Tekna Holding ASA (TEKNA) Earnings Call Transcript & Summary

My name is Obaid, and I'm the founder of Investorweb. Today, I have the pleasure of moderating this presentation with Tekna. Joining me, we have Luc Dionne, who is the CEO of Tekna and CFO, Espen Schie. We also have IR, Arina. As always, you can submit questions during the presentation. But remember, if you are watching this presentation on LinkedIn, Facebook or YouTube, we will not be able to see your questions if you submit them on those platforms. In order for us to see the questions, you have to go to Tekna Holdings profile on Investorweb and submit your questions there. That's also for the viewers that are watching this presentation as a recording. You can still ask questions and the management will answer them in a written format on Investorweb. The format of the presentation is a slide presentation, 25 to 30 minutes, and after that, we will jump to Q&A, both the pre-submitted questions and the questions you have during this live presentation. And with that, I give the word to you, Luc.

Thank you, Obaid. Thank you, and welcome, everyone. Thank you for joining us today. So this presentation today [indiscernible] to our Q1 presentation that we have shared last week on May 15. So it should take about 30, 35 minutes. So let's jump in the presentation right now. Next slide please, Arina. So basically, about Tekna, who we are, our business segment portfolio, additive manufacturing, how we plan on harvesting the potential of that fast-growing segment, a few words from our financial performance that Espen will share with you and then conclusion and Q&A. Moving on to the next slide. And the next slide, please. So I will introduce you basically to Tekna. So Tekna, who are we? We are a world-leading provider of advanced materials and plasma systems. The company was founded in 1990. We have listed on the main board of the Oslo Stock Exchange in 2022. Our headquarters is located in Quebec, Canada. We are just over 200 employees. We have 2 production facilities, 2 research centers and have established a global reach with our sales force. When it comes to our revenue, 48% of our revenue is generated from customers in North America, 37% in Europe and 15% in Asia and the rest of the world. When it comes to the customer segments, 39% of our customers operate in the aerospace industry, 12% are actually 3D printing machines manufacturers, 7% medical implant manufacturers, 5% consumer electronics, and I will say a few words about that later and 37% of our revenues come from other sectors such as the academic and industrial research. As you can see here on the right side, we have quite a distinguished list of high-class customer profile. I would not list them all, but you can see there that the -- if you're familiar with the aerospace industry that all the big players are there, Boeing Airbus, ArianeGroup in France, Thales and so on. So we're serving quite an important and very good list of customers. Next slide, please. So Tekna has developed from originally a company serving mostly R&D customers to a company today that has a global reach, delivering materials to over 200 customers globally. If you look on the top side, we have expanded our footprint in Europe, in China, in France, Korea and so on. And we also have managed through these years, if you can see there where our customer base started to change from 2014 when we started to industrialize metal powders up to 2024, where we grow to 200 customers, where we have managed to secure multiyear supply agreements with industry leaders such as Airbus and others that, unfortunately, we cannot disclose the name today, but this is telling us that this industry of additive manufacturing, which we will talk later on, is reaching a transition point towards a high industrial scale. Next slide. What we have done at Tekna is we have invented a process that allows us to take a raw material, which you can see on the top here, and this raw material could be various metal, and through a proprietary plasma torch that we have invented, we transform this raw material into a very fine micron-sized or nano-sized powder. And what is special about these powers that they have high purity. There are no contaminants once we are done with processing this material in our process. We have a high yield of production and a very high repeatable quality from batch to batch, which is very important when you cater to industries like the aerospace or medical industry. Next slide. The company is surfing on macro trends that are driving growth for every segment we are developing. Those macro trends can be Industry 4.0, climate and green transformation, space travel and defense spending, interest rates. And sometimes, it doesn't always favor you, but in the case of Tekna, it does favor us and also geopolitical shift as we can see around the world today. And how is this helping us? Well, every technology, every segment we are developing today have some benefits emerging from these macro trends. It could be the emergence of 3D printing, where you require more powder materials to print parts. It could be the requirement for low-carbon solutions. It can be increasing investment in research and materials development and so on. So these macro trends are favoring every -- and I'll mention a few things about that later also, they are favoring every segment we are developing today. Next slide. So in the following slide, I will share with you about our business lines. So basically, we have 2 main business lines. One is plasma systems and the other business line is advanced materials. In the plasma systems, what basically is a technology using a plasma torch, a concept that was developed by Tekna. We actually sell some of those small-scale units, which we call R&D plasma systems and also plasma wind tunnels, which I also will describe in the following slide. And with this technology, we have found a way to produce metal powders in the form of advanced materials. One of these segments is additive manufacturing, the other is microelectronics and the last one here, which is not developing right now is energy storage. I will go into the details of R&D of plasma systems on the next slide, starting with plasma wind tunnel. So plasma wind tunnels was developed by Tekna and launched a few years ago to cater to a growing industry. As you know, there are more and more satellites used for telecommunications. Hypersonic flights are getting popular. So we have developed this technology, which allows to replicate, here on the ground, some conditions that will be seen by the aircraft traveling through space or at very high velocity. We have built a portfolio of over nearly $300 million with potential sales over the next 10 years. And in that portfolio today, we have $35 million worth of customers who already have their budget approved. We expect that, by the end of this year or early next year, we will close one more of these orders, and then after, we expect to have more orders every 12 to 18 months afterwards. And you can see here the quality of customers that we are addressing with this technology. Boeing is there; Blue Origin; KIMS, that's a research institute; JAXA, which is Japan Aerospace and so on. So this are high-profile customers as I mentioned earlier. On the next slide, please. Our next segment here is Additive Manufacturing. So what is additive manufacturing. If you're not familiar, it's the cornerstone to the Industry 4.0 and it allows for digital manufacturing of metallic parts. Basically, you have on the left side, top left side, you have a 3D printer into which you feed metal powders such as those produced by Tekna, and you transform this powder into a finished good, which you can see on the top right side of the screen here. And the industry will use this technology to move from conventional manufacturing to 3D printed parts. And what are the main benefits that you get out of this technology? Well, you can see on the left side, there are multiple components that are composing this conventionally manufactured device there. And on the right side, well, basically, there's only one component. That was printed bottom-up in one shot. And that part on the right side is 40% lighter and 20% stronger than the one on the left. So that's the main reason why the industrials are marching towards 3D printing. Next slide. The other segment here is Multilayer Ceramic Capacitors. So Tekna is manufacturing a powder that is used to manufacture very small devices that we can see, maybe we can point at, Arina, on the screen here, very small devices called multilayer ceramic capacitors. And we find those MLCC in almost every electronic device that are out there today. In a cell phone, for example, you can have up to 1,000 of those little devices. Over 1 trillion MLCC are manufactured every year and that represents a market of over $14 billion. So Tekna has made quite some progress in developing in this segment and we are dealing today with the leaders of this industry. There's a handful of leaders in that segment, which make it very attractive. We have delivered our first revenue-generating order last April. And our powder today is undergoing trials with 2 prospective customers in their factories. So it's actually being factory tested. And we expect to have an update to the market in the second half of this year. So these are basically the 3 segments that are active at Tekna. So plasma systems and additive manufacturing are revenue generating and microelectronics, the slide we have here, is a potential upside to our investment case. Now on the next slides, I will go into more details about additive manufacturing and how do we plan on gaining a market position in this industry? So again, additive manufacturing is this technology where you take a powder, and you use this powder to print a finished good. We can go to the next slide. So on this slide, just to give you an idea of how the market is developing today. So I mentioned about printers and powders that are used to produce parts. On the graph on the left side, what you can see is a number of 3D printing machines that were sold per year every year since 2021 until 2023. And you see that this has grown by almost 25% every year with 3,793 printers, that's a lot of big number for printers sold in 2023. And on the right side, it's the growth of all types of materials used for printing parts with these printers. So you can see materials has grown about 25% as well. So what is driving this? I did mention a few reasons why earlier. And the big drivers here, aerospace, medical, consumer electronics. And this companies, they want to either optimize their production or reduce the use of scarce natural resources. So there's one good reason for adopting this additive technology. It will also allow them to shorten delivery lead time and/or go to market faster, and we're talking about here from cutting from years of development down to months or months down to weeks. So in a competitive environment, it makes a significant difference for customers who want to accelerate product introduction to the market. Of course, it makes your manufacturing much easier, your parts much lighter and if you reduce the number of components entering into the manufacturing of a part, you obviously streamline your supply chain along with it. So those are the main drivers that the industry are considering for the introduction of additive manufacturing technology. Next slide. So how has Tekna developed over time in this industry. So first of all, on the left side, you can see that we started in 2014 with very modest revenues, but we have steadily grown year after year from 2014 until 2023 every year, some slower years and you understand that this is an industry that is developing today. But what we have been able to do is to build a strong portfolio of very loyal customers. And today, in 2023, 80% of our revenues are generated from recurring customers that have been with us 2 years or more. And well, here, you can see on the right side, 70 customers that are established with Tekna for 3 years or more, that was 66% of our revenue. Our powders are qualified with the most prominent aerospace OEMs and Tier 1, so the Tier 1s here represent the suppliers to the OEMs in the aerospace, mainly. And that we're talking about 45 customers here in this very short list out of the 70. We have managed to sign master supply agreements with Airbus namely and other undisclosed customers. Again, we would like to disclose them, but we cannot because of our NDA. But you can see that every month, we deliver to almost all of these customers some orders, and we've seen the average order size growing year after year. And the qualification time in this industry, if we talk about aerospace and medical, it's quite long and it's quite costly. So this is why we say this industry has a sticky business model for Tekna. And it has also a limited competition with maybe 3 or 4 relevant competitors when we refer to the materials that Tekna is addressing in that industry. Next slide. So what we are doing to grow our revenues in that industry? If you recall the previous slide, in 2023, we had $26 million in revenues for additive manufacturing materials. In 2027, we are targeting to reach at least CAD 70 million, and that is in line with the estimated market growth around 25% to 30%. And the growth we are aiming to reach will come basically from the addition of new atomizers, so atomizers are machines, plasma machines, used to produce these powder materials. We're going to add 3 of those in the next year. We have a concrete plan for productivity improvement and performance enhancement of the existing machines we have in our factory. We actually have 5 of them now. And this plan for improvement will also favor the 3 new atomizers we are implementing. In addition to this, we also plan on optimizing the sales mix of the materials that we are selling, meaning basically that we will be targeting markets that offer better price and better margins for our products. So in addition to these 3 machines and this improvement plan, we have identified further potential for improvements that we also plan to implement in the next 4 years, including this year. So with this further improvement plan, we expect that we will reach the production generated by each atomizer will reach $8.5 million by 2027 should we be successful with this additional potential improvement? If we are not, well, we still have the $7.5 million in revenue generated by each machine. And the beauty of this is that we will be able to achieve this growth with limited capital expenditure. A lot of investment has been done in the past year, and now we are starting to get the benefits out of those investments. So the 3 new atomizers we will be implementing are already manufactured to date and the CapEx required for those is limited to the minor adjustments and the installation of the atomizers in our factory. And then we plan on an average of $2 million per year for utilities and peripheral equipment in support of the growth for this Additive Manufacturing segment. Next slide. So I'll pass to you Espen?

Yes. Thank you, Luc. Can we move to the next slide, please. Great. So Tekna has sustained growth over a very long period of time, long beyond the 5 years that we see on the screen as also Luc presented. Despite the last years, we have seen very turbulent years with supply chain constraints, political and trade restrictions, COVID, all of these essentially living challenges that we have overcome in this period. The growth is a testament of successful scaling of the business, and it's relatively early still in most of our customers' markets as our customers are scaling their production processes for additive manufacturing. On the screen here, in particular, I would like to highlight the more than 2x growth in material sales on the right side and a stable between 9% to 15% revenues, mainly revenue on the system business. This kind of picture also reflects how we see the company's future where the system business is a bit bulky, but it is stable over time and that we have significant growth within the materials business. On the left side, also on the margin side, we have bounced back in '23 to historical or better margins, which we also expect to continue. And this is also something that we also saw in Q1 this year that we presented last week. We can move to the next slide, please. Yes. So here, we are looking at the trailing 12 months' performance, revenues on the left and adjusted EBITDA on the right. Both graphs exhibit a trend of cumulative improvements over Q1 last year with revenues up 35% and an EBITDA improvement of $5.7 million. And despite the slower start in Q1 this year, we are in an upward trajectory in performance. We can still expect some quarter-to-quarter variations. It's still a developing market. But nonetheless, it's very encouraging to see the improvements in these key metrics that we have focused a lot on in the last years. So all in all, and [indiscernible] concluding here, the focus on increasing capacity, controlling operating costs is enhancing and strengthening the resilience of our business model, and we are positioning Tekna to maintain this momentum that we see and that we have built over the last period, which we try to also continue with this in the future. So thank you, and I will now hand back to Luc for concluding remarks.

Thank you, Espen. Next slide. Okay. Thank you, Arina. So basically, if I want to summarize the growth opportunities for Tekna, those are driven by technology and supply chain transition that we see across multiple industries, aerospace, medical, consumer electronics and so on. The additive materials sales guidance is for Tekna to deliver at least $70 million in revenues by 2027. And this is for this segment alone. We expect that plasma solution pipeline would deliver growth for Tekna. We have currently CAD 35 of prospect customers who have their budget approved today. We expect potential upside that we'll be further developing with our multilayer ceramic capacitor materials. And of course, we are maintaining a strong focus on cash management and cash flow, improving our cash conversion by improving the yields of the sale of powders. And also after many years of CapEx-intensive investment, we expect to gradually ease CapEx in the coming period. Next slide, please. If we look at the indicators, basically, from the revenue growth, well, 2022 was pretty flat coming straight out of the COVID, but we managed to keep the company afloat and run through it. In fiscal year, you can see how 2023 was a fantastic year for Tekna with 52% year-on-year growth. And on the long term, a little bit more conservative approach. From '24 to '27, we expect from the Additive Manufacturing segment, an annual growth between 25% and 30%. From the adjusted EBITDA margin, we are improving minus 48%, minus 10% and then aiming for a 20% adjusted EBITDA by 2027. CapEx, $6 million in '22 to $8.1 million in '23. And then as we said, this will be easing off in the following period, $5 million, including $4 million in growth CapEx for '24 and then $3 million to $4 million in average per year for the following years. And the last but not least performance indicator is for our potential upside for multilayer ceramic capacitors. Our goal is to at least reach an industrial scaleup with at least one qualified customer in this segment in the period of '24 to '27. So I guess with that, we managed to fit that in a very tight but interesting period. Thank you very much for listening. And I think for going back to you, Obaid, for the question.

Perfect. Thank you. Thank you very much for the slide presentation. Maybe we can start by introducing Arina.

Yes. Hello. Good evening. My name is Arina van Oost, I'm Vice President, responsible for Investor Relations. Nice to see you all today.

Thank you very much. Remember, guys, if you have any questions, we cannot see your questions if you submit them through all the social media channels. So you have to submit them on Tekna's profile on Investorweb. And remember you can also ask or submit questions if you are watching this presentation as a recording. Okay. Let's start by going through some questions here. We got a question from [indiscernible]. I hope I pronounced that correctly. What proportion of your sales of metals is recurring?

Recurring portion, 80% of our sales come from recurring customers. And we're talking about powder sales, right?

I guess, Paul, maybe you can follow up on that question. Another question here. Can you talk about your main competitors?

The industry for additive manufacturing has -- I would not name my competitors, if you don't mind. I'll let them do their own marketing campaign, right? But our competitors, both of them has been established before Tekna in the industry. But what we have managed to do in a very short period of time, what Tekna has managed to do in a short period of time is to become the first or second, depending on the industry or the territory, we've managed to become the first or second lead supplier in this additive manufacturing industry. So that's how we have grown our position.

Okay. I can go through some presubmitted questions there. Given the growing demand in additive manufacturing, how does Tekna plan to balance investments between this segment and the promising but less developed microelectronic markets?

Yes. I can take that. So I will give 2 -- this answer is twofold. Additive manufacturing first, as you pointed out, is very interesting and indeed developing very quickly and with very high-tech customers. These are also the most demanding and most developed customers or industrial complexes in the world. We have invested heavily in this area for many years. And here, our business is about scaling up the industrial production. We have 1 machine here that is going live this year. We have 2 more machines that is already built, and we are waiting to set them live to capture the demand in a timely manner. So here, we have some flexibility to actually put them live as we see demand fit. And since these are then all essentially built, what we need of remaining CapEx is just to install them, so there would be in the area of about $4 million to cater for this with building CapEx. So that is of gases, utilities and things like that. And then Luc mentioned, improvement on machine production performance. So this is a very capital-light way of getting more production output. So this is another way we are investing, but it's improving our machine work. So as we see then this installation of the growth CapEx and this production performance would be enough to meet the growing demand for additive manufacturing. For microelectronics, the other part of the question, here, we do have a pilot line today for R&D purposes. And this requires very limited equipment CapEx today. It's more in a sense of R&D stuff and the CapEx for what we need right now is essentially already taken. On the other hand, should we get a commercial breakthrough for this product line, we will propose a CapEx plan to cater for this market or a customer or customers that is potentially here. And there's a handful of large, very large potential customers in Asia producing MLCCs today that we are working with.

We can maybe talk -- one question here, just one second. There's a question there. How will you bridge the parent funding gap to reach breakeven, from Paul?

As we see today, we have sufficient capital as it is. We still have a quite a working capital that we are decreasing. And then with the scaling and the limited CapEx, I think the funding that today is sufficient.

Okay. Another question here. What is your estimated market share within the relevant markets?

According to our internal data, our market share is around 20% for the market we are addressing. A quick answer, because it's a complicated topic, market share in an industry where there is very few numbers available and independent studies available.

So to be clear, you're talking additive manufacturing.

We're talking about additive manufacturing, of course, thank you Arina for pointing this out because for PlasmaSonic, basically the kind of equipment we are producing, we are the only company known as an integrator of these entire solutions.

We can go back to the presubmitted questions. Could you elaborate on how the newly developed universal and reusable containers for additive materials are expected to impact the operational efficiency and the customer satisfaction? What are the anticipated cost savings and environmental benefits?

Yes. So I'll take that one. So we've developed the container to get away from the single-use packaging that we have today. So we're using plastic containers and aluminum bottles that are single use in a sense because they are contaminated with the metal powders and cannot be easily reused because they have to be cleaned before. So for us, it streamlines the packaging process at Tekna. Logistically, it helps because the container can be shipped instead of air transport, which is now required for those plastic packaging. So there is obviously an environmental and a cost benefit to the logistics or both. It also improves the loading process of the 3D printers. So for our customers, it is much more efficient to load the machines instead of using small containers to fill every time and it also has a safety aspect on their side. So we see many benefits of this. So for the first or early adopter, specific customer, we estimated the reductions in CO2 emissions. And based on their sales forecast for the next 5 years, we would reduce about 1 million tonnes of CO2 equivalents. So it's really significant, the change that it can bring for Tekna and this is not even taking into account the different shipping methods. So really based only on the plastics and aluminum single-use packaging.

Here's a question about the geographic revenue distribution. Espen, you talked a little bit about it. But with a significant portion of revenue coming from Europe and Asia, what specific strategies is Tekna employing to increase the market penetration in other markets, like North America?

I will take this one. Well, today, our revenues are -- 48% come from North America already and other 50% from Europe and Asia. So basically, over the years, what we have done is we have managed to develop sales force and distributors globally. And this strategy is the same in the U.S., in Europe and in Asia. And our goal is to develop each continent with the same workforce catering each customer in their own language as much as possible and in their own time zone. The goal is to have all these countries develop at the same time. So it makes us more vulnerable in the event of any more political issues in those countries. But so far, that has been our strategy, and it's been very successful for us.

I got a follow-up question from [indiscernible]. He asked, "I understand you do not want to name competitors, but could you please estimate what market shares you have within metallic powders? How many relevant competitors are we talking about? And what are their relative size compared to you?"