Tekna Holding ASA (TEKNA) Earnings Call Transcript & Summary

Welcome to this webcast where Tekna presents its second quarter and half year results. [Operator Instructions]. I would like to invite Claude Jean, our CEO, to start the presentation. We also have Espen Schie, our CFO that -- who'll join a little bit later to present the financial figures. Over to you, Claude.

Thank you, Arina. Good morning, good afternoon, everybody. Thank you for being with us today for the presentation of our Q2 financial performance and key highlights. I'll start with a brief introduction, and Espen will follow with the highlights of the 2 business areas and financial performance. And I will come back at the end with the outlook and key takeaway. And of course, we will have a Q&A session. Next slide, please. So this is the agenda. Next slide, please. Okay. So for those of you that are not too familiar with Tekna, let me start with a brief introduction of Tekna. So Tekna was founded more than 30 years ago. And the foundation of everything we do is ICP technology. ICP stands for Inductively Coupled Plasma that generate an extremely hot gas stream. So we use ICP as a controllable heat source to produce the high-purity metallic powder that we supply for additive manufacturing. And then the System business area develop and manufacture those ICP equipment that we use internally to produce our powder. And we also sell those ICP equipment to external customer, for example, University, R&D Institute or corporate R&D that people use it to develop new material. And the big order that we just announced for a U.S. customer for a very critical material is a good example of that. If you look at -- we're located in Sherbrooke, Quebec. All our manufacturing and R&D operations are in Sherbrooke, Quebec. About 142 employees, and our technology is protected by 95 active patents. The Material business area is really right now the growth engine, really based on additive manufacturing, but the System business area also offer a lot of opportunity. And one example, people use our plasma to recreate the type of environment that a space shuttle would encounter when it's coming back in the atmosphere. So, people are using it to test material to develop new thermal protection system, and we have a lot of opportunity in that business area also. Next slide, please. So let's look at what role we play in the additive manufacturing ecosystem. So we use critical material like titanium, for example, in the form of wire. And this wire -- this raw material is fully traceable back to the mining. And it's extremely important for regulated market that we play in like defense -- aerospace and defense and medical and dental. And then we use our ICP technology to melt this titanium and to create some very fine, highly spherical, very high purity powder of titanium. And we really produce because of our technology, the highest purity material, the highest quality material. And since we were one of the first mover in that market, we've been qualified very early with the main OEMs, most specifically in aerospace and defense and medical, and it's a very sticky business because we really make the most difficult material. We make -- like titanium, for example, is extremely reactive, difficult to make, difficult to handle. We also make refractory metals that have extremely high melting point. So we don't try to compete on the cheapest and the easiest material to make. We also make other material like aluminum, for example, and we're working on developing other material. And then we ship this powder to the companies that are doing the 3D printing. So it can be the OEM itself. It could be Service Bureau. We ship across the world. We have customers everywhere in the world, very easy to access. Next slide, please. Now if you look at additive manufacturing itself, so additive manufacturing market is forecasted to grow about 18% per year CAGR towards 2030. And more specifically, the section that we serve, which is Material, is forecasted to grow at a 16% CAGR. Additive manufacturing presents several merits compared to traditional machining. So you can basically manufacture shape of parts that you could rather not manufacture with traditional CNC, for example. And it's more important in medical, for example, where you can adapt the shape, the geometry of the product to the exact patient shape. So additive manufacturing also can be done much faster because you just put powder in the equipment and you print the part, you don't need to wait for multiple components coming from everywhere, different parts of the planet that would most of the time make the lead time much longer. And also additive manufacturing is benefiting for the main mega trend that we observe today. For example, reshoring, companies are trying to reshore like, for example, in North America manufacturing, they would rather reshore with the most advanced technology and the most efficient technology and also resource scarcity with additive manufacturing, you can definitely use much less material. You can use almost 100% of the raw material, which is not the case with traditional manufacturing. Next slide, please. Okay. Now let's turn to Espen for the highlights of the 2 business areas and financial review.

Thank you. Hello, everybody. Let me take you through the financial updates. Note that all figures are in Canadian dollars. So Tekna reported a strong quarter across the board, revenues of CAD 10.6 million, up 18% year-over-year with growth in both business areas. Contribution margin expanded to 57% from 45% a year ago. Both business areas remain above their targets for the third consecutive quarter. Adjusted EBITDA was $1.4 million at 12.8% margin against a loss of $2 million in the same quarter last year, so this is an improvement of $3.4 million and it is our fourth consecutive adjusted EBITDA positive quarter. So the inflection point we talked about last year is holding. The order intake is really the standout this quarter. We had $19 million of new orders in the quarter, more than double last year, giving a book-to-bill of 8.8x. Backlog is also now at a record at $28.5 million. And the balance sheet remains strong. We have a cash position of $18 million and a net cash position of $11.5 million. So with that, let's take a look at each business in more detail, so we can go to the next slide, please. So first, we have Materials. Revenues was $7.9 million, up 20% year-over-year, driven mainly by aerospace and defense demand. On a trailing 12-month basis, we're now at $30.6 million, up 19% year-over-year. Contribution margin was 54%, up from 38% a year ago and well above our 50% target. On a trailing basis, we are at 56% margin. Order intake was $7.4 million in the quarter. So this is up 5% on last year. And backlog is at $16.6 million against $18.2 million we had last year. A reminder that in early last year, we had orders that were -- we had additional orders that were with lower margins. So the picture that we see on the graph right now, you can sort of read it. You have to be careful when you read it. So this is not like a softening demand situation. We have a strong order intake. The order quality has improved. Average order value is up, delivery schedules have shortened. So what it actually means is that we are converting the book faster than we were before. I also made the same point in Q1 and it's much more visible now. So -- and after the quarter closed, we also announced 3 orders from a U.S. defense customer, taking that specific account past $3 million year-to-date with a significant step-up in volume. So we can go to the next slide now. I go a bit more deep on here. So this is a new slide for this quarter to give some more flavor on this. So of the $16.6 million of backlog from Materials, roughly 60% of this, $9.8 million is scheduled for delivery in the second half of this year, remaining $6.8 million is in '28 and beyond. So what actually is happening here is that a greater share of the book now converts inside the next 12 months. We deliver faster. We have a shorter delivery schedules, and it gives us visibility on the near-term revenue line. So with that, we can go to Systems on the next slide, please. And in Systems, this was an exceptional quarter. So revenues were $2.7 million, up 13%. We had solid execution on the current order book. We closed the quarter with a very good order book. We'll come back to that. So we had a contribution margin reaching in the quarter 66%, up from 62%, and yet again, above our 60% target for this business area. The headline really remains, as I said, the order intake. We booked $11.7 million in the quarter, a record against $2.1 million a year ago. So the bulk of that is $11.5 million order for 2 plasma systems. Backlog has then gone from $2.7 million to $11.9 million year-over-year. So in Q2, we did say that the low backlog was temporary, and we had a maturing pipeline and the pipeline still remains robust, and we have further opportunities progressing. So this kind of business is lumpy by nature. And this shows, however, the earnings power when pipeline lands because such a backlog we have now gives us high profitability and more stable revenue base going forward. And especially given our reduced cost base, this yields interesting results. So we can -- with that, go to the next slide, we will take a look at the costs. Next slide again. So yes. So here, we have -- on the cost side, we have our indirect personnel costs that remain about 22% below the peak. They have been flat for several quarters, and this is the level we expect to hold. Head count is down 30% since Q2 '24. We have made small adjustments during Q2. So now we have reached a point where heavy lifting is behind us. The cost base is aligned with the current activity levels. So as I was hinting to on the previous slide, one important point for, I think, especially people modeling this is that we do not expect indirect costs to move much from here. So now at this point, as revenue grows, this convert directly into operating leverage and margin expansion. With that, we can go to the next slide, which sort of shows this visually. So the bridge shows how we got from minus $2 million a year ago to plus $1.4 million this quarter, an improvement of $3.4 million. The largest single contributor is Materials at $1.8 million volume and margin together. The split there is about $500,000 on volume and $1.2 million, $1.3 million on margin, give or take. And Systems added another $0.3 million. On the cost side, we have year-over-year savings across the board, giving us great operating leverage and margin expansion as the revenue increases, as I mentioned. So the reported EBITDA was $1.2 million. So we had adjustments of about $200,000 related to restructuring on the cost side and some share-based compensation. And then -- so sort of the takeaway that we see here is, this is a situation where we come to now where volume margin and costs are pulling in the same direction, and this is also what makes this durable. We can go to the next slide. So we will have to take a look at the cash flow. So we started the cash -- started the quarter with $18.8 million cash ended at $18 million. So we were down about $800,000 on the cash side. So we can look at that in the bridge, we'll see that the operating cash flow was negative $1.2 million. Meanwhile, the P&L, of course, positively at $1.3 million coming from the profitability, and this is pretty much the EBITDA number we talked about. Against that, we had working capital consumed about $2.5 million, and we have slightly increased on the inventory to faster convert orders and the backlog, as I talked about earlier. And we have higher work in progress to support the record backlog that we have landed prior to closing the quarter. CapEx was merely $200,000 with some investments in maintenance and intellectual properties. And we keep our guidance for $1.2 million to $2 million for the full year as there might be some expansion CapEx we are considering if we need to in respect to demand increases. On the financing side, we had loans that increased by $800,000 for cash management purposes being partly offset by minor lease repayments. So this gives us a very strong cash balance, and I will finalize with the balance sheet at the next slide, please. And the balance sheet remains a real strength of the company. Total assets sit at $70 million; net cash at $11.5 million, improved from $9.9 million at year-end on the back of positive $2.2 million operating cash flow year-to-date and equity ratio of 78%. We remain very well capitalized. So this is up from 75% last quarter. Net working capital at $14.5 million, which is 37% at trailing and also a reduction from 40% at year-end. Liquidity solid $23.2 million in cash, which is 26% of total assets. And we have $5.2 million undrawn credit facilities, which gives us flexibility and a fully funded business plan. So with that, that concludes the financial update, and I will give the word back to you, Claude.

Thank you, Espen. So, before concluding, I would like to give you a bit more information about the 2 main market verticals that are fueling our growth. I'm talking about aerospace and defense and medical and dental. So let's start with medical and dental. As you can see on the chart there, the market in 2025 was -- for titanium powder specifically, for additive manufacturing was USD 69 million, forecasted to grow 20% per year to $171 million in 2030. So why is additive manufacturing used for medical and dental? I alluded to that a little bit before. So it can be -- it can produce patient-specific device from additive manufacturing and also design flexibility. So our customers are telling us that some products would not be feasible with traditional manufacturing method. And of course, aging demographic is lifting the implant volume demand. That is leading to the 20% forecasted growth. And if you look on the right there, you see some example for orthopedic & spinal implants, cranial/maxillofacial plates and also dental & patient-specific instrumentation So our powders are qualified for medical implant with the main Tier 1 global OEM. We have more than 20 active customers in medical segment that are expanding their demand. We have long-term strategic partnership with a U.S. medical contract manufacturer. And we are -- we have ongoing qualification with several medical OEMs. So it would be a good portion of our future growth. And you can imagine that once you get qualified with those -- on those medical device, it's becoming a very sticky business for Tekna because it's not easy to change a powder supplier. And as I said, our powder is fully traceable back to the mining of the mineral, which is required in a regulated market like medical and dental. And Tekna is one of the very few companies that can produce those extremely high-purity powder that are needed for medical and dental, and it's because of our unique ICP technology. Next slide, please. The other market that is fueling our growth is aerospace and defense. And the market in 2025, there was USD 63 million, growing -- forecasted to grow 24% per year until 2030, reaching $182 million in 2030. And why is additive manufacturing used in those market verticals? The lightweighting. So using additive manufacturing, you can produce a part that is typically 50% lighter than a part that would be made by traditional manufacturing. Reshoring is also driving demand. Again, their design flexibility, you can produce some part that would not be otherwise possible to manufacture. And supply chain simplification and acceleration, again, not having to wait for multiple components coming from all over the world You can even see some 3D printer deployed on the battlefield to be able to produce some replacement part for the equipment. So again there, on the right, you can see some examples of parts that are being manufactured with additive manufacturing. The one in the middle is the one that we have announced together with Burloak, a Canadian Service Bureau that is printing satellite part for MDA or the MDA satellite. Also unmanned aerial vehicle that needs to be lighter are a big user of additive manufacturing. o we are active with 57% of 69 identified aerospace and defense OEM; Airbus, Boeing and Dassault are some examples. And of course, we have all the quality certification that are required. Again, there, you can imagine that those markets are very sticky when you get qualified there. And again, as one of the first mover in titanium powder for additive manufacturing, we benefit from those early engagement with those OEMs. Next slide. So all that, if you look at the observed Material order intake and increased customer order size, coupled with the current trend that we observe, we are in a very good position to deliver on our target to post double-digit growth every year towards 2030 and achieve 15% to 20% EBITDA. We see the market accelerating, benefiting from the reshoring of manufacturing and also the big investment in defense is really playing in our favor. And our innovation pipeline, specifically for new material or new application, new market for our System is also supporting our ambition for the next year. And if you look at our solid contribution margin since 2025, we have achieved contribution margin above target in both business areas. Next slide. So as a conclusion, we're very happy to be posting our fourth consecutive adjusted EBITDA -- positive adjusted EBITDA quarter. It's basically confirming the profitability inflection point that started last year. Again, a very solid contribution margin in both business area, above target with our indirect costs structurally lower. The System sales pipeline is advancing with further orders anticipated in 2026. We have capacity in place to scale without significant CapEx investment. We're talking about $1.5 million to $2 million worth of CapEx in 2026. So again, confirming our favorable position in a fastly growing market. So that's the conclusion, Arina. I think we can get to the Q&A. But first of all, I would like to thank Espen, our CFO. Espen has been with Tekna for -- as a CFO of Tekna for more than 3 years now. I personally joined Tekna more than 15 months ago, and I really enjoyed working with Espen, and I quickly realized the impact that he had on the company. So I think that the results that you see, the performance that you see there, Espen was instrumental in growing the company, developing the company and getting to the stage where we are today. So I'm very happy to have been working with Espen, and I wish you best of luck, Espen, in your next adventure.

Thank you so much.

So now Arina, is it the time to ask Yves to introduce himself?

That's it. So before we start the Q&A, I would like to welcome Yves Lemoyne to the stage to introduce himself. He joined Tekna in September last year and will take over as CFO from Espen for this third quarter. Yves?

Thank you, Arina. I'm very pleased to take on the role of CFO. I have been with Tekna Canada for 11 months now. During this time, I have learned a lot about the business, our operations and our key financial priorities. This new role is a natural next step. This continued responsibility I've already been assuming. I look forward to sharing my experience with the whole Tekna team. I also look forward to building strong and open communication with all our stakeholders. I would also like to thank Espen for his contribution. His leadership and support has been provided throughout this transition. Thank you again, Espen. Going forward, my priorities are simple: ensure clear financial communication, strong financial discipline and a good management of our working capital as we execute our strategy. I look forward to speaking with you again on our next quarterly call. Thank you.

Thank you, Yves. All right. Let's start the Q&A session. Once more, you can submit questions here in the event page below the video player. But we have already received a few. So Claude, I have a few for you. Let's start with a strategic one. Do you see opportunities for accelerating growth via M&A? Or is the balance sheet strength purely a buffer for organic scaling?

It's a very good question. Yes, we actually see some opportunities in terms of M&A, and we're always looking at opportunities. I think it's important to pay attention to that because we see that there is some consolidation happening in the market right now. Every quarter, there's some M&A announced, some merger, companies are getting bigger. So of course, we are paying close attention to that. And of course, when there will be some real development, we will come back to you with details on that.

Okay. Then obviously, we've spoken about MLCC in the past. Is there already a final decision on where that is going?

Not a final decision yet. So we spoke about it in the last quarter that although we're quite happy with our technical development, we have achieved extremely high-quality powder quality of the most advanced powder for MLCC, we think. But it's extremely difficult to get some commercial traction on that. So we don't have clarity yet if we can actually turn it to a commercial business. We also look at opportunity to sell systems rather than selling powders. So stay tuned on that. We haven't made a decision. We've slowed down R&D investment because we think that we -- the powder quality got to a point where it meets the requirement for the most advanced MLCC. So we have reduced R&D on that. And as I said, we're looking at all commercial opportunity, including selling system. So we haven't made final decision yet on that.

For Materials, in our risk assessment, we have disclosed that we are not selling our full production yield at attractive prices. So what is the current percentage of production yield that is sold at an attractive price? And what operational or commercial milestones would unlock the remaining yields?

Yes. So it's a very good question. So currently, our process produce about 50%, 5-0 of what we call the prime material that is really used to manufacture the most critical parts in additive manufacturing. The rest is either very small powders or larger powders. And it's 2 different situations. So we see better and better sales opportunity for the coarse powder that is typically between 50 and 75 micron that are more and more selling at attractive price because the printers are getting better and better. They have higher power laser. So some parts can be printed with larger powder -- larger particle. So there's definitely some very good development on that front. On the finer particle, finer powder, it's a little bit more difficult. It's selling at a lower ASP, mostly for MIM manufacturing. And I think the key thing is that we continue to develop better outcome for those mostly the coarse powder, but also the small powder, the fine powder, but also we keep improving yield. And we have very, very good activity, very good results already in R&D, where the 50% that I was talking about will significantly increase such that the portion of the prime powder that we manufacture will increase. So we're working on several fronts, either commercial or technical.

Yes. And it's already starting to happen, right? That's where the margins are also improving.

Absolutely. I think our margin above target in Material is a demonstration of that.

Yes. So how much of the recent Materials growth is actually coming from either higher volumes, higher prices, the product mix or customer qualifications?