Kromek Group (LSE:KMK) — Interim results Q&A Session

0:01 Good afternoon, and welcome to the KROMEK GROUP PLC Interim Results Q and A Session. For this recorded meeting, investors will be in listen only mode. Questions are encouraged, and they can be submitted at any time using the Q and A tab situated on the right hand corner of your screen. Simply type in your questions and press send. The company may not be in a position to answer every question received during the meeting itself. However, the company can review your questions submitted today and publish responses what is appropriate to do so. Before we begin, I would like to submit the following poll, and I would now like to hand you over to CEO, Anubhasu. Good

0:32 afternoon to you, sir. Good afternoon, and good afternoon to everybody that is joining joined us. Hopefully, you've all had a chance to see the recorded webinar and which we used to sort of convey the results and and the opportunities that are that is in front of us. So I've got Claire Birches, our CFO with us, and and together, we will try to answer all your questions that you have. Fantastic. Arnab, Claire, if I may move on to the question. And the first one here reads as follows. You have stated that circa £4,800,000 in CBRN orders have been received year to date, with half still to be delivered in H2.

1:20 Given the H1 CBRN revenue was GBP 4,300,000, can you clarify if the GBP 2,000,000 post period debt draw was specifically to purchase the long lead components for this £2,400,000 remaining backlog?

1:34 If so, does the cash from these deliveries settle the revolver by the end by April year end? Apologies. Thank you. I'll take that one. So I, at the year end, negotiated a 6,000,000 revolving credit facility with HSBC Bank, and that is to support the working capital of the business.

1:55 The working capital of the business, we've got the advanced imaging, and we've got CBRN. CBRN side is a relatively short working capital period. And although some of that drawdown will have been to support the CBRN side of the business, predominantly most of it will be to support the advanced imaging side, which has a much longer working capital period. The revolving credit by nature is revolving. So during the year, the, the facility will get paid down. I don't expect that to be at the end of the year because as the year goes through, we are ramping up our production on advanced imaging. So I do expect some usage of that facility to continue. Perfect. Thank you. Next question. Firstly, congratulations on the acceleration of KROMEK over the last eighteen months.

2:43 I have great confidence in KROMEK over the next five years. I support the under promise over deliver approach. That said, with large deals taking years to mature, investors need some sense of pipeline health to gauge process. How can you give us a clearer picture of pipeline without compromising your disciplined approach?

3:04 I think that's a great question, and and we do acknowledge, that, you know, often it is the type of bed type type of customers we have and the relationship we have and the strategic nature of product introductions and so forth makes it difficult for us to convey everything that we want to convey in an ideal world. But hopefully, the conversations we are having like this is going to help in in conveying in some of the tapes, some of the messages, and and hopefully, that'll help you understand where we are going from where we are today. So let me just characterize the broader market a little bit, and hopefully, that'll give some context and and some understanding. So the adoption of CZT in the advanced imaging segment, which is primarily the medical imaging segment, which is CT, dominated by two modalities, CT and SPECT, are accelerating.

4:02 And and that is pretty evident by new product introductions that are happening in the market over the last five or six years. And and, certainly, we are seeing the acceleration of new product introduction utilizing CZT that that has happened even in last year. So let me talk a little bit about the spec market. So so 2018 was the first product that GE introduced, in the spec market, with their six seventy n m, And that was really the first very first full body imaging system or the mainstream imaging system with CZT that was introduced. And since then, both GE and Spectrum Dynamics, which with with whom we have a stated contract of $57,000,000, have continued to introduce new products throughout the last periods. And, of course, last year, the enablement contract with Siemens is, of course, for SPECT. So pretty much majority of the market has now stated their interest and demonstrated through product introduction that CZT is becoming more of a mainstream sort of detector, replacing the conventional detectors that exist in legacy systems, today. So so we are we have seen real tangible take up of CZT through GE, through Spectrum Dynamics, and and laterally through Siemens' enablement program in that market.

5:27 When I look at the, CT market, it is going through exactly the same kind of transition at the moment, although a couple of years behind the adoption, sort of cycle of of SPECT. So Siemens Healthineers introduced NEOTOM Alpha, the first photon counting system with two, you know, CZT CAT detectors. That was back in 2023, and then expanded their portfolio, over the following year. And now last year, just just in 2025, three other companies, including Canon, has, come out with, either soft product launch or really new product introduction in the market with CZT in the CT, in their CT systems, photon counting CT systems.

6:13 So we are seeing, not only one company really introducing product, but a number of companies starting to introduce products. And in this market, of course, we are working with with everybody at the moment who does not have access to an internal supply chain, like Siemens, Healthineers, and CT does have. So so we look at this market as a total market opportunity by 2030 of about roughly $400,000,000 of of CZT requirements by 2030. 80 to $85,000,000 of that is required in the spec and about $320,000,000 required in in the CT market. Now we have access to about 40% of that $400,000,000 CZT requirement by 2013, these two markets, that we can supply into.

7:04 And as the only independent commercial supplier of CZT, we have a pretty good strategic position to really capitalize on that on that demand that is coming through. So the where we are today to where the market would be in 2030, which is roughly requirements of of three four hundred million dollars of CSFT with us having access to about 40% of that market, we are seeing a real opportunity that'll that'll enable us to grow pretty aggressively over that period, and that's where we have set that medium term target of £60,000,000 revenue with a 30% EBITDA during our Capital Markets Day last year. So what we can say here is that we are working with all our customers. Our customers are either really accelerating their products and and getting better market share like Spectrum Dynamics with Siemens Healthineers in in in the in in the spec market, and our stated customer that we announced the tier one customer in 2023 in the CT market, and also the other other players that we are working with, and we are going to see continuous introduction of new products, continuous continuing that journey of adoption of CZT in this market here on. So it's not a question of if, it's a question of how fast in in terms of CZT adoption.

8:28 So, hopefully, we would be able to come back to the market on a regular basis over the next few years to provide a more clearer picture in terms of as and when products are launched, as and when that ramp up happens, as and when we are expanding in these markets. So I understand the challenge. I understand the information gap that some shareholders are feeling in terms of where we are today to how we are going to achieve that growth. But and and we will be looking at every possible ways of conveying and and and addressing that in that information information gap that we understand investors feel we have. These conversations are important, and and we'll be continuing to have that so that we can paint

9:12 a picture, we can we can articulate, we can frame the opportunities, and we'll be continuing to do so going forward. Fantastic. Thank you, Anna. The next question has two parts to it. The first one being, how much spare CZT production capacity does KROMEK currently have left to service new tier one OEMs without requiring significant fresh CapEx? Second part, how does the board view KROMEK's role in the ongoing consolidation of the medical imaging supply chain? Is the priority to remain independent? Look, I think the capacity question is a very relevant question. If you recall back in 2019 when we announced the Spectrum Dynamics contract, we actually invested £10,000,000 in expanding capacity. So today, we run 174 CZT production furnaces.

10:03 That's our total stated capacity. We don't, of course, run at 100 unit utilization of that at the moment, but we so we do have some spare capacity to start to service some of the early, you know, contracts that, you know, during the ramp up the early phase of the ramp up of the contracts we already have from new customers, such as the supply contract we have with Siemens Healthineers on on top of the enablement contract we we we have, which was a $37,500,000. The contract which is we announced in April 2023, where which which will be which had a a sort of a development phase, and then a commercial phase. We are we are rapidly approaching that commercial phase, so we'll be able to start serving some of that contract with with the capacity we have got. But if I go back to my numbers of of that 40% of a $400,000,000 market requirement in 2030, we will have to go through a pretty, you know, steep expansion of capacity.

11:12 But we have made it very clear, and and we have demonstrated within the structure of the Siemens contract that as we need capacity to to facilitate and supply into this market, we wouldn't be stressing our balance sheet or asking our shareholders to to really fund that. The the CapEx will be structured within supply contracts such that our the funding actually comes through that supply contract rather than us having to bear the burden of the CapEx that is required. So I I say these numbers and and and so to to get to, you know, if that to that market demand, we would be looking at at between

11:51 eight and tenfolds increase in furnace numbers over over over the force foreseeable future and over the next medium term. So so it is a significant expansion, but but we also we but we also have a plan of how to fund that growth, both from a working capital needs through debt and the revolving credit facility that Claire has put in place, but also in the CapEx form of within the supply contracts, how we are structured. To answer the second part of the question and the consolidation in the medical imaging, I mean, we have seen that this market has acquired. If you'll go back to 2008, GE acquired Orbotech, which was which currently is their internal source of supply for their spec detectors of CZT.

12:36 ACRORAD was a the Japanese company was acquired by Siemens in 2010, 2011. That really is a primary source for

12:46 CT detectors, photon counting CT detectors for Siemens Healthineers, but at the same time, Siemens licensed technology from us for their SPECT detectors, which are two subtly different flavors of CZT. And then Canon acquired Redland in in 2021. So this has been a market which has been acquisitive, and and we have remained independent in there. We have remained a player where we are able to serve 40% of the market and and go through a tremendous growth phase. And and our our focus is very much to serve that market as an independent listed business in The UK to and and grow and capitalize on that significant market need that is articulated and visible to us in in in the current year in the in the future years.

13:38 And that growth ramp will be actually reasonably, you know, going on for the next ten years as as the market reaches maturity in terms of adoption of CZTs. So we have got a long way to grow. We have got you know, we can build a really, really interesting and long term growth business in KROMEK here in this particular market segment alone. Fantastic. Thank you. Next question is administration cost at circa 50% seems high. What is the breakdown of these costs? The company has done well to achieve the Siemens contract and other potential areas going forward. Okay. Well, first and foremost, admin costs, I believe, are about right for the future growth of the business.

14:26 As we grow and as the revenues grow, the administration costs will not grow in line with that growth.

14:34 We're at a stage now where we are fully focusing on value from our overheads, making sure we've got the right overheads in place to sustain the growth. Within that, we've got a lot of valuable people. We've got well, the majority is people, I think, as we as we go forward. The business is well placed to grow. What I'm not going to do at this stage is is cut those admin costs any further. I think they're an appropriate level. But as we grow the revenue, those admin costs as a percentage of revenue will start coming down.

15:13 Thank you, Claire. Next question we've got here is, it is great to consistently hear about progress, but over the five year period, the share price is down. Why is that? Thanks for the question. Of course, five years back, we had the whole world went through COVID, and and and that affected large number of businesses, overwhelmingly large number of businesses in UK and around the globe, and and we were no exceptions. So we had a pretty difficult time around COVID. But but what we have continued to do through that period is is really focus on the areas that matters. Focus on development of CZT, winning those customer contracts, getting embedded within their customer supply chain, within the CT and the spec market. And that's what is coming through in 2023, the tier one contract, the 2025, the enablement contract with Siemens. So we have continuously, developed that business. On the on on the other side, we have we have developed significantly

16:19 on the CBRN side as well as we have won very important framework contracts within The UK home office frameworks, within our relationship with Department of War, our relationship and the contracts with Department of Energy, and our presence in in in Ukraine, is a testament of how we have continuously build building, you know, building blocks as we have gone through that last four years. As a business

16:45 and as a management team, we are focused on building the business. We achieved profitability. We delivered profitability. We said we are going to grow sustainably in a profitable way over the over the next years, and and we are focused on delivering that. It is also please pleasing to say that see that their share price has moved in the right direction. And and over the last six months or so, it's it certainly has has moved, moved up. But as we say, there's a tremendous growth opportunity, on a profitable basis for this company in the coming, periods and and years, and we continue to execute. And hopefully, the market will provide, you know, recognize that value and deliver value to our shareholders.

17:31 Thank you very much. And the next question is on dividend. When will the board look to a dividend?

17:41 Look, we we are a technology company. And and as and our stated strategy, we we part of our stated strategy on top of the mainstream strategy of really focusing on organic growth and delivering organic growth on both on our AI side and on the CBRN side. We also have stated that we would look at bolt on m and a's, but all those bolt on m and a's will have to be done based on up you know, on a self funded basis. And so as and when we have got spare cash and and and capacity on the on the balance sheet, we I think we will con we will invest in building the business and and and building the value within the business, And and that's where we have our our money is going to be focused in the foreseeable future.

18:32 Thank you. The next question, they note, I'm a non scientist. Does CZT ever lose its potency? Interesting question. I don't I don't know what exactly the potency bit mean, but but I'm I'm guessing the the question is about what's the expected lifespan of a CZT detector. I I CZT detector is a room temperature semiconductor, which doesn't degrade with time particularly. It's a very stable detector, and that is one of one of the advantages of Siemens CZT detector, a robust solid detection system, works at room temperature, unlike unlike what is is is there now.

19:19 But the general life expectancy of a medical scanner where our detectors go into is roughly between seven and ten years. So the replacement cycle is roughly ten seven and ten years. So so we serve that market, and and so effectively, you can say the, you know, expect you know, expected useful life of our detectors is roughly in that order of magnitude. Thank you very much. Next question we've got here is, we have recently seen significant new investment from high profile city veterans on the open market. While the management recently exercised options, we haven't seen an open market purchase from the executive board in some time. Once the current closed period ends following these results, should shareholders expect to see the board's personal skin in the game increase to reflect the inflection point you have described?

20:12 Well, I'll start with this one as it does involve doctor Vasu kind of directly. I think first and foremost, as most of you know, I joined the company in May this year. The executive directors on the board have never taken any money. They never sold any shares in this business. They have been diluted over time, but they've never sold any shares. In terms of, share investment, doctor Basu exercised some options, I think, as the question refers to last year, but also the exec team at the time where we both were entitled to cash bonuses and the execs remaining in the business both invested those in options over shares. That's beneficial to the business because it retains cash in the business. It could have taken cash and gone out into the open market, but this twofold in keeping the money in

21:06 the business kind of is beneficial. And then the other announcement that we did, around the time of the AGM that, both the executives and the nonexecutive directors who took wage increases took those in options as well. So they didn't actually take the cash benefits. So I think as a as an outsider coming in anew, the executive board and nonexecutive board are putting the skin in the game and investing in the business alongside other shareholders. I don't know if you've got anything else to add. To add again, I mean, you know, this is this is primarily about the executives rather than non execs, but but if you if you go back, there's there's been investments from the non execs and shares buying by the non execs on a reasonably regular basis. Execs have also bought shares in pretty much every fundraising that has happened.

21:57 So I I I and and whoever, you know, the other execs at that time has purchased shares. So so, yeah, I mean, there is an ongoing commitment, but, you know, I've been in this business for twenty three years. And and as Claire rightly points out, I I have never sold a share, but but we have continuously put where, you know, money where our mouths are. So Perfect. Thank you. Moving on to another question we've got here. KROMEK has transitioned from a cash burning r and d led business to a profitable licensing heavy model in h one. How should investors think about the long term balance between high margin licensing, scalable product sales, and internally funded r and

22:40 d as business matures? That's a great question. And it's kind of it's very reflective of allows me to explain how the business is moving forward. We completed the Siemens enablement contract, which was a $37,500,000 licensing contract. That revenue is going to get recognized over the four years of the contract. The majority of that recognition happened in the the the first year, financial year 2025, which was $20,500,000,

23:14 about £16,500,000. We've recognized about $11,000,000, 8,300,000 in the first half. From here on out, I expect that licensing revenue to be spread relatively equally up to the end of those four years for the balance. And as that tails off, the underlying business will grow in line. Market expectations are set very carefully as as we work out. And as that licensing revenue tails off, the underlying business grows. I think the the growth prospects of the advanced imaging business is is very, very strong. I think there's still growth prospects of the CBRN business to to go through as well.

24:00 The business overall, we don't disclose margins at the individual division levels, but on a on a balance, historically, our gross margin is about 55%. So I think we've got a healthy business to to go forward as both segments of the business go going forward. I don't know if you've got anything to add to Not really. I mean, it it is going to be a product led business. The licensing revenue has given us a bridge from where we were in in 2024 to where we are today. But, ultimately, that underlying business is growing, and that will continue its growth journey. As I said, in the medium term, when you look at the just the advanced imaging segment opportunities, that alone is sufficient to really drive that growth on a profitable basis going forward. So Thank you. Changing topics here. Airports across the world are installing luggage scanners, including Heathrow recently.

24:52 Are you supplying any of these as you have mentioned this scanner product before?

24:58 Look. We are working with baggage screening companies, multiple baggage screening companies. We we cannot confirm or we don't disclose where our technology goes into, but we you know, that although that's in a very rapidly changing market, our overwhelming focus at the moment is capitalizing on the medical imaging market where we have got a very good, firm strategic position on the supply chain in the SPECT and CT. So our growth, sort of, strategy is not based on the luggage screening or the baggage screening market. Our growth strategy is firmly footed in the medical imaging markets, which is sustainable, predictable, month on month growth over the next ten years.

25:51 Fantastic. Thank you, Arnab. Next question here. Over the next over the years, KROMEK has required additional capital raises that have diluted existing private shareholders. Is KROMEK now at a point where you are cash generative negating the need for future share raises and dilution?

26:10 Yeah. I I mean, I think we've been very clear about this. Yes. The business has raised money in the markets historically. There is no intention to do further capital raises. We've got, debt facilities in place. We are talking with customers around structuring of contracts as we go. The m and a will be structured in a way that allows us to grow over time on a managed basis, but there is no intention to come back to the market and dilute shareholders further. Thank you. Next question. If the addressable spec and CT markets total £400,000,000, how much is Canon, GE, and Spectrum?

26:53 How much for KROMEK? What is the competition in the remaining market? So firstly, the by 2030, the CZT requirement, it's not the end market, but the CZT detector market, is $400,000,000. So and we have, as I as I said, we have got access to 40% of that market. Remainder is it would be supplied through internal supply chain through that through the acquisitions that Canon made, through the acquisition that Siemens made, and then through the acquisition of GE makes. So

27:28 we'll have roughly access to about $120,000,000. And and, that $120,000,000 sorry. 120 to $160,000,000 is actually a market where we're not competing with anybody. It's a it's because we are the only independent player of CZT which can who can commercially supply that product in the market. So it's a big growth market for us. We have got a internationally, globally, we have got a very strong position. And as the market grows, that will be reflected on the business itself. Fantastic. Thank you. Next question on production. Do you have plans to move production to The United States? We already produce in United States and in The UK. So we have got two manufacturing facility, one where we are sitting today in the Northeast Of England and the other in just outside Pittsburgh in Pennsylvania.

28:25 So so we have got a production footprint on both sides of the Atlantic. Thank you. And sticking to The US, given the higher valuation of tech companies in The US, have you considered listing on a US Exchange? Look at I think the very short term and medium term plan is is to be where we are. We understand the valuation challenges that we have faced in in the past. I think we need to build scale. We will be demonstrating the profitable growth parts. And as we scale, we will continue to explore opportunities, you know, which will be aimed at, returning shareholder value and creating shareholder value. So so but at the moment, we are firmly an aim listed company, and and we have absolute, you know, commitment to grow as an aim listed company in The UK.

29:18 Thank you, Arnab. Next question here. I'm worried that KROMEK has given away its intellectual capital to Siemens. Will it continue to trade with them? Look, if I just take a step back in terms of the structure of that deal with Siemens, so Siemens has got a non exclusive license to produce CZT for use in SPECT only. And the SPECT of the two markets, SPECT and CT, SPECT is the smaller of the two markets. So so as I said, the total detector requirement in 2030 in SPECT would be about $85,000,000, in CT would be $320,000,000 by then, and CT at an earlier stages of adoption at that point. So, yes, we have licensed our technology, and we'll be teaching Siemens to produce CZT as good as we will you know, we do.

30:15 But but I don't think that means that we have given away our IP. We got significant value in return. And and we also have a supply contract with Siemens at least for the next four years, and and and we we hope that that supply contract is going to extend beyond

30:32 that four years supplying products to Siemens in in in for the prospect. Thank you. Maybe a couple more questions. How material will be the sales of biodetection consumables be?

30:48 Great question. So we haven't talked about biodetection a lot, but we are developing a unique capability with funding from the US government initially from DARPA and now from CWMD, Department of Homeland Security, and and with the US government agency and several contracts from the UK MOD. So we have extracted a significant amount of funding to develop a a pathogen detection system, which is which doesn't rely on having a targeted you know, one targeted pathogen or three targeted pathogen that you're looking for. This is a agnostic system where we are able to detect any pathogen present in a sample, and that is very important. That's a unique capability globally.

31:35 This is a portable system. This is, you know, this this this is going through the rigors of customer testing and and because the two customers on both sides of the planting are the main are the main customers who are paying for the development for their use, and that use then goes beyond those two customers, and it is so it's a global opportunity. And the business model, as you have rightly pointed out, is a consumable driven business model. So we sell equipment, which is the base and but every time you do a test, there is there is you know, we we earn we we get revenue out of consumables and and and usable. So so it is a consumable driven business model. Thank you very much. Next question.

32:23 You mentioned last year and repeated £60,000,000 turnover in medium medium term. Is medium term now one year shorter? No. Medium term is medium term. Generally, you know, you're looking at medium term between three and five years. So and but if we look at it, we are kind of aiming towards that 2030. That's that's how we define that. That's medium term. Understood. Thank you. And, Anna, Claire, perhaps one more question here. If there is no competition in the remaining 40% medical market, what is the scope for price and margin increases? It it is a great question. Let me let me have a swing at it to start off with. These are the medical imaging market has got very it's a very well established market for SPECT and CT. So, you know, if you look at the CT market stratification, you're going from the the premier end CT to mid mid, you know, mid section CT to value CT. And and similarly, in SPECT, it's digital SPECT and and then lower functionality SPECT.

33:37 It is important to understand that the adoption of technology that is happening is not happening just because, you know, it's vastly superior. It's happening because it's vastly superior in in terms of detection capability and the diagnostic capability and the clinical benefit it brings, but also it brings at a commercially viable price point. So because these are not niche markets, these are absolutely mainstream medical imaging markets. So when we talk about price and margin, there are established price points or price brackets within these medical imaging segments. And it is it is absolutely crucial that the that the end user are are are able to live within that price segment of, say, premier CT or mid mid mid section CT. So that what the detection system or the sensor prices needs to be are well established for a very long time.

34:37 The the adoption rates and and the timing of adoption are on based on two things. One is the technology being ready, absolutely crucial and fundamental. But secondly, the technology is deliverable at the right price point. So the margin question comes from operational efficiency, from yield improvement, from all the things that we need to do internally to to really get to improve the margin year on year. And that is exactly where the money is being spent at the moment when you see the r and d money being spent. It is being spent in exactly those things so that the future margins are better, future margins are sustainable because we know what the price needs to be in this market for this market to expand very rapidly and have that complete conversion from current detection system to the photon counting detection system of the digital spec that is happening.

35:31 And that train is, you know, that that trend is already inside. That's great. Well, look, you have covered a lot of ground there, guys, and thank you for addressing those questions for investors today. And of course, the company can review your questions submitted today, and we will publish those responses on the Investor Meet company platform. But Anna, before I redirect investors to provide you with their feedback, which is particularly important to the company, could I please just ask you for some closing comments to wrap up? I just see another question pop up. Is that correct, Alex? I've I've I'd rather Yeah. Go ahead. Go ahead. Could you read out the question? Yeah. Yeah. Of course. So I wonder if you could give us oh, hold on. Sorry. So let's just move that. I wonder if you could give us some insight into the shareholder, ROTA. Who is Graham Spears, and do you know his intentions?

36:20 We know Graham Spears very well. He has been one of the most supportive shareholders of of of this company. So he he his first investment was made in 2005, and since then, he has invested in every fundraising, private or post market and during IPO. So and and he Graham Graham is an entrepreneur, a businessman himself, and and he and he is he also, through his company Polymer Holdings, provided the sort of debt when we needed the debt pre Siemens Healthineers enablement contract. So he's a very stable, supportive, solid investor, and shareholder that we have got who has been through the entire journey of KROMEK or or a very significant part part of the journey with KROMEK. And we expect him to remain on board as a as a stable shareholder.

37:16 Thank you very much for listening, and and and I hope our answers, Claire and my answers gave you a little bit more insight into the business business where we are, what the growth potentials are. And and and we we hope to update you as and when there is things to update, and and we'll be catching up again on a regular basis in in the general q and a sessions during results. Thank you very much. Thank you. Fantastic. Anna, Claire, thank you very much indeed for updating investors today. Could I please ask investors not to close this session as you'll now be automatically redirected to provide your feedback in order that the board can better understand your views and expectations. This will only take a few moments to complete, and I'm sure will be greatly valued by the company. On behalf of the management team of KROMEK GROUP PLC, we'd like to thank you for attending today's meeting, and good afternoon to you all.