Earnings Call: H2 2019

Jun 27, 2019

With me this morning from Kromek, I am joined in the studio by Arnab Basu. Arnab, good morning. Good morning. Good to be here. Results for the 12 months to the end of April 2019. In your words, a milestone year for the company. Just give us a quick opening couple of words about how it has been for you. It has been a milestone year. It has been a critical year for us. 23% growth in top-line revenue, quadrupling the EBITDA position to £2 million, halving of the pre-tax losses. Losses narrowing, revenue growing, EBITDA position improving year-on-year dramatically. The year is characterized by the overall commercialization process, so $80 million of contracts won. Including one of your biggest contracts to date. Indeed. If you look at the last three years, we've announced nearly $145 million worth of contracts. This year, last year, $80 million, of which $58 million from a particular contract that we announced in January. Yes, our pipeline is very strong. The conversion of the pipeline is well evidenced now, and that is what's driving growth. Also, a lot of these contracts are actually multi-year in nature, which provides us very good visibility in the future revenues as well. As we entered this year, we entered with about 80% visibility of our current year's revenue figures. Good commercial traction you feel here across the business. Absolutely. In all three segments, we are seeing real activity, real commercial activity, real scale-up happening. In medical imaging, the contracts we have announced and the traction we are seeing in the areas of SPECT with the very steady market in bone mineral densitometry, BMD, and of course, in gamma probes. Equally, last time we were here, we had sold D3S in about 10 countries. Now we have sold it in 18 countries, it is really expanding, really growing. Of course, the aviation security market, driven by regulations, is taking shape very well. In terms of potential applications, of course, drones being one of them for D3S? Yes. D3S, if you recall, started off as a product which was designed to be used as networks in very large networks where thousands of these devices would be used simultaneously as part of a very large integrated network, providing information about radiological signature and position as an early warning system for dirty bombs. We now have multiple user modes of that same product. Of course, that network version is very important, and that is going through some very important sort of trials implementation in multiple countries outside U.S. Of course, U.S. is where we started off. But the same product is also being used as a handheld discreet radiation detector, which is disruptive in the global marketplace based on its performance, form factor, usability, and indeed price. So we are bringing something which is a true disruptor in that market. As the world goes, it also gets integrated into drones and UAVs as well. So the application space for this product is really increasing. So it started off as a product for Homeland Security, protecting cities and events, going on to border security, going on to defense. Of course, we had that IDIQ contract announced in end of December 2017, with the US military, with the JPEO. So this last year, we have announced a couple of contracts with DTRA and others in this field. So the application space and the scope, the market scope of this product is really increasing, and the traction we are getting from the market is absolutely tangible. Good progress, too, in the security screening division. Security market is a regulatory-driven market, so regulators set standards, and companies have to meet those standards. The new standards, thankfully for me and you, we'd be able to take liquids and laptops inside our bag when we go through an airport without having to take them out. That means the baggage screening systems are having to meet new standards, so new levels of capability. There's two ways the screening companies are approaching this issue. One is a much more expensive way, which is bringing medical CT-type systems to meet these standards. The alternative systems are really based on better detection technology based on exactly the same architecture that exists today in airports. Our customers have chosen the second route using CZT detectors, so we feel very good about it. As that regulation comes into play by 2022 in Europe, as we have announced two or three contracts in this space, that segment is going to grow for us. We also announced a contract in April this year, which was an expansion of an existing contract we have in this space with an existing customer. That's a great example where we win these multi-year contracts and announce a minimum value of those contracts. But as and when the customers actually start to get traction in these markets, we expect these contracts to actually attain a larger value, and this was a great demonstration of that. I think it was during the year you moved into a new facility in the U.S. Is that correct? I characterize this year of having two very large programs within the business. One is completed, which is the move from our old facility in the U.S. to the brand-new development near Pittsburgh. It is a world-class facility for production of CZT-based detectors. That move was completed late last year. It was a big challenge. Nobody has ever moved a CZT facility. So hats off to our operational team, which successfully delivered that. We closed down an existing facility, we moved the entire operations to a new site and made it operational. That's complete. That's fully operational, successfully running. The second project that is running is post-fundraising. We are going through a significant expansion of our overall CZT capacity, which is happening on both sides of the Atlantic. We are building a lot of capacity in growing CZT material itself. We are nearly quadrupling our output from our existing facility. Also in the U.S., we are putting a large degree of automation, which will, in processing of that CZT to make ultimate products, detectors and products using CZT. These will drive productivity. These will drive throughput. These will drive efficiency, and more importantly, it will drive reliability and enhance the quality of the product. It is a big program running, and it is exciting both for our customers and ourselves. We are going to have the state-of-the-art facility for producing CZT in the world. How would you describe where Kromek is now in terms of its development as a company? What Kromek has done over the last few years has very patiently, together with its stakeholders, built up a company which has got a solid set of customers, built on very solid set of technology platforms, which is now being leveraged to build application-based values and in different segments. We are at that cusp of that commercial growth of the business. Evident, as you have seen over the last three years, as I said earlier, $145 million contracts announced, quadrupling our output of the factories, increasing our market share in going from 10 countries selling D3S to 18 countries selling D3S. It is really that commercial journey is accelerating at the moment. As we grow, supported by the order pipeline, conversion of that order pipeline, we are going towards a big growth path and profitability and sustainable growth for the business itself. Well, big eye on growth, as you say. Is there anything that you are just keeping your eye out for in terms of any upcoming potential challenges, risks which may present themselves to the business? Look, the business going through the type of growth we are going through, and the scale-up that we are going through always carries an execution risk, and we are very mindful of that. We have got the team. We have planned very well. We have successfully demonstrated twice in the past few years that we can scale up, when we built the U.K. facility, replicating our U.S. sort of manufacturing facility in the U.K., but also last year when we moved our factory from one site to another site. We are doing that at a much larger scale right now. So that is a risk itself. But when I look at the overall business itself, what are the key growth drivers? Let's look at a little bit on the macro growth drivers globally for our two very big markets, which is medical imaging and the nuclear security. Medical imaging is really characterized. If you look at the Western markets, there's been an endemic sort of underinvestment in medical infrastructure. If you look at what NHS is talking about and what the government is talking about, that better investment in diagnostics leads to better outcome in patients, but also ultimately lowering of cost, which means investment in diagnostic systems is going to go up. That is true in general in the developed and the Western world. But when the other big driver of the medical diagnostic market is, of course, in countries like China and India, where there's a whole emergence of a very wealthy middle-class population, which is a substantial number of people who are demanding better healthcare because the quality of life aspect of it. Also people are living longer. So people can afford better quality of healthcare, demanding better quality of healthcare. That's what is going to drive the adoption of new technology and advanced diagnostic technology, which is going to make life easier, better, and safer. On the other hand, in the security markets, we are seeing increasingly inward-looking politics, which is dominating, and ultimately instabilities in parts of the world are threatening to a certain extent in terms of the rise of terrorism. Nations are investing much more aggressively in security and defense. That investment is also going to drive growth for Kromek because of our products in that segment. If you look at the two big markets and the actual external growth drivers, they're very well aligned to what we are doing. Anit, good to see you this morning. Thanks very much. Thank you very much.