Tekna Holding ASA (TEKNA) Earnings Call Transcript & Summary

Welcome to Tekna's Investor Presentation prepared in relation with the refinancing plan and rights issue announced yesterday. I'm joined by our Chair, Dag Teigland; CFO, Espen Schie; and particularly happy to introduce our new CEO, Claude Jean. The presentation will be about half an hour, followed by Q&A, and you can post your questions in the webcast. With that, over to you, Dag?

Thank you, Arina. Good morning to our overseas participants or good afternoon to our locals. Yesterday, we announced a rights issue, and I'm very happy to get the opportunity to explain the rationale for what we are doing, to give you an update on current trading and the way forward for Tekna. After years of heavy investment in production capacity and qualification processes with some of the most demanding customers in the world, Tekna has gained a world-leading position within advanced materials and plasma systems based on our proprietary technology. It is then rewarding that we are finally starting to see the result of this work also in the financial performance. Q3 is usually a weak quarter for Tekna due to holiday season. I'm therefore, particularly pleased with our financial performance for this quarter. This is the result of the streamlining of the business and the organization that has been going on for some time, including the cost reduction measures executed earlier this year. A strong improvement in contribution margin for our materials business area, combined with a reduced cost base, represents a kind of profitability inflection point for Tekna. I would really like to complement our new CEO, Claude Jean and the entire Tekna team for this development, good track to sustainable profitability. We believe Tekna is very well positioned to capture the accelerating demand for Advanced Materials. Based on the current business of the company, we expect to see double-digit annual growth with a target EBITDA margin of 15% to 20%. And these figures are achievable without any significant growth CapEx. We have also identified a number of additional opportunities in Advanced Materials that represent a substantial upside, but we will be selective in which one to pursue in order not to lose focus on the core business. So to enter this new phase for Tekna, we think the timing is right to strengthen and streamline the balance sheet to give the company a solid financial platform to fully capture the value from the expected high growth in demand for Advanced Materials. In addition to the rights issue, we are also very happy that with the improved financial performance, Tekna has gained the confidence of one of the most reputable banks in Canada, Scotiabank. Scotiabank will take on the banking relationship of Tekna, including some credit facilities that will give us more flexibility and more efficient cash management. Next slide, please. And now some details of the transaction. The rights issue of NOK 300 million is fully underwritten by the majority shareholder. There will not be any fee to the underwriter. The subscription price will be announced the day before the EGM, which is to take place November 13. There will be a discount of not more than 25% to the 10-day VWAP prior to this date. That will be the period October 29 to November 11. The subscription rights will be offered pro rata. They will be tradable, and we will be open to oversubscription. Next slide, please. It has been very important for the Board to ensure equal treatment of all shareholders. This is the reason why we are doing this as a fully underwritten rights issue. By offering pro rata participation, we will give equal opportunity to all shareholders and having tradable rights will enable nonparticipating existing shareholders to potentially mitigate the impact of dilution. We are very much -- we very much appreciate the support from the majority shareholder when we received the shareholder loan almost 3 years ago. We now believe it is time to remove any uncertainty regarding the refinancing of this loan by repaying it in full. And at the same time, give Tekna a solid financial foundation to continue the growth path. In sum, this will lead to a substantial strengthening of the balance sheet of Tekna, taking the net debt position from NOK 27 million at the end of Q3 to become net cash positive with CAD 15 million on a pro forma basis. In addition, we will have the credit facilities made available from Scotiabank. Next slide, please. The proceeds will be used to repay debt and interest to AFK, about NOK 205 million, leaving about NOK 95 million to strengthen the financial position of Tekna. Including the borrowing base facility from Scotiabank, Tekna will have total available liquidity of about CAD 20 million. Next slide, please. We touched upon the time line earlier where the key dates are the EGM to be held November 13 and the subscription period and trading in rights commencing November 18. So with this, I would like to pass the word to Claude, that has been the CEO of Tekna since he joined in April this year. And Claude, this is probably also a good opportunity for you to give a quick introduction of yourselves to the investors attending.

Thank you, Dag. So thank you, everybody, for joining us this morning. So yes, so as Dag said, I just joined Tekna about 5, 6 months ago. It has already been a huge pleasure to work with the team here. My background is I'm a physicist by training, and I spent my whole career in the semiconductor. So I ran the semiconductor business unit for many years with 2 locations in Canada. And it's quite interesting that I'm joining Tekna at a stage where we have quite an exciting future ahead of us. And it reminds me where we were like 25 years ago in my semiconductor business when we were in a new phase of development, developing sensors, for example, for space application. And we were basically going through the same phase, going out of an intensive R&D phase and getting ready for -- to pick up production volume and revenue. So we went through that exciting phase. And I see a lot of similarity with additive manufacturing frankly and plasma system where there's so many exciting opportunities ahead of us. So I'm very, very excited to be joining Tekna at this time. So on this slide, basically, Dag touched on it already. Those are the topics that I will be covering during my presentation. So let's go forward straight into the topic. Next slide, please, Arina. So about Tekna storyline, everything really that Tekna is doing is based on the ICP technology, inductively coupled technology that is based on 35 years' worth of development effort and investment. And it's been used to develop nano material and eventually PlasmaSonic application that I will talk about during my presentation. And more recently, about 10 years ago, Tekna started addressing the opportunity of selling metallic powders for additive manufacturing, and it's been quite a success. And as you can see on the right graph there, Tekna has been able to sustain continuous growth when it comes to selling powder to additive manufacturing market. And I think what we are ready to continue this revenue growth path, but also profitable revenue growth path. So we'll touch on those topics in the next slide. Next slide, please. Okay. So if you look at the company itself, we are headquartered in Sherbrooke, Quebec. We have 2 production facility here in Sherbrooke, one for system and one for powders where we make both production and R&D in the same location. We have several patents. As I said, our ICP technology is at the core of everything we do. So quite important to protect that. And we have a lot of highly qualified personnel. Again, they are at the base of everything we do. So if you look at the historical financial performance, on the System side, revenue has been quite stable and a bit lumpy. That's something I will be covering also during the presentation and Material has been on a constant growth, about 12% CAGR in the last year. And what is worth noticing is that the system BU provides very healthy contribution margin. And more recently, in the powder business area, we were able to increase significantly our contribution margin, mostly due to much improved selling price of all the powder we make, either the small one or the big one that we had hard time selling at a good price in the past, but we made very significant progress on that recently. So overall, we were able to establish a pretty healthy contribution margin there, and we think that we are able to keep improving that. So as a result, in Q3, we posted positive EBITDA for the first time, and we think we have everything in place to stay on this track moving forward. Next slide. Okay. If you look specifically at additive manufacturing, I think most of you understand that additive manufacturing is a different way of building a metallic part, metallic component compared to traditional milling, and there's several merits in using additive manufacturing, like, for example, being able to manufacture parts that are much lighter, which is a significant advantage in the aerospace industry, for example, it's also highly flexible. You can make very complex part, much reduced number of components. So it makes the supply chain management much easier and you can easily delocalize production. So Tekna is one of the first mover in that market. We started many years ago. We are very, very solidly implemented in this market. We have some good raw material procurement contract. And again, we use our ICP technology to make the highest quality powder. Really, our Plasma technology can produce the highest quality powder for the most demanding application. So we are actually solidly implemented in the supply chain when it comes to aerospace and defense. For example, we can -- with our distribution network, we can ship to any customer in any market vertical everywhere in the world. Next slide. Okay. So when it comes to market for additive manufacturing market vertical, well, first of all, in terms of geography, we -- our customers are mostly in North America and Europe, but also in Asia. And when it comes to market vertical, aerospace and defense has been a significant focus for us over the year. If you look at the commercial aircraft market, for example, as you know, there's more and more demand for commercial aircraft and also for maintenance of those commercial aircraft and additive manufacturing play a role not only in building new aircraft, but also when it comes to maintenance and manufacturing replacement part, for example, for those aircraft. And as you can imagine, it's a very demanding market segment and Tekna has been there for a long time. We are already engaged with several major customers there. So once we get qualified and when it starts seeing recurring production revenue, it's a very sticky business. It will last for a long time. When those powders get qualified, they don't get replaced easily. Next slide. Okay. Again, more specifically about aerospace and defense. First of all, AM Power forecast that there will be high demand for new printers in the next year. So the number of metallic printer that will be out in the field printing part will about double in the next 5 years. And since those new printers have higher throughput, the demand for powder will more than double. And where will it go? It will go specifically in defense, space, civil aviation, where we are already quite dominant in that sector with most of the dominant OEM and Tier 1 in the world using Tekna Powder. And we're also making a lot of progress in the medical sector. where we are currently under qualification with several customers. And one of our main goals in the next few years is to increase significantly our market share in the medical while staying dominant and keep increasing our market share in the aerospace and defense segment. So given the fact that we have such a dominant footprint already in aerospace and defense, we think it's giving us the credibility to make progress in the other markets verticals since aerospace and defense is definitely the most demanding in terms of powder quality, performance, services and quality certification also. Next slide. Okay. If you look at the forecast, specifically for additive manufacturing, again, in the next few years, AM Power forecast that additive manufacturing overall will grow about 18% CAGR. And specifically for material, it would be about 20%. And what is good for Tekna is that we have ample capacity already invested to be able to capture those growth opportunity. So between 2020 and 2030, we will have tripled our production capacity. And as I said, it's already invested. So it's a matter of installing and qualifying some equipment that we have already invested in. And also about improving some KPI. And I think that we have a realistic plan when it comes to improving KPI like throughput, yield and other KPI. We're in a pretty good shape to capture the growth ahead of us. Next slide. Okay. And again, on additive manufacturing, what's happening in additive manufacturing. We're seeing a lot of momentum building, and we've been there for a long time. So we really witnessed this momentum picking up. So as users see more use case, they perform more qualification, they need more machine, they need more material and so on. And there's a good example there at the bottom where it's an example of an aircraft engine that is using more than 300 parts that are made with additive manufacturing. So -- and there are several other trends that will fuel this acceleration of additive manufacturing demand, of course, defense and aerospace, but also climate and green transformation, medical spending and so on. So most of the trend that we know will fuel more and more additive manufacturing demand. Next slide. Okay. This slide is showing in the case of Tekna, I think it's picturing well this momentum picking up. So on the left, you have the distribution of revenue per customer. So back in 2020 about 21% of our customers were buying more than $100,000 worth of material per year. And in 2024, it was 36%. And as you can see on the right, the orange line is showing the average consumption per customer per year. It keeps increasing. In 2024, it exceeded $150,000 per year, and it keeps going up. So as we complete qualification with more and more customers and as they get into recurrent production phase, you will see this number increasing steadily. Next slide. Okay. Now when it comes to System. On the System side, we have 2 type of System. So we have the Plasma Machine that are used to develop new material. So that's the history of Tekna. Those ICP system can develop powder nanomaterials, spherical powder. They use in universities, R&D lab, corporate R&D. And we also have the PlasmaSonic application where our plasma is used to recreate the environment that space shuttle experience when they come back to earth, for example, or the hypersonic flight airplane experience when they fly. So this business unit is providing extremely good contribution margin, typically about 60%. But as you can see on the right, the issue with that is that the powder development system revenue is about $8 million, flattish, $8 million per year. And when we get PlasmaSonic business, then it can more than double during any specific year. So we're currently working on making this business much more adaptable to the cycle. By the time that we increase the baseline revenue, we need to make sure that we can go through those the low year [ opportunity ] and the high year. But at the same time, we identified several opportunities that we could capture with our plasma system. So we evaluate about $65 million worth of total available market that we will be studying over the next month and year. And as Dag alluded to, we will be very, very disciplined, making sure that we don't invest in things where we cannot win. So it will be a disciplined analysis and execution to capture some of those opportunities. Okay. So if you look at the 5-year plan, as we said, we're targeting double-digit growth and EBITDA around 15% to 20% towards 2030. Most of the growth will be fueled by additive manufacturing, so powder sales and additive manufacturing, and it will be profitable growth as we show there on the top right, we've been able to achieve 47% contribution margin in Q3 through several efforts, and we think we can sustain that and keep improving it. On the System side, we've been quite conservative when it comes to growth plan. But again, this is providing very solid marginal contribution, and we have several opportunities that we can probably gather to do even better. And one important thing is that our system business area is providing a significant competitive advantage to the material business area because we manufacture our own powder production system. We develop our own process, and it's really highly valued by our customer. They really see it as a secured way to be able to quickly install capacity, quickly develop new alloy that they need. So not only for selling system, but also for providing significant competitive advantage, the system business area is really important, playing a major role. Next slide. So as I said a few times, on top of the plan that we're presenting, we have identified several potential opportunity that we can play in. There's a few examples here. One key example is selling nickel nanopowders for the multilayer ceramic capacitor market. We've been developing those powders for many, many years. We -- as those MLCC get smaller, they require smaller and smaller powder. And Tekna is one of the few companies that is able to make those high-quality small powders. And we're currently under qualification with one of the main MLCC vendor in the world. We think that we have the needed performance right now. And we evaluate that the market is between $500 million and $800 million per year for the total nano nickel powder for MLCC. And we think that we can definitely play a role in the future given what we have developed in the past few years. And there's several other opportunity, as I said, both on the material side and the system side. And again, we will be studying that and being careful in which one we set to play in. Next slide. Okay. And of course, there's so many exciting opportunity ahead of us. Just a few examples. You know that drone development is -- there's a lot of activity there, and we see more and more parts being manufactured with additive manufacturing, of course, needs to be extremely light. And also in medical, using our tungsten and tantalum that we make also in medical, in energy and defense. And also, we're talking about powder recycling, which represents a good opportunity. Titanium for coating brake is becoming mandatory, particularly in Europe right now and also some opportunity for our plasma system. So there's a lot of opportunity ahead of us that we can play in. Next slide. Okay. So coming back to the Q3 performance and the cost reduction initiative that has been ongoing for 2 years now. We have reduced cost by about -- recurring costs by about $1.5 million already, and we keep working on it. And we think that we are well positioned now to capture the growth ahead of us. Those cost reductions are, and we are working on more cost reduction process simplifications since we are becoming bigger and bigger, we need to make sure that we get our process aligned with the level of business and the level of maturity reaching, and we're working on it. We will keep working on it, but we're in a good position when it comes to growing with profitable growth moving forward. Next slide. Okay. On the growth ahead of us, again, we are quite well positioned to capture this growth with limited investment since we will be more -- about tripling our capacity between 2020 and 2030. Again, it's about installing and qualifying equipment that we have already invested in and also improving some KPI. And we have set quite a realistic plan when it comes to improving those KPI like equipment yield, feed rate, et cetera, et cetera. So CapEx will be limited to about $2 million per year, about general maintenance and also improving -- investing in some equipment, again, to improve our KPI. And also, we will be working to keep increasing our ASP. As I said, we have made significant progress recently in that direction, specifically focusing on our small and large powder that we used to have hard time setting, but we made significant improvement there, and we still have some improvement ahead of us in that area. Next slide. Okay. So now over to Espen.

Okay. So let's take a look at the balance sheet following the proposed transaction. The NOK 300 million, CAD 42 million of new capital will increase our equity. The proceeds will be used to repay the CAD 29 million loan interest to AFK. The balance is CAD 13.4 million new cash. And you can see that our cash position will then go from CAD 7.2 million to about CAD 20.6 million. The final numbers here will depend on the FX rates. Our equity percentage will go from 28% to a strong 77%, and our net debt will go from CAD 27 million to minus CAD 15 million, so more cash than that. The remaining debt at this point is limited to loan and subsidy programs with the governmental agencies, some with low interest costs and some are interest-free. In addition, the new credit facility of CAD 6 million brings our liquidity to a solid CAD 26.6 million. Next slide, please. Let's look at the Q3 cash flow. The message on this picture is important. First, the operations were positive. And when considering that the working capital here is -- the working capital increase here is temporary, we expect to further reduce the working capital over time. Next for the investments, we have invested [indiscernible] in CapEx in the quarter. This is in line with a normalized range going forward. Lastly, the changes in loans in the quarter was for cash management purposes, namely FX. But if we look post transaction, then being cash positive, the financing costs will be negligible. To summarize, operations should cover normalized CapEx needs. We have a new bank facility in place to be able to handle the working capital and financing costs will be limited tending towards. Therefore, the message here is that the cash flow going forward is looking great and gives us a lot of flexibility in executing the strategy. Next slide, please. To sum it up from a financial standpoint, we're now at the stage of profitable growth with a fully funded business plan. Profitability was rich in Q3 with a solid cash flow development with a positive cash flow from operations on a trailing 12-month basis. I encourage you to look at the cash flow graphs we have in the appendix. We experienced accelerated demand for materials, and we have unlocked important contribution margin developments to 50% and above, driving scalable profits with low investment requirements. We have attractive unit economics with 60% contribution margin and above for systems. We're targeting double-digit growth and can achieve strong operating margins in a growing market. We will have a robust pro forma balance sheet post transaction with almost $21 million cash, $27 million liquidity, negative $15 million net debt, again, more cash than debt. All this to say, we are fully set to execute on the business plan, and it gives us the flexibility to pursue upsides, new products and application areas that we are developing for the future. Next slide, please. You can here see our management team on the left side and the Board on the right side. We have an experienced management and Board focusing on creating a high return on capital and here presenting a profitable growth agenda. I would like to commend our new CEO, Claude Jean, adding strong execution since he joined in April. We have also strengthened the financial management with Yves joining as CFO for the Canadian operations last month. Next slide, please. Let's recap the financial highlights of Q3. A positive quarter, the first since IPO, driven by strong performance in materials and cost reductions. Revenues were up 9% year-over-year to $8.3 million. This is very, very good for -- in particular, for Q3. Total contribution margin ended at 58%, up from 46% last year. I would like to again underscore the solid development on the contribution margin on the business -- on the materials business that increased from 33% to 58% year-over-year. This is very important for scaling profits. Lastly, I'm happy to report successful execution on our cost improvement program, driving OpEx reductions with sustained savings. And with that, I will give the word back to our Chairman, Mr. Dag Teigland.

Dag you're muted.

Thank you, Arina. So just to sum up, Tekna has gone through a period of heavy investment in CapEx and customer qualifications to become a world-leading supplier of materials and systems. With a strong focus on operations and cost reductions over the last 2 years, combined with increasing margins, we are now finally at a profitability inflection point. Tekna is strategically very well positioned to capture the growing demand for advanced materials for additive manufacturing with increasing contribution margins. Our system business also represents attractive opportunities within defense and hypersonics. We are targeting double-digit growth and EBITDA margins in the area of 15% to 20% within our existing business. In addition, there are several opportunities, both within materials and systems that will generate revenue and attractive margins. This rights issue will give Tekna a solid financial platform to execute on this strategy and to capture the accelerating growth in demand for advanced materials. Thank you.

All right. Thank you, Dag. With that, we move on to the Q&A. But before we start that, I have to apologize. It seems that this is not the latest version of the presentation. So there are some numbers that are not correct. Obviously, the one that is posted to Newsweb is the leading version.

And with that, I think we'll start with some questions on the equity raise that we have received. So Dag to you, why are we raising equity guaranteed by our biggest shareholder to repay back a loan to our biggest shareholder?

Yes. By the time we received the shareholder loan from AFK, it was very much appreciated. However, as time has gone, this also represents uncertainty for the future financing of Tekna. So we have been in dialogue with investors, both existing investors and also potential investors looking at the company that consider the upcoming refinancing of this loan to represent the risk. And therefore, we consider it is the best for the company to sort this out, raise the equity, get rid of the shareholder loan and continue on a stand-alone basis financially.

We have 1 shareholder commenting that it seems very defensive. So what is the reason for doing it now?

I think the timing, again, the shareholder loans start to expire Q2 next year. So the closer we get to this expiration, the higher is considered. And then with the positive EBITDA in Q3 and now also the positive outlook, combined with the Scotiabank financing is a good time to reset the entire Tekna case. And then I think also we have to say that additive manufacturing is still a somewhat what do you say, immature industry. So even though we are bullish and guide on double-digit growth, it will not be a straight line quarter-to-quarter. So we have to be prepared for some fluctuations within the quarters. And then it's good to have a buffer just to make sure that we will not have -- we will not get in the same situation again where we will need more capital.

Makes sense. All right, Claude for you some questions about the business. So what are our main priorities going forward?

Yes. I think that the main priorities going forward is really to execution, execution. So as I said, we are very solid in aerospace and defense. We have customer demand. We have successful qualification process ongoing. So it's really a matter of delivering of those demand. On another hand, we need to make progress on our medical qualification that are currently ongoing because we have an ambition to grow our market share significantly in medical. So we need to be successful in those qualification. And then after that, we need to continue improving our cost structure, simplify the business, which we started doing already because as we grow, we need to make sure that we transition to a more mature operation. So it's all about execution. It's about being very careful in selecting the right opportunity that we want to get in. As I said, there are several opportunity. We need to be disciplined. We will tackle some of those opportunities, but in a very disciplined way where we can really win and provide good financial performance. So I think those are the priority moving forward.

It sounds like we're going to continue to be busy.

Yes, absolutely.

And then, of course, the question we get quite often for MLCC. So when do we expect to see any revenue from this?

Well, I think we need to be cautious there. As I said, we are currently under qualification with one of the main MLCC manufacturers. So it's positive on that front. They're talking about qualification, completing qualification around the end of 2026. So revenue -- recurring revenue would not -- definitely not start before 2027. But again, we need to be cautious there because we're progressing step by step. So -- but that's basically end of qualification 2026. That's really the only thing we can say about that.

Okay. And then maybe one for you, Espen. So you seem really excited about our Q3 results. You want to summarize them one more time just to celebrate our good performance.

Yes, we had a very good quarter. So I'm very happy that we finally can see this inflection point that we have been working towards for quite some time. As you know, we have strengthened our cost structure over quite some time. And now we see the fruits of that on the OpEx side. We also have worked significantly with streamlining our product portfolio and working on the optimizing the margins on the business. This is also something that we see in Q3. So if we summarize the quarter, we think also the cash flow here, very exciting. So CAD 8.3 million revenue. Q3 as such, Q3 is typically, as Dag mentioned earlier, a low quarter because of the seasonality we see in the summer months. So this is a particularly strong quarter for that reason. The margin ending at 58%, also up from 46% the prior year, very, very good, driven by, in particular, the margins on the materials business going from 33% to 58%. So with that, I think we have a very exciting time ahead of us.

We just received a follow-up question. I don't know if you have the number in the top of your head, the order intake for Q3. I don't think we have released that yet. So it's probably going to follow in November.

Yes, we do have it. It is $5.3 million. It's in the appendix.

All right. We didn't get any questions -- further questions from our viewers. Claude, if you're open to it, maybe you want to talk a little bit about what you've learned from Tekna over the last few months and from our customers, et cetera, and how...

Yes. Yes, that's a good question, Arina. Yes, definitely, I discovered an amazing word with additive manufacturing. definitely. That's a word I knew, but not in very small detail. I learned all the opportunities. So as I said, I can see some similarity with the sensor word that I went through 25 years ago, that was about the same stage. So I think I can understand the challenge ahead of us when it comes to making it more mature, more stable moving forward. And also the ICP technology that really Tekna has built this business over this proprietary ICP technology that I think can -- we can use to capture many other opportunities. So -- and of course, a fantastic group of people because it's not only about equipment and patent, it's really about the people that are doing it. We have brilliant people and very engaged people. So yes, super exciting about the future.

All right. I have one last question, but I think I can answer that myself. So do we expect the participation from management and the Board in the fund raising? I don't think we have done the inventory yet, but we will communicate closer to the actual start of the event on that. All right. I think with that, we'll finish the webcast for today. We are planning to do another event around the Q3 release -- official release on 6 November. The management and Dag, obviously, will be in Oslo for meeting with investors. Thank you, and see you soon.