Tekna Holding ASA (TEKNA) Earnings Call Transcript & Summary

Good evening, and welcome to Tekna's presentation of the highlights of Q4. Luc Dionne, CEO of Tekna; and Espen Schie, our CFO, are with me here today. It will be a short presentation of about 15 minutes, and you can pose your questions in investorweb.no or by e-mail to [email protected]. Over to you.

Hello. Thank you, Arina. So hello, everyone, and I'm pleased to share our company's fourth quarter results with you today and reflect on the progress we have made despite the challenging market environment in 2024. So over the past 2 years, we have focused on strengthening our financial position. We are not quite where we want to be, but our fundamentals have significantly improved, as you will see. We will also comment about the tariff threat on the Canadian U.S. trades. But before we go into these -- the details, I will share a few words about Tekna for those who are joining us for the first time. So next slide, please, Arina. Tekna is a world-leading provider of advanced materials and plasma systems solutions. The company was founded in 1990. We have our headquarter in Canada, and we are listed on the Oslo Stock Exchange since July 2022. We currently have 185 employees in the company, with 2 production facilities located in Canada. We also have offices and distributors that are located, well, of course, in Canada, U.S.A., France, China, Korea, India and Japan. Approximately -- well, 46% of our revenues at the end of 2024 were generated in North America, 27% in Europe and the same in Asia and other countries. In terms of the customer segments we are serving now, 50% of the revenues, again, for 2024. So 50% came from the sales to the aerospace industry, 13% to the medical industry, and this has increased. It was 7% last year. 3D machines, 9%, so this was down from 12% to 9%, and then 9% to consumer electronics, which was 5% last year. So the balance of 20% are sales that we do to various other segments such as academic institutions and industrial research. So you can see here on the right side of our slide that we are serving and targeting quite a large base of high-quality customers. And as I mentioned earlier, a good number of them are leaders in their -- in the aerospace industry. Next slide, please. So the company, Tekna, is engaged in 2 business lines: Plasma Systems on the left, and Advanced Materials. The Systems business line represents more or less 30% of our total revenues, and this is in 2 specific market segments: one is R&D Plasma Systems and PlasmaSonic Wind Tunnels. Here on this picture, you can see what an R&D size Plasma System looks like. And you will see on a later slide in my presentation, we will see what a PlasmaSonic Wind Tunnel, that is a high potential for Tekna. One of the key applications for our Plasma Systems is to produce advanced materials, and those materials are produced in the form of very fine metal powders. We have developed a customized configuration of these systems, and we use them for our exclusive production of advanced materials in 3 rapidly growing segments that we see under here, the -- under the Advanced Materials business line. So that is Additive Manufacturing, Microelectronics and Energy Storage. Additive Manufacturing is our current business. Microelectronics is a business we are currently developing, and Energy Storage, development is currently on hold. The production for materials serving for Additive Manufacturing segment is fully industrialized, and it has generated more than 2/3 of Tekna's total revenues in 2024. Next slide, please. And then, Espen, I'll leave the word to you.

Sorry, I was muted. So thank you, Luc. Let's take a look at the results. So our Q4 revenue decreased 15% compared to the same quarter last year to $9.6 million, the decrease due to lower Systems revenue. Advanced Materials had a good quarter and were up 14% year-over-year to $7.5 million. For the year, revenue ended at $37.2 million, which is a 9% decrease. Again, this driven by the lower Systems revenue we see. The Advanced Materials increased 3% in 2024, with very strong growth in all segments, except for material sales to 3D printer manufacturers that declined by almost 40% in 2024. We do find very strong confidence in our system pipeline, and also the fact that virtually all the underlying Advanced Materials segments are with strong growth. Next slide, please. So you see here, this slide, as we mentioned in our Q4 report that we published today, we have closed the activities of a joint venture. So historically, Tekna had revenues from making services to this joint venture. So when we look at this graph, we then exclude this from the Advanced Material part. Those are the numbers in green. And then we can conclude that the year-on-year growth on Materials were actually 17% instead of 14% that we saw on the last slide side, and 7% here on the right side instead of the 3%. So that is just to compare properly apples with apples. The next slide, please. Let's look at the profitability. So the adjusted EBITDA ended at $1.5 million negative in Q4, and in 2024 was down by 2.8 versus 2023. This decline, again, is mainly driven by the lower System revenues that we just saw in the previous slides. We continue with very high focus on profitability and cash flow, and we remain very cautious on spending with continuous tight cost control. Some of the readers that have been following us, we have been working on cost reduction actions for a while. And the cost reductions that we have made in 2024, most of them will also continue with recurring effect into 2025. You can go to the next slide, please. To illustrate, here some of the fruits from the capital efficiency. We have, over the past year, reduced net working capital by $5.1 million. This largely then contributed to a very good improvement in operating cash flow by $10.4 million in '24 versus '23. The CapEx in '24 was -- in Q4 was very limited. And for the year, it ended at $2.2 million. This is -- then excludes the lease contracts that are subject to IFRS 16. And finally, I'm very happy to say that the cash balance increased in the quarter to $12.4 million, up $4.8 million since last quarter, and $2.9 million of this, we received from a litigation case that we won last year. The next slide, please. So a small touch on the U.S. tariffs. So here, the recent threats that we have seen in tariffs between U.S., Canada does create some uncertainty in the marketplace. We do experience that the business is cautious, and pending on the outcome of this situation, it's -- you see that some customers are delaying their decisions. Others are pulling forward on orders. Both are effectively different ways of managing their respective risks. So we see that everyone is managing on this basis. So we, on our end, we are monitoring the potential risk for us, the advantages for us that we can take out of the situation, any changes on the competitive landscape, and we work on minimizing the current exposure with the existing business we have as well as positioning ourselves for new business to limit the impact as much as possible pending the outcome. As we see the situation today, we do expect little impact on the System business, and for Advanced Materials, no impact on the purchasing of raw materials, but a portion of the backlog that we have on hand could be, in some way, impacted depending on the outcome of what comes, but we do have mitigation plans in place, and we expect that this number will also be reduced by the time, if the tariffs come into play. So as the story evolves, we monitor and adjust our planning and try to limit the impact as much as possible. So with that, I will hand back to you, Luc. Next slide, please.

All right. Thank you, Espen. So looking at the year-on-year for the Advanced Materials. So over the past year, we saw strong year-on-year growth in Advanced Materials sales across the key industries, aerospace, medical and consumer electronics. However, the sales of our materials to the 3D printer manufacturers were affected by end users that were delaying their purchase of new printers. So -- and these delays were mostly due to the high capital costs. As we can see on the graph here, this is basically the sales to AM machine manufacturers is essentially the factor that has affected our material sales throughout the year. And hopefully, the downward revision of interest rates should be a positive development for this market segment in 2025 and the coming years. So despite this situation with AM machines, our sales to the aerospace and medical customers remained strong in Q4, and we closed 2024 with growth rates over '23, respectively, of 24% and 29%. So this is a quite strong growth for these segments. And just to give a hint about the use of our materials. So for aerospace, the powders are used for the manufacturing of various parts used on aircraft, satellites or rocket components. For medical, it is either for the manufacturing of medical implants, hip or like knee joints and/or small medical tools. On the consumer electronics side, although the sales was quite soft in Q4, we have recorded 24% growth over last year. So this is quite impressive if we -- considering that there were basically no sales or little sales variation in Q4. So in consumer electronics, the use of our powder is to manufacture cases of -- and small components such as dials and press button that are used on cell phones, digital watches or any other wearable electronics. So next slide, please. So if we look at the long term for Advanced Materials, our ambitions for the growth and improving our margins remain very strong. Although some years have performed better than others, in 2024, we have recorded the tenth consecutive year of nonstop revenue growth for this business line. And basically, if you look at the graph there, do some maths, you'll see that we're doubling revenue more or less every 3 years. So several economic factors are working in our favor and that are fueling the demand for our materials. So namely like trade tensions and Western reshoring of manufacturing capabilities, or I would say, maybe reshoring from Asia to the West manufacturing capabilities, the aging population that is driving demand for medical implants and of course, growth in connectivity and electronic wearables. So all of this translates in a growing number of customers who are operating at industrial scale for 3D printing. And of course, beyond 3D printing, it is important to mention that our addressable market is expanding and creating additional sales opportunities for the full range of the size fractions that we are producing. Those are the powder size fractions we are producing to serve various markets. So looking ahead, Tekna aims to gradually scale sales and production capacity to achieve about $40 million -- $70 million in revenue by 2027. This will be -- we expect that we will be able to achieve this with limited capital expenditure because we will be tapping on our current powder equipment base and productivity improvements. Next slide, please. So beyond Advanced Materials sales for Additive Manufacturing, we see a significant potential upside in 2 key areas. The one, the acceleration of satellite space hypersonic flight programs that is driving demand for our PlasmaSonic product line, and also the growing market for multilayer ceramic capacitors that are supported by our nickel nano materials. The economic drivers remain favorable for Tekna's PlasmaSonic product line. In Q4, we have added 4 new opportunities to our pipeline, and each having an average selling price exceeding $10 million per unit. We continue to see consistent progress in the sales cycle for productive plasma project. So these opportunities are maturing, strengthening our confidence in near-term to midterm orders. On the MLCC front, our recent applications and validation test on delivered samples that have yielded promising results. In Q4, we provided an adjusted version of our product, and we expect feedback of these samples delivered in Q1 2025. Additionally, we still have trials of our Tekna nano materials for next-generation MLCC applications that are ongoing, and this is reinforcing our position in this high potential market. Next slide, please. So in conclusion of our presentation. So for Systems revenue, we see a decline in 2024 that has significantly impacted our profitability, but we expect to rebound in 2025 with potential large PlasmaSonic System order. In Advanced Materials, sales grew 25% to 30% across all sectors, except 3D printer manufacturers that were affected by high interest rates. Financial strength improved. We have improved our cash position and cash flow from operations compared to the previous year. EBITDA and market conditions is -- the EBITDA is below market, and that is -- was mainly impacted by our low Systems revenue. The technology and commercial fundamentals of Tekna have proven resilient in a market challenge globally. We've seen this with our growing sales for additive powders. And last but not least, we -- our focus on cash reduction and cash preservation remains our key priority. So with this, I thank you, everyone, for listening today. And Arina, I pass it back to you for the Q&A session.

Yes. Thank you. So welcome to the Q&A. We have already received some questions, and we'll start with our CFO, Espen. Some questions for you on our profitability program. So what specific cost reduction measures were implemented to help reduce overheads?

Yes. So we have in the reduced -- first of all, we have reduced our staff cost base. So year-over-year, it's about 17% lower staff. So we ended the year at 185 and we had over 222 in the same period a year ago, so end of '23. If we compare it to the end of end of June, so Q2, that was 203. So it's still a significant reduction since the summer. And the savings coming from this fact of the lower cost base also continues into 2025. In addition, we have significantly reduced our operational expenses, so typically, OpEx. These are mostly recurring and also structural savings, but some of this is discretionary spending, meaning these things we have temporarily reduced. By structural savings, what I mean with that is that we have changed our methods, processes in a way that we are leaner and operate more efficiently. This basically summarizes it, and we expect that this will be a main or a key driver for profitability in the future.

Thank you. Then at the same time, the working capital reduction is impressive. So how do you see that going forward? Is there more room to improve?

Yes. We have done a lot of work on the working capital in '24, including inventory management, payments, price negotiations with suppliers, and reduced -- yes, virtually everything that is overdue on our receivables. In this equation, it's also an important thing for the viewers to keep in mind that the system business we have, that's the business that have very low working capital because where these systems come with higher prepayments. So the working capital is mainly driven by the activity on the Material side. And for 2025, we expect that the working capital level will be more or less stable with slightly improvement that we can take probably something reduced on the inventory level. So I would say, about 35%, which we ended now at 39% at December '24. And over time, I do see that we have potential for improvement, much beyond 35% also.

That's good news. Luc, for the reduction in headcount, it was quite drastic that we've done over the past year. How do you plan to maintain operational efficiency, but at the same time, grow the company?

Yes. Good question. So I think we need to understand that an important part of this reduction in the head count was made when we terminated the joint venture operations. So that part does not affect our remaining current business. So that was one thing. Another change we have done recently was the change in top management positions. So we made sure that we are keeping all the critical skills inside the company to continue and maintain the operations as well as the business development. For example, we have not touched at our sales force. Sales force remained untouched, and we even further made some recent acquisition in acquisition -- hiring, sorry about that, of a new staff. We have strategically positioned a sales director in Asia to cover that important part of our revenue. So I think that the key skills are in the company, and they are strategically deployed to make sure that we maintain our ability to develop and grow the company.

Okay. That's good to hear. We recovered the legal fees, but there's also an appeal going on. Can you give us a bit more information on that whole side of our story?

Yes. Well, first, we were very happy to recover the legal fees, no doubt about it. As you saw in our report, it's about -- well, not about, it's $2.9 million, basically close to 100% of what we had claimed in the fees. In terms of the appeal process, well, there's not much to say about it because this is an ongoing process. We are very confident in our -- in the fact that the original ruling will not be overturned. But nevertheless, this process is going, and it can take another 1.5 years before the court -- the appeal court hears the case.

Okay. So we still have this going on, but it seems like we're not -- it's not going to occupy our thoughts for now.

We're not too concerned about it.

All right. Then a question about the market dynamics that we observed in this quarter.

I think it was -- Q4 was a pretty good reflection of what happened during the year, meaning that we did some good progress in every key sectors, like I mentioned earlier, aerospace, medical and -- consumer was a little low, however. But the 2 key, medical and aerospace, went well. For the sales of powders to the manufacturers of the 3D printer, that was still low as it was all year long. So I think it's pretty much same pattern in Q4. There's nothing special there. Of course, our sales team, as usual, when we get close to the end of the fourth quarter, we try to promote sales as much as possible. So we've been successful to some extent in doing this as it has reflected in our Q4 sales for Systems -- for Materials. So I think, all in all, it's good. And that we're talking about powders, but also for Plasma Systems, we did receive 2 orders in Q4. So that really helped to boost a little bit of the backlog for that business segment. We also saw some acceleration going on for the -- our PlasmaSonic product line. So we are actively, as you know, developing and growing in this highly interesting sector. For example, we have recorded 4 new opportunities in our pipeline. Each opportunity sells for about, in average, above CAD 10 million. So those are -- it was quite, I would say, interesting to see how, in a single quarter, 4 opportunities came up. And I think it's useful to say that it's a 50-50 spread between -- share between industrial users and academic users.

Since you brought it up as -- since you brought up the systems, so we have a maturing pipeline, do you want to add something about that?

Well, I think I'd just maybe conclude that we trust that the progress in one of the orders we had in our pipeline was quite encouraging in Q4 and has continued in January. And if all things remain as they are going today, we believe that we could close this order early this year.

Fingers crossed. Then one very specific question. So you said that one order for PlasmaSonic could be $10 million on average. What do our other Plasma Systems costs?

It's -- the average selling price we've seen so far for other systems is $1 million. So it goes from somewhere between [ 700 ], and depending on the size, of $2 million. But what we usually sell, in average, it's about $1 million.

Thank you. Espen, so you spoke about the tariffs. Do you want to say something more about how Trump, Musk, and these tariffs may be affecting our business this year?

I think -- well, for the Systems that I mentioned that there's a very limited impact most probably from at least from what we understand of the situation that has been presented so far. On the Material side, I think it's -- one may keep in mind here that is, of course, quite expensive for our customers to change supplier of metals because there's a long qualification chains. So for that reason, I wouldn't expect that we're going to see a change of customer base jumping around because of this. But -- and adding to that, tariffs are probably a temporary measure. Then if we put that aside, if you look at our product portfolio as such, the product portfolio we have remains highly competitive, also should tariffs come to play. And that's why I believe such a statement would be relevant is that most of the metals that are relevant for Tekna are competitions for -- competitors of Tekna, most of these metals actually are coming from suppliers from Canada into the U.S. So it means that it's going to be a higher price for U.S. buying in Canada for everybody. This is not a phenomenon that's going to be isolated to us if it happens.

Yes. So for now, we're not thinking about putting our production in the U.S. or any dramatic changes like that?

No. I think that will be an overreaction to what we see.

Yes. Luc, any update on the consumer electronics, smart watches? The question we get every quarter.

Yes, you mean for the MLCC or for the...

No for the small-size powders.

Small size, yes, okay. Well, I think we -- pretty good development on that front. So for those who are less familiar, our process when we produce powder, we naturally generate different sizes of material. Let's say if we sit -- break this in 3 sizes, I would say, the middle range sells like a premium product, and we're -- every year, we sell 100% of what we produced. And we also have 2 byproducts. So these byproducts have been challenging to sell in the past. So if we take a byproduct A, to give it the name, which is a smaller fraction of what we produce in size. Right now, for 2025, it's sold out. So we managed to find an outlet to sell 100% of those smaller size fractions, how we call them. And for the larger size fraction, it's been challenging to sell it in the past years, but now we have managed to find some outlets, and the sales of this larger size will be growing throughout 2025. So I think all in all, we think -- it's realistic to think that by the end of this year, we will have some outlet for about 85%, maybe a little bit more, 85% of the total powders we are producing.

Which will be really helping our margin in the end as well?

Absolutely. Yes.

So since you mentioned micro electronics, let's go there. How do you see that going forward? And what specific developments are we looking for in order to turn that into a revenue stream?

Yes. So last year, well, our last meeting, we've mentioned that we had received customer feedback on samples we had sent, the -- in 2023. And that feedback was pretty much -- we checked pretty much all the boxes, except for one, where our powder was, for one parameter, was slightly on the low end of what the customer was ready to accept. So the customer asked us to make some adjustment to the product and hit the middle of the target. So this is what we've done, we've managed to -- our R&D team managed to achieve this target in Q4. And with a lot of prowess and effort, the team managed to deliver the product to the customer before Christmas, and we expect to have some feedback from this customer in Q1 this year. So it's quite exciting for a lot of people to see how this will turn out. It's a huge potential. We're talking about dealing with the largest producer of MLCC device. So one of the largest, yes.

We're so close. Okay. So this one is for you, Espen, how do you see the margin profile evolving over the next quarters, especially if Plasma Systems revenue remains lumpy?

Okay. We don't guide specifically on quarters. It's very difficult to do that. But I would like just to say that because we see this -- to restate that, again, on the tariff situation, it is a little bit of uncertainty in this moment for what happens in the U.S., particularly. But I think that's going to be much clearer very soon. And then that should probably then again speed up more business again. And for the margin question, I think what I can say for '25, I think here, we do expect margin improvement in '25 versus '24, and that should be on both Systems and Materials. But of course, this depends on how also the revenue develops. But we remain positive on this.

Okay. Well, and then also a final question for you. Any revenue and profitability guidance for 2025?

No. So to follow up a bit on my following previous comment, both -- we do expect '25 to have higher revenue, a higher EBITDA or improved EBITDA. And in addition, we have mentioned in the report today that we plan for about $2.5 million CapEx in '25, which is similar to what we had in '24 at $2.2 million. These numbers then excluding these contracts that are subject to IFRS 16 accounting. And then I mentioned the working capital of the 35%, around that. So I mean, that brings the total picture.

Sounds good. Let's deliver that. Okay. So Luc, any closing remarks from your side?

Yes. Well, first of all, thanks, everyone, for listening today. There's likely a lot of Tekna employees also listening to this conversation with us -- with you guys. So I want to extend all my recognition to the team because 2024, it was that tough. Generally, the market was very challenging, not just for Tekna, but also every industry around the world. It was a quite challenging year. Our team has delivered, in these conditions, quite exceptional results. So thanks to everyone. I think when I reflect about Tekna and this kind of, I would say, our performance in '23. If we exclude the low Systems revenue, which, of course, it's -- that segment is usually fluctuating a lot year-on-year. But if we look at our Advanced Materials and the performance we have been able to deliver for these key sectors: aerospace, medical and consumer electronics, and if we analyze that, we find that it's like a testament about our technology and the commercial fundamentals that we have established over the 5, 6, 7 years in developing ourselves as a reliable supplier of advanced materials in that industry. So I'm very happy about these results. I'm happy and proud actually about all we have accomplished, and I really look forward to continue 2025 on the same trend. So thanks a lot, everyone, and looking forward to talk to you again in our Q1 results later this year.

All right. Thank you for joining us today. Please consult the published interim report for more information, and we will be publishing our annual report on April 10 of this year. Thanks a lot.

Thank you.