Kromek Group plc (LON: KMK), a worldwide supplier of detection technology focusing on the medical, security screening and nuclear markets, announces its interim results for the six months ended 31 October 2019.
Financial Summary
- Revenue increased by 43% to £5.3m (H1 2018/19: £3.7m)
- Product sales accounted for 82% of total revenue (H1 2018/19: 78%)
- Gross margin was 58% (H1 2018/19: 67%; FY 2018/19: 57%)
- Adjusted EBITDA* was £0.6m loss (H1 2018/19: £0.6m loss)
- Loss before tax was £2.7m (H1 2018/19: £2.1m loss)
- Gross cash and cash equivalents at 31 October 2019 were £13.4m (30 April 2019: £20.6m; 31 October 2018: £6.3m), with the key movement being planned capex of £5.5m primarily to expand production capacity to fulfil customer demand
*Adjusted EBITDA defined as earnings before interest, taxation, depreciation, amortisation and share-based payments as detailed in the Financial Review below
Operational Summary
- Record H1 revenue driven by delivery of high value, multi-year contracts with commercial and large government customers worldwide across nuclear detection, medical imaging and security screening
- Substantial expansion programme implemented at UK headquarters to increase CZT manufacturing capacity and D3S production
- Significant commercial traction with D3S family of products:
o Expanded sales team and rapid channel development resulting in the D3S platform now having been sold in 22 countries
o Received and has successfully delivered orders of £2.1m from a European government-related company, a new customer, for the provision and integration of D3S-related technologies
o Further contracts won from US government and European Commission and, post period, a national civil defence agency of a European country
- Commenced delivery on a significant $58.1m contract to provide an OEM customer with CZT detectors and associated advanced electronics for its state-of-the-art medical imaging systems
- Substantial increase in capacity in detector manufacturing and introduction of process automation resulting in increased throughput and efficiency in the US facility, which is delivering on substantial medical contracts
- 3 new patents were filed and 8 were granted during the period
Outlook
- Entered H2 2019/20 with increasing commercial momentum: Kromek signed multi-year contracts totalling c. £100m in the three years to 31 October 2019 compared with c. £50m and c. £30m for the three years to 31 October 2018 and 2017 respectively
- Unchanged outlook for FY 2019/20: on track to achieve revenue and EBITDA profit in line with market expectations
Dr Arnab Basu, CEO of Kromek Group, said:
“This year has seen a focus on executing on the previously-signed agreements and commencing delivery on the multi-year contracts won in recent years. This has resulted in record first half revenues. We have seen an increase in adoption of our next-generation products in the medical imaging market and an expansion of applications for our D3S platform. Consequently, our product sales have seen a year-on-year increase of 53% and account for 82% of revenues in the first half.
“Kromek entered the second half well-positioned to report its highest ever full year revenues as delivery of high value, multi-year contracts continues to ramp up. We are delivering on contracts worth nearly £100m won over the past three fiscal years in our target markets of medical imaging, nuclear detection and security screening as customers commercially deploy their next-generation CZT-based products. Additionally, we continue to experience growing demand for our flagship products, which is expected to convert to further orders. As a result, the Group has visibility of 90% of expected revenue for FY 2019/20 based on delivery of the contracts already won and supported by a strong and increasing pipeline. The Board expects to deliver significant revenue growth and EBITDA profit for full year in line with market expectations.”
Overview
Kromek achieved the highest first half revenue in its history at £5.3m (H1 2018/19: £3.7m), a year-on-year increase of 43%. This progress was based on Kromek continuing to execute on the high value, long-term agreements that it has been awarded across its target markets, which, over the last three fiscal years, amount to nearly £100m in orders. In particular, the Group’s growth is being driven by increasing adoption of Kromek’s next-generation molecular imaging single photon emission computed tomography (“SPECT”) products in medical imaging and the D3S family of products in nuclear detection. It also reflects the increasing commercialisation of Kromek’s technology, with product sales accounting for 82% of total revenue (H1 2018/19: 78%), representing 53% growth in value over the same period of the prior year.
During the period, the Group implemented a substantial expansion programme at its UK headquarters in Sedgefield to increase its cadmium zinc telluride (“CZT”) manufacturing capacity. The expansion programme, which is on track to be completed in H2 2019/20, will increase the Group’s CZT manufacturing capacity in the UK by almost seven-fold and will support Kromek in delivering on existing orders as well as expand its pipeline with larger, higher-volume contracts. The Group’s management believes that it will provide Kromek with the largest CZT production capacity globally and enable the facility to become a world centre for this core technology. Alongside the major relocation last year of its US operations to a new state-of-the-art facility, Kromek has significantly strengthened its foundations to enable it to deliver on the anticipated future growth of the business.
Medical Imaging
Kromek continued to deliver on its contracts and win new orders in the medical imaging markets across its key segments of SPECT, bone mineral densitometry (“BMD”) and gamma probes. In particular, Kromek commenced delivery on one of its most significant contracts to date, which had been awarded in H2 2018/19, to provide an OEM customer with CZT detectors and associated advanced electronics to be used in its state-of-the-art medical imaging systems. The contract is expected to be worth a minimum of $58.1m over a seven-year period.
Also during the period, the Group advanced towards achieving clinical validation of its CZT-based SPECT detector system under the contract signed in 2014 with an established manufacturer of X-ray diagnostics and analysis equipment. The Group’s management believes this system will significantly enhance the identification and management of diseases such as cancer and Parkinson’s.
Kromek is collaborating with its medical imaging partners to support them in leveraging the advances in SPECT imaging, with a focus on reducing required patient dose, exam time and broadening the application of molecular imaging. This includes the Group’s work with the Newcastle-upon-Tyne Hospitals NHS Foundation Trust (the “Newcastle Hospitals Trust”) to transition SPECT from a purely diagnostic technique for establishing the presence of disease to a screening solution for detecting potential disease indicators. In particular, under a three-year project that commenced mid-2018, the Group is developing, alongside the Newcastle Hospitals Trust and an OEM partner, an ultra-low dose molecular breast imaging technology based on Kromek’s CZT-based SPECT detectors.
Nuclear Detection
Kromek continued to experience increasing demand for its D3S platform, which is attracting business interest across the globe – and has now been sold in 22 countries. This is supported by the expansion of the D3S sales team and distribution network, with new channels being regularly put in place.
In particular, Kromek was awarded a strategically significant contract, worth £1.1m, by a European-government related company, a new customer, for the provision of D3S-related technologies, which was subsequently extended by £1.0m to provide technology integration. The customer works with a European government to detect and protect against potential nuclear threats. Kromek has successfully delivered this contract and the Group’s solutions are being actively deployed by the customer for wide-area threat monitoring.
The US government awarded Kromek a new and an extension contract worth over $1m in total under two initiatives:
- The US Government’s Countering Weapons of Mass Destruction Office, which is a component within the US Department of Homeland Security, has awarded Kromek a $0.7m extension contract to add further technical innovation capability to the D3S family of products.
- The US government’s Joint Program Executive Office for Chemical, Biological, Radiological and Nuclear Defense (JPEO-CBRND) awarded Kromek a $389k contract to provide D3S-related customisation for military operational transition, which will leverage the DARPA SIGMA Program sensor and technology.
The D3S platform was used in active deployments and field-tests in multiple locations of strategic importance and high risk across the US, Asia and Europe. This includes deployment under an initiative by the European Commission’s Directorate-General for Migration and Home Affairs, working alongside security authorities in Belgium, Luxembourg, The Netherlands and Spain, to allow the law enforcement authorities to validate new and emerging technologies for homeland protection. Over the course of this year, the European Commission will use the D3S-ID and D3S Drone radiation detectors for the protection of public spaces across multiple European locations covering high risk venues such as airports, train stations and other public areas. Kromek was awarded a €180k contract for this programme.
Post period, Kromek won a competitive tender to provide its D3S platform to a national civil defence agency of a European country under a contract worth up to €200k. This is a new customer for the Group and also represents the first sale in this European country for Kromek’s D3S platform as its reach continues to expand globally.
In the nuclear markets, Kromek’s portfolio also includes a range of high-resolution detectors and measurement systems used for civil nuclear applications, primarily in nuclear power plants and research. During the period, this area of business continued to gain traction, receiving orders from both existing and new customers. The Group has also appointed new distributors in key geographical markets, furthering the channel development strategy on a global basis.
Security Screening
In security screening, Kromek continued to provide its OEM and government customers with components and systems for cabin and hold luggage scanning applications. This includes commencing delivery on the $2.7m expansion order, that was received at the end of the 2018/19 year, under the Group’s long-term contract to provide key components for a US-based customer’s security screening system for the detection of explosives. The order expansion, which increased the total value of the contract by almost 90%, reflects the growing recognition of the strength of Kromek’s detection solution and credentials as a high-quality product supplier. Kromek continues to receive increasing interest in its technologies that are able to meet the high-performance standards demanded by customers to ensure passenger safety while increasing the convenience and efficiency of the security process.
The Group also reached a key milestone with another OEM customer in the security screening market, which achieved the highest level of European liquid explosive detection certification for cabin baggage for its scanner that is based on Kromek software and detectors. This certification enables for commercial deployment of the product.
Manufacturing Facilities and R&D
During the period, Kromek implemented a substantial expansion programme at its UK headquarters in Sedgefield to increase its CZT manufacturing capacity. This included significantly increasing the number of furnaces for growing CZT as well as equipment for other stages of the manufacturing process. In addition, the Group increased the size of the work area for the building of the D3S family of products. Despite this substantial undertaking, the Group was successful in ensuring that its existing facilities remained fully functional throughout the process to enable continued production.
The expansion programme, which is on track to be completed in H2 2019/20, will increase the Group’s CZT manufacturing capacity in the UK by almost seven-fold and will support Kromek in delivering on existing orders as well as expand its pipeline with larger, higher-volume contracts. The Group’s management believes that it will give Kromek the largest CZT production capacity globally and establish the facility as a world centre for this core technology.
The implementation of the expansion programme also demonstrates the scalability of the Group’s production as Kromek ‘industrialises’ the CZT manufacturing process. In addition, Kromek invested in significantly increasing process automation at its facilities in both the UK and US, which is already realising results. With greater automation, the Group will expand throughput capacity as well as improve efficiencies. These improvements are intended to be implemented in a phased manner over the course of this current financial year. Alongside the relocation last year of its US operations to a new state-of-the-art facility, Kromek has significantly strengthened its foundations to enable it to deliver on the current and anticipated future growth of the business.
Kromek continued to develop its new technology pipeline, with its R&D efforts focused on the development and enhancement of products and platform technologies that form elements of Kromek’s product roadmap, particularly for near-term commercial opportunities, and to enable the Group to maintain its leading market position. Kromek worked on both externally and internally funded R&D activities, with the proportion continuing to transition away from externally funded R&D projects as its technologies are increasingly commercialised. In addition, Kromek’s R&D efforts were focused on value engineering to increase cost efficiencies to enable the Group to offer competitively priced products whilst maintaining margins.
Kromek’s externally funded work is primarily in the areas of medical imaging and nuclear detection. In nuclear detection, the focus is on the D3S platform to further reduce the size, weight and power consumption of detectors and increase their immunity to environmental conditions.
During the period, three new patents were filed and eight patents were granted.
