Tekna Holding ASA (TEKNA) Earnings Call Transcript & Summary

Thanks, everyone, and welcome to Tekna's webinar on the company's results for the second quarter of 2022. My name is Luc Dionne. I am the CEO of Tekna. And I am joined today by Arina van Oost, our VP for Investor Relations. This is our first report since the transfer of our shares to the main board at the Oslo Stock Exchange. So if it's the first time you are joining us today, welcome to you. The presentation should last a little less than 30 minutes and will be followed by a Q&A session. So for those who have questions, you may post them in the chat during the presentation. Now let's turn to the highlights for Q2. Next slide, please. Yes. We closed the second quarter with total revenues of $7.6 million, a 3% increase from the same period last year and an adjusted EBITDA of minus $3.2 million, reflecting lower sales of systems and the front-loading of resources supporting our growth strategy. Materials revenue were at a record high $5.6 million in Q2. That's 12% over the same period last year and 21% increase from Q1 this year. The demand for additive manufacturing materials remained strong throughout the year with another record this time with order intake of $9.7 million, increasing the backlog for materials by 76% to $15.3 million. I will share more about our ongoing efforts to increase materials production capacity later in my presentation as well as the milestones we are expecting in the coming months in the microelectronics segment. Next slide, please. On July 1, we reached a significant milestone in our growth journey when Tekna share started to trade on the main list of the Oslo Stock Exchange. By doing so, we are increasing the company's visibility in the marketplace. We are providing a leading investment opportunity in a less volatile market, and we are better aligning with our long-term ambitions. Consequently to the uplisting, we have elected 2 new independent Board members, starting with Ms. Barbara Thierart-Perrin, Vice President at Northvolt Systems. Barbara brings to the Board an extensive and relevant background in the automotive and battery industry. And Ms. Anne Lise Meyer, who joins us with an impressive track record of nearly 20 years as Chairwoman and Board Director. Anne Lise was also elected in June as the Chair of our Board Committee. So we now have a highly competent board with independent shareholder representation and complementary industry and financial expertise. Next slide, please. So now for those who are joining us for the first time, I'd like to take a few seconds to share a brief overview of Tekna just before we dive further into the Q2 financials. Tekna is a world-leading provider of advanced materials and plasma systems. Today, roughly 70% of our revenues come from the sales of Advanced Materials and the balance from the sales of proprietary designed R&D plasma systems. The company was founded in 1990. It has its headquarter in Canada and trades now on the main board of the Oslo Stock Exchange. We have just over 200 dedicated and passionate employees who are working in production facilities with sales offices and distributors, sorry -- located in Canada, France, China, Korea, India and Japan, where from where they are supporting our customers globally. But what has made Tekna relevant in the market, however, is our technology and the high-profile industry and customers we are serving. Next slide. This slide here on the left depicts the distribution of materials revenues by industry as well as on the right side, the quality of customers we are serving. Tekna is a leading supplier of metal powders for additive manufacturing or 3D printing applications. 1/3 of our revenues come from these materials are delivered to the aerospace industry. 1/3 to the manufacturers of the 3D printing machines and the balance is distributed between medical applications, consumer electronics and the automotive industry. Over the past 7 years, we have developed an industry-leading position with many blue-chip customers while remaining -- maintaining an annual growth rate of 50%, securing long-term supply agreements with customers like Airbus and delivering hundreds of tons of quality powders in highly regulated industries. Being a supplier in this industry requires organizational discipline and commitment. The supplier qualification process are stringent and take time. And the customers expect that we will deliver consistent quality on time, every time. But this leads to a sticky business model with long-term customer commitments. We are very, very proud of our track record, believe us. Next slide, please. Now let's have a closer look at the Q2 financials. We recorded total revenues of $7.6 billion for the quarter, including $5.6 million in materials revenues. For the materials, this is 12% increase over the same period last year and 21% over the previous quarter. In April, we signed a 2 sales contract for R&D plasma systems, and we anticipate a turnaround for new systems order in the second half, namely with the plasma product line. I will get to this later. The adjusted EBITDA was minus $3.2 million for the period. And as I explained earlier, that was impacted by lower system sales and the front-loading of resources supporting our growth strategy. Now if we take a closer look at our activities for material sales. As we can see from the light green bar on this chart here, the order intake for additive materials reached a record $9.7 million, increasing 49% over the same period last year. Our backlog also saw a significant increase of 76% to $15.3 million. That's a color here. The market dynamic is quite exciting, and it's showing many signs that the additive manufacturing industry is trending towards larger scale industrialization. And we see this for instance with the average size of orders that have increased by 38% and in the first half of this year over the same period last year. We also see this with 70 open orders received with call-off for multiple deliveries and also with 2 additional long-term supply agreements we have signed this year. So let's look at a few examples from these recent orders on the next slide. Here, 3 examples of customers that have increased our backlog in the last quarter by securing supplies until 2023. The first case, it's an order of $2.1 million received from a printing machine manufacturer that has integrated -- is integrating vertically downstream to support the European additive manufacturing for the aerospace industry. The next example is an order of $1.4 million with, again, multiple delivery dates. This one was received from a distributor based in the U.S.A. who needed to secure his supply chain for this year and next year. The last case is an order of nearly $1 million received from one of our high-profile customer that is seeing an increase in sales of medical implants and those medical implants are made out of titanium alloy. And you will recall that I had raised this issue in previous webinars where there seem to be a growing concern over the use of cobalt-chrome implants in the medical industry, hence why we start to see increasing sales of titanium alloys for medical implant. These longer-term orders, along with the increasing average order size are signal to us that 3D printing industry is heading towards higher scale industrialization and predictability. Next slide, please. Earlier in my presentation, I refer to plasmasonic opportunities ahead of us. The picture we see on this slide here is a hypersonic wind tunnel that was designed, manufactured and commissioned by Tekna for a customer earlier this year. And behind that, the rugged look of stainless steel pipes and places you see here, there's nothing less than a marvel of science and engineering. But what is the opportunity for Tekna here, the demand for hypersonic wind tunnels has accelerated in the recent years with a growing number of programs for satellite deployment, space terrorism and hypersonic travel. And many of these programs are led by ambitious companies from the private sectors, such as you certainly know all of them Virgin Galactic, SpaceX, Blue Origin, Boeing and so on. The ultra high-speed vehicles they have developed requires material that can withstand the extreme heat and temperature conditions that are encountered during hypersonic flight and orbital space travel, and this is where Tekna's plasma solutions comes into play. Our product line provides a comprehensive and advanced set of tools that are designed to reproduce, measure and characterize material behavior when exposed to these extreme conditions. Over the past 2 years, we have surveyed the industry and identified a pipeline that could grow to over $220 million. Out of these prospects, we have already provided offers totaling $100 million. And as we speak today, we are in advanced discussion with 7 customers that could generate total orders valued between $45 million and $75 million, depending on which options they would be selecting. If you want to learn more about this product line, you can click on the link that we show in the middle on the middle box of this slide here. You will actually see -- you will see actual footage of the hypersonic wind tunnel in operation. Next slide, please. So in Q1 quarterly update, we shared our plan to increase our factory output by focusing on improving the machine performance and increasing the number of staff working on process -- on post processing operation. So here is a brief update on our progress so far. Next slide. As a start, we achieved the machine output we had set for Q2 as well as the hardware and software upgrades on targeted machines. And we were also able to demonstrate the increased output for short runs on each materials. Going forward, additional trials and development work is needed and is, of course, ongoing to secure a continuous and robust process. This phase that we are going through right now will likely affect Q3 machine output, but we are confident on achieving the 70% year-end target we have set ourselves. Finally, the hiring and training of operators is also in progress, and we aim to have the critical post processing operations running 24/7 by the end of Q3. Next slide, please. Now I will update you on our 2 main development programs, starting with microelectronics then followed by energy storage. We are very excited to see how the market for Multi-Layer Ceramic Capacitors devices is shaping up. The demand for these devices is driven by the fast-growing industry of autonomous and electric vehicles, mobility devices and 5G as well as the acceleration of the globalization of the economy. As a reminder, Tekna's ultrafine nickel powder is a key material for the manufacturing of the highest performing of these MLCC devices. There are very few companies capable of producing the quality required by this industry and Tekna is one of them. As it can be seen here on the left side graph, last year, the industry analyst projected this market to grow at an average rate of 4.5% annually. This year, the analysts are projecting an average growth rate for an average growth rate 3x larger at 13.8%. And this view on the demand accelerating is further supported by many investment decisions announced by the industry leaders over the last year. The 4 companies shown on this slide on the right side, have announced more than $1.3 billion for expanding or setting up new factories. So then how does this translate for Tekna on the next slide. This slide is an overview of ongoing opportunities and qualification program Tekna has with leading MLCC manufacturers located in Asia. The [ Gantt ] table on the left shows how we are progressing in developing each opportunities. While some are more at the account or commercial qualification stage, others like customer 2, 3 and 4 have reached average the trial phase. Customer 2 has completed a set of evaluation this year. We have provided them with additional samples and trials are ongoing. We are expecting their feedback in the second half of this year. Customer 3 provided us with positive feedback on our material in late June this year, they are conducting additional trials and will have more feedback in the second half of this year as well. The customer, while in our discussions also shared with us future volume needs of 40 tons per year once their program reaches maturity. Last but not least, customer 4. This is the first customer with whom we have shared a first generation of our 50-nanometer powder. This unique product is not yet released to the market, hence, the importance and excitement we had on the positive initial feedback they provided us. New samples will share with the customers in a month. And if the characteristics of power are confirmed, we plan on launching a joint development agreement with them. Next slide. Now let's talk about our Energy Storage segment. As many of you already know, the demand for lithium-ion battery is growing exponentially and is following the global demand for electric vehicles. The anode is a key component of the lithium-ion battery and is essentially composed of 95% of graphite with some silicon. Tekna has developed a process capable of producing high-quality silicon natal materials that can be added to the anode and has demonstrated the concept that it can increase the driving distance for charge, reduce the size of the battery as well as the volume of other critical material used in manufacturing the batteries such as lithium, graphite and cobalt. This segment is a potentially very, very large market for Tekna nano-silicon products, and we are looking at various alternatives for securing our position in this promising vertical. Next slide, please. More specifically, we are assessing options and possible path for delivering engineered silicon nano materials, evaluating partnerships with anode manufacturers and jointly developing nano materials for next-generation batteries with OEMs. We are building our strategy on strong foundations, starting with our unique silicon nano materials manufacturing process, but also by bringing together a strong and industry relevancy. On this front, over the last months, 2 strategic team members have joined the company. The first one is our new Board Director, Barbara, which I have introduced earlier in this presentation. The second addition to the team is our Business Development Director for Energy Storage, Mr. Arnaud Bondelu. Arnaud has been in the battery industry in Europe and Asia for nearly 15 years, both as an executive and consultant. He has an impressive network in the battery industry and has already provided Tekna with many insights since joining 2 months ago. In addition to the development work we are conducting with customers and partners, we are completing a thorough analysis of the lithium-ion battery value chain with a special focus on anode materials and options for accelerating the introduction of Tekna's material to the market. Next slide. Now let's move to the closing remarks with some perspectives on the outlook. Tekna strategy, technology and products are considered highly relevant in today's global markets, which are marked by geopolitical turmoil, economic uncertainty and an urge for sustainability and increased predictability. The strategic position we have developed in the industry makes us a supplier of choice for all companies either challenged by global shortage in the process of remodeling their supply chain, transitioning towards new technology, relocating manufacturing or considering more sustainable production processes. All these factors support continued strong and increasing demand for advanced materials, such as those provided and produced by Tekna and are supported by the market indicators we are monitoring. Next slide. For instance, the analysts are expecting the additive manufacturing industry to grow at a rate of 24% to 30% until 2030. They expect that the demand for microelectronics MLCC devices will grow 14% in average by 2027, and the demand for anode materials related to lithium-ion battery will grow 28%. The megatrends are driving the growth. And although we are living in paradigm shifting times, our experience so far says that our strategy has proved to be robust and relevant. So where does this leave us? Next slide. For additive manufacturing, our short-term priorities are clear. The market is there and has been growing stronger than ever. We will increase our sales by increasing our machine capacity. Medium term, we will be adding more machines to our factories in France and in Canada, and we will continue to grow market share as we have done for the past 7 years now. Looking ahead of us, we expect strong market demand and production capacity ramp-up to improve material sales onwards, but the sales seasonality in Europe and North America will affect third quarter revenues and EBITDA. In microelectronics and energy storage, our development programs are ongoing and continuing through partnership with OEMs and Tier 1s. The market volatility of the past few years has caused delays on the qualification cycles, but our focused and longer-term ambitions remain unchanged. We strive for an annual revenue growth of 40% to 50% and operational EBITDA of 25%. Next slide. So this concludes our presentation for today. Thanks to all of you for your kind attention and special thanks to Tekna's employees, to our customers and investors who put their trust and take now every day. We will now open the question period.

Yes. Good presentation. Thank you for that. We have some questions from the audience. So let's start with the first one. Can you elaborate a bit more on the capacity topic. It looks like you're behind schedule for Q3, but trust that you will catch up by year-end.

Yes. Thank you for your question. The straight answer to your question is yes, we are behind our schedule. The time for having a stable process is a little longer than planned. But if you recall the slide, we had expected some level of ramp up towards the end of the year. And that's how we see things developing. We know the hardware and software upgrades are completed. The full implementation should go fast once we have reached a stable process. So for these reasons, this is why we're confident of our target of 70%.

Excellent. The backlog is growing. Is that because the customers are securing their supply by placing orders for a longer period. So is it a one-off effect or growth...

Okay. This is a good question. And actually, we have 2 cases here. First, yes, some customers are placing orders to secure their next year volumes, but we also have customers that are securing deliveries for this year as well as next year. So we have both cases. I would say that maybe 50% to 60% of the backlog of $15 million that I mentioned earlier are for deliveries that will happen this year.

Okay. Then we have another question on the order intake. So order intake for Q2 was impressive amounting to $9.7 million. Is it possible to split it between powders and systems?

Yes. Definitely, it's about $1.5 million in systems and the balance in powders.

All right. So since we're talking about systems, what are the signs of recovery that you're seeing.

Well, first, we're talking about systems here. We knew last year when we prepared the budget that systems order would happen in the second half of this year. So that situation is not a surprise to us. And the point in case, we recorded our first 2 orders late in June. We announced them in July, but we actually recorded them late in June. And another sign is that we are noticing a lot of progress on most of the systems opportunities we are expecting to close this year. So for us, those signs are that those are signs that the situation for systems is recovering. However, China definitely took longer than expected. And if there is a little caveat in our plan here, it's -- or I would say, uncertainty in the timing. It has more to do with a few Chinese orders than the balance. So I hope this answers your question.