquisition of Redland was, again, a very clear indication, post following on from Siemens' acquisition of Acrorad. So the market is all the 4 major CT players, the global Tier 1 CT players have really taken that directional towards Photon Counting CT. And that's really the choice of detectors is CZT, and that's where we play in. So yes, I mean, we are very confident of really taking a significant sort of market share of the -- from conventional technology into CZT technology, driven by these customers, the Tier 1 customers, particularly but also the Tier 2, which are ultimately driven by the markets need to get better quality of imaging earlier diagnostic, more reliable diagnostic to have a better patient outcome and to reduce the overall cost of care, whether -- and that is important, whether it's the health care system is a publicly funded health care system like NHS or it is a more privately funded systems such as America, the overall cost of care is escalating currently because of aging population and increased prevalence of disease and really early detection, more reliable detection is one of the ways of mitigating against that ever escalating costs. So CZT is here to stay. It's now in mainstream products. And over the next 5 or 7 and 10 years, that is going to continue to accelerate until it reaches a steady state where a significant proportion of the global market is going to convert into CZT-based detection systems. Can you please provide an update on your collaboration programs with Tier 1 OEMs in advanced imaging? As you have seen, there are 4 Tier 1 OEMs in our markets in SPECT, it's primarily GE and Siemens who hold nearly 90% of that global market and there's a handful of Tier 2s. And in CT, there are 4 Tier 1s, GE, Siemens, Philips and Canon. Again, GE and Siemens being the predominant players within that market in Siemens and Canon slightly smaller. And then there is a handful of smaller Tier 2 players within that market. We have been working with 3 of these OEMs and Siemens is a named ones, as you would know through the enablement program that we announced in fiscal 2025, January of 2025 last year. But we are continuing to work with not only the Tier 1 OEMs, but also with a range of Tier 2 OEMs within which Spectrum Dynamics and Analogic are, of course, named in the market. Our relationship remains very strong. Our relationship within that market with all of these players remain strategic so that we are getting -- we are working very closely with them. We are helping with the commercialization and adoption and ultimately, product launch and acceleration plans and we are working to a point of really planning what the ramp-up schedule looks like with these OEMs. And so there is a lot of work going on in the advanced imaging as that entire market is going through this generational shift from conventional detectors into CZT detectors. So at the moment, it's a very busy period and the time for CZT is now as it's evident from the market and the new product introductions that are happening. So we remain very very enthusiastic and confident of growth in this market in a very solid way over the coming years. What measurable evidence demonstrated a transition to repeatable commercial revenue? Look, the growth we are seeing in -- that we are in our numbers is one indicator, of course, Advanced imaging is slightly easier to understand with companies like Siemens, with companies like Spectrum Dynamics and other Tier 1, Tier 2 OEMs where we get designed into a product, into an established product range and that product sells. And again this is a market where it's very difficult to have dual sources of supplies or at multiple sources of supplies. So the repeat revenue cycle becomes much more predictable in this with the OEM customers. In CBRN, it's slightly different. The nature of customers are different. It's mainly government customers. And the requirement goes either new requirement or replacement requirements and -- but it is a spend that is increasing. As we know in here, in that market is driven by the need for countries to feel to spend more on defense and national security. And that is generally driven by conflicts, wars, tensions between countries. And at the moment, there are plenty of those, and that is really driving up both defense spending, but spending also in national security. And as a result, we are going to see our key customers like Ministry of Defense, MOD of U.K., where we have provided our detectors to our frontline soldiers and other areas of MOD users, Department of Energy in the U.S., where we have got repeat contracts, those will remain very important customers going forward. But also we are seeing the widening of the pipeline in various different countries through those sales channels. And we are generally seeing an uptick in requirement of this kind of detectors, which are used in national security or defense areas and both on the radiation side, but we are also, as we move into the transition into commercialization of the biological detection system, which we have developed over the last 6, 7 years, using U.S. government and U.K. government funding, which has attracted nearly $20 million of funding from agencies like DARPA, like Department of Homeland Security, MOD in the U.K. and U.K. government agencies. We are going to start to see commercialization coming through of those because the threat of unconventional sort of weapons or incidents or dirty bombs has not gone down. In fact, when the world we live in, the threats are higher than where we were 2 years back. So we are going to see a ramp-up in this and expanding of the customer base, but also solidly embedding within the AI customer base for a long period of time as we are doing with Siemens. Can management give shareholders any indication of scale of CZT production volumes it expects from Siemens and other OEM customers over the next 3 years? Look, I'd love to talk about specific plans with specific individual customers, which we are often very, very -- we are talking with a lot of details with each of these customers in terms of their plans and how we can support them. And what we need to do. Let me give you a slightly a directional answer on this one. So today, we run 170 furnaces, 150 commercial furnaces, 20 sort of research furnaces. By 2031, we expect to run anywhere between 600 and 1,000 furnaces across all our OEMs for their demands that they are articulating to us right now. This is a significant increase, both in terms of volume but also in capacity but also in infrastructure. And one of the things that we have always articulated in this market is that this is a CapEx-heavy industry sort of segment. And that CapEx investment will have to be borne by our customers rather than our balance sheet. And those are exactly the type of discussions we are having with our customers right now as we speak. Does management believe Kromek's existing manufacturing capacity is sufficient to meet the potential demand from its current OEM pipeline. Our capacity become a constraint requiring further investment or expansion. I think I kind of covered it in the previous question. The current capacity will serve us for this year going into next year. So -- but we are -- right now, we are talking about the ramp plans. We are talking about very detailed models of operational models of how we ramp where we ramp what rate do we need to ramp to meet demands of customers. So this is -- we certainly don't have the capacity to get to that number, that midterm number of GBP 60 million and -- but we have a very -- we are talking and constructing those final plans with our customers who are critical in that demand plan that is coming through from our customer to meet that. So just to add to that, of course, the CapEx, again, just to reiterate my point of the previous answer. The CapEx will be funded by the customers rather than our own balance sheet.

I think on the CBRN side was fixed for our future foreseeable.