Tekna Holding ASA (TEKNA) Q4 FY2025 Earnings Call Transcript & Summary

Welcome to the Tekna webcast for the Fourth Quarter Results. With us are Claude Jean, CEO; and Espen Schie, CFO of Tekna. We expect the presentation to take about 20 minutes, followed by a Q&A session. So without further ado, Claude, the floor is yours.

Thank you, Arina. Thank you, everybody, to be with us today to listen to our Q4 Earnings Call. Next slide, please. Okay. Before jumping into the Q4 number and highlight, I would like to spend a few minutes explaining Tekna a bit for those of you that are less familiar. So Tekna come backs to the 1990 and everything that we do at Tekna is around ICP that is stand for inductively coupled plasma technology. And it initially started with a system provider for nanomaterial and spherical powders. And eventually, in the year 2000, our customers started using our plasma torch to recreate or simulate the harsh environment that the space rocket experience when they come back, they reenter the atmosphere and also another example is when a hypersonic plane fly at our high speed, they experience the same kind of environment. So our system are excellent to recreate those environments. So universities and corporate R&D are using those plasma torch to simulate and test new material for thermal protection system and we call this product line PlasmaSonic. In the year 2010, Tekna started using its own ICP technology to develop spherical metallic powder for Additive Manufacturing. So since we started so many years ago, we were one of the first mover in this market back then. So as you can see on the graph on the right, we have been experiencing steady growth in selling spherical powder for Additive Manufacturing. So we are in a very well positioned given the fact that we were one of the early adopters of that technology. Next slide. So fast forward from 1990 to 2026. So we have finally reached profitability inflection point. In Q3, Q4, we posted a positive EBITDA for the first time. and it's a result of a multiyear of investment in development, either system or powder, in production capacity and customer qualification. So we are in a position now a world-leading provider of advanced material for Additive Manufacturing. And for the -- and we are in a position to capture a good share of the growth of this market with healthy contribution margin. On the system side, we have very attractive unit of economic, very healthy contribution margin. It's a business line that is more lumpy. So we get less regular order such that we have managed -- we're managing costs such as we can adapt to the lower order area. So in both business area, we're in a good position to execute on our plan, which is grow double digit towards 2030 and achieved 15% to 20% EBITDA also towards 2030. In a market that is forecasted to grow at about 20% rate, if you look at the Additive Manufacturing market forecaster we're a bit more conservative on the top line growth because we're focusing line on growing the bottom line also. So we're focusing on the highest quality revenue. And as Espen will show, we have now have a very robust balance sheet, thanks to the refinancing that we went through in Q4. And we see additional revenue opportunity also on top of the plan that we have presented, so we are studying those opportunities. I will talk a bit about that in the next few slides. We go very carefully, making sure that we invest in the one that will provide the best ROI. Next slide. Okay. About the highlight for the fourth quarter, our revenue increased by 2% year-over-year. We had excellent performance in the material business area, we achieved overall 60% contribution margin with 59% from the material business area. And if you couple that with our cost reduction effort that we have implemented in the past 2 years. We have achieved a record EBITDA of $900,000 or 9% of revenue. Order intake also were very good in Q4, $12.2 million, 27% higher than the same period last year, such that we enter into 2026 with a very healthy backlog at $20.5 million. $17.4 million of it is for material. And as you can see on the right there, on the material business unit, we throughout 2025, we experienced steady growth, both in revenue and contribution margin. As I said, on the system side, it's a bit more lumpy due to the fact that the orders are not coming regularly, but we had a very good order in Q4 for the system view also. Next slide. Okay. So now I turn it to Aspen for the detailed numbers.

Great. Thank you. So hello, everybody. So first, let's dive into materials business. So materials business delivered a record quarter. Revenue reached $8 million driven by aerospace and defense demand from established OEM customers in North America and Europe. Order intake, $9.1 million, bringing a full year order intake to also a record. Backlog grew to $17.4 million in materials which was up 46% year-over-year. We had 2 notable orders in the quarter at $2 million and a $1.3 million order from Tier 1 aerospace and defense customers in the U.S. and Europe. This is exactly the type of larger strategic orders we are building towards. On margins, we reached 59%, up 21 percentage points from 38% a year ago. This reflects an improved product mix and increased sales of larger particle sizes. I also want to highlight 2 important milestones in the quarter that we attained NADCAP accreditation for metal powder production which is a key quality standard in aerospace, and we established a strategic partnership with Burloak Technologies to supply materials for the MDA Aurora satellite program. Next slide, please. So these slides illustrate the commercial momentum that we are building in materials. First, on the left, you can see that the average revenue per customer has been growing steadily. More and more customers are increasing their annual consumption, moving from development and qualification into recurring production. Back in 2020, only about 21% of our customers bought more than 100,000 per year. That share has now grown consistently to now 37%. On the right, we see that the share of larger customers continues to increase, and this is a result of our positioning upstream in the value chain. Once customers qualify our powders into their production processes, their relationship becomes very sticky and we prioritize this type of scaling. So we are seeing this play out in practice with customers placing larger orders and growing our recurring revenue base. Next slide, please. So let's look at system business that improved both margins and bookings. Revenues was $1.8 million, down 16% year-over-year. This is a more volatile business in the past year has been impacted by U.S. government shutdowns, budget funding delays and tariff uncertainties affecting overall project time lines. That said, order intake in Q4 was $3.1 million. We secured 3 new systems orders in the quarter, and the sales pipeline continues to advance with some orders anticipated in the first half of '26. And margins were strong at 62%, up from 51%, driven by the type of -- type and size of the systems that we delivered. I should note that the full year margin was impacted by a $400,000 tariff expense that we had in Q1 '25, which we do expect to recover during 2026. Meanwhile, we do have cost containment measures in place, given the lower activity level in this business. We are also managing this business prudently while the pipeline develops. Please, next slide. This slide shows the results of the efficiency program that we initiated in 2023. The graph is clear. We have brought indirect personnel costs down by 24%, reached a level that we expect to maintain going forward with more than $1.2 million reduced quarterly when compared Q4 to Q1 '23. So last year, headcount was reduced from 222 to 158, a 29% reduction. And in fact, if you annualize the total salary cost savings, so this will be including direct staff and indirect staff between the end of '23 and '25. So now expanding to 2 years. The reduction would be $7 million compared to 2 points to each other. So importantly, these are not one-off measures. Many of these reductions have a recurring effect, and this is a structurally linear organization. We have simplified the operation reduce complexity and positioned the cost base at a level that supports profitable scaling. Next slide, please. Next slide, please. Yes. So here we go. So let's talk about profitability. So we had a second consecutive EBITDA positive quarter, adjusted EBITDA, like Claude said, of a record $900,000 and an improvement year-over-year by $2.3 million. Revenues were up 2% to $9.9 million, mainly driven by materials. The margins were very strong. Contribution margins reached 60%, up from 41% a year ago. The materials margin improved from 38% to 59%. There was the result of a more favorable product mix and systems recovered back to 62% back to expected levels. On the cost side, operating expenses continue to come down, reflecting sustained savings of our efficiency program. Personnel and operating cost reductions contributed positively as you see in the 2 green bars in the graph and partially offset by timing effects on the grant, which is presented as other income and also some negative effects from FX. So the message here is we are delivering profitable growth, expanding margins and a cost structure in place to support continued improvements. So with that, next slide, please. We'll have a quick view on the cash -- the cash flow for the quarter. So the big picture here is that we ended the year with a cash position of $17.4 million up just above $10 million since last quarter, a strong position following a successful refinancing in Q4. So if we start with the operations, the cash flow was negative with $1.2 million, but working capital was a positive contributor as we reduced inventory. Following, among other things, the sale of these large materials fractions. The negative P&L reflects also some one-off realized FX losses and costs related to the equity raise. On investments, CapEx was limited to $300,000, in line with a lean maintenance approach. Going forward, we expect '26 CapEx to be in the range of $1.5 million to $2 million, which remains limited and also timing flexible. And yet, we still have ample spare production capacity even beyond 2026. On financing cash flow, this is where the quarter was transformative. So we raised $40 million through an equity offering and used almost $29 million of this to repay a shareholder loan to Arendals Fossekompani. This eliminates debt financing costs and it simplifies the balance sheet, which brings us to the next slide, please. The balance sheet. So this story you probably then now, we completed the refinancing $41 million, which at the time was announced, NOK 300 million. Net proceeds were about $40 million, so about $1 million in costs and minus the $29 million that we used to repay the shareholder loan. So then we see that the transformation is visible. The equity ratio went from 28% to strong 77%, and we moved from about $27 million in net debt to almost $12 million net cash positive with a cash position of about $17.4 million. So now we have a very strong and clean balance sheet and additional liquidity expected of about $6 million once the new credit facilities with Scotiabank are up and running. But Tekna is now fully funded and with financial flexibility to execute on the strategy thank you for following and please take it from here Claude.

Thank you, Espen. So now regarding the outlook. As we explained, we have observed excellent performance in the material business area with revenue growth, record backlog, very improved contribution margin. So we think that we are in a very good position to execute on our plan. And as you can see on the top right on the graph, regarding future growth, we're counting a lot on the material business area. Our growth plan is mostly based on the material business area. There's some growth plan in the system business area that is more difficult to plan, given the lumpiness of the business. But again, this business provides very healthy contribution margin, and we are managing costs such that we can go through the low period. We think that we -- in terms of geopolitical situation, of course, there's some risk, but we also see some opportunity. The reshoring trend is very favorable to our Additive Manufacturing. As I said, we are one of the early mover in Additive Manufacturing. We have been qualified with several customers in Aerospace & Defense and Medical. So once you get qualified, it's a very sticky business. And of course, the trends of increased defense spending is also very favorable in both business areas. And we also look at other opportunity. Nano powder for microelectronics for multilayer ceramic capacitor is one example. We have been working for many years on that development. Still in Q4, we made significant progress with our customer, which is one of the main MLCC manufacturer in Asia. So we keep working on it. We keep progressing. And as I said, in both business area, we are looking and starting to work on some opportunity to increase the growth rate even more. Next slide, Arina. So as a summary, very good Q4, continued margin expansion since Q3, very high order intake in Q4 in the material and also, it was the best quarter in the system business area in terms of order intake. And we -- the effort that we made to reduce the OpEx spending will continue moving forward. In terms of CapEx, we're expecting $1.5 million to $2 million. As Espen said, we have ample production capacity established, and we're in a good position cash-wise. So we think that the macroeconomic factors are supporting the growth moving forward, and we're in a very good position in the market that we play. That completes the presentation. I think we're ready for Q&A.

Yes. Excellent. Thanks for the sharp and concise presentation. We did receive already a few questions. So let's -- well, let's start with you Espen. since you had the time to rest your throat. Now that we have a net cash position, how are we thinking of deploying the capital? Is it an expansion, R&D, M&A, what's the plan?

Okay. So for the -- I think just a backdrop here, keep in mind that we are still in a developing industry. So it's -- this will not be a straight line of course we have to expect some variation with a positive trend. First, we want to have a strong balance sheet. We're not expecting to need it for this reason alone, but it's preferable that we have a solid balance sheet. We continue with disciplined capital management also going forward. We will do some investments in production efficiency which yet remains somewhat limited, and we also want to have flexibility should there be opportunities that rise, then we are also ready to invest in the right opportunities with appropriate ROI.

Okay. Excellent. [Operator Instructions] Claude, for you. To what extent are larger strategic customers negotiating volume discounts? And how may this affect our gross margins.

Yes, that's a very good question. Actually, of course, there's always some price negotiation when you see customers growing their demand. But so far, we've been able to manage that pretty efficiently. We have to be mindful of our margin and our customers understand that. So cost does not necessarily scale down with volume. And as we explained, once you get qualified with customers in aerospace and defense and medical, it's a pretty sticky business where it's very expensive for our customers to requalify another supplier. They cannot just play supply against the other. For every single order. It's a much more stickier business. And as you have seen, we've been growing customers order in the past few years and especially in the last year, and we have been improving contribution margin at the same time, very significantly. So, so far, that's something that we've been able to manage quite efficiently.

Yes. Exactly. Another question on supply chain risk. Should our investors be aware of any dependency of certain raw material, energy costs or anything else that could squeeze the margins?

Well, yes, that's something that we're mindful of. We're -- there's -- we can buy our -- especially when it comes to titanium raw material we can buy it from quite a few countries. But of course, everybody know that wire from China are less expensive than any other place in the world. So it's certainly a risk that we have been talking about in the past presentation, something that we are managing with firm supply agreement with our supplier. So again, so far, we've been able to manage that quite efficiently, but we always have to have a plan B. So we have several customer qualified...

Suppliers.

Several supplier qualified when it comes to raw material, especially titanium wire because we use wire for our optimization process. Yes, of course, it's a risk that we're actively managing by qualifying several suppliers.

Okay. Excellent. Is there a recurring revenue or service model that could work for the installed systems base?

Sorry, I haven't heard that Arina.

Sorry. Is there a recurring revenue model or service model that we could apply to our installed systems?

Yes. It's yes, very good question. And in the other revenue opportunity that I have been talking about, this is something that we are seriously looking at. I would not like to disclose the exact example at this stage because we want to study that carefully and make sure that we capture the opportunity before anybody else. But yes, this is something that we are looking at, especially on the system business side where we see some opportunity in providing some services on top of the hardware that we provide to our customer.

Okay. So we'll have to wait a little bit for that. I think for our investors, we have about 250 systems installed at the moment. So that frames a bit the potential of that as well. Then one question that we got here, which is more R&D oriented. Is Tekna expanding its plasma optimization capabilities toward novel iron-based or multi-element alloy systems for Additive Manufacturing.

Yes. So in terms of new alloy, right now, our plan is really to focus on what we're good at, titanium, aluminum and refractory metal. Part of the organization simplification that we've been talking about is that we are -- we try to be laser-focused on what we do, making sure that we don't do too many things at the same time. And since we are really, really good at those materials, we're looking at developing new alloy, new titanium alloy and new aluminum alloy. One thing to take into account is that since we do plasma itemization, we need to make sure that we choose the right alloy, where we can really differentiate ourselves and be competitive because and we compete against IGA and VEGA and other optimization technology that are better for some type of metal. And in our case, we need to focus on the 1 that we are really excellent at, and that's what we're doing right now.

Let's keep going with that. So I think that those are the questions that I've received so far. I don't see anything else coming in. So perhaps any concluding remarks from you Claude, before we go?

Thank you very much, everybody, for listening. So again, we're very proud of the performance that we have posted in the fourth quarter. And thanks to our employees because it's not only about market demand, it's not only about market position, but it's also about excellent execution. So we've been able to deliver in our aspect during the fourth quarter, and it's all to the merit of our team across the world. So thank you very much. And thank you very much, everybody, for listening.

Thank you, everyone.