Circa Group AS

OSE:CIRCA

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Bertel Karlstedt, executive]

Good morning, good afternoon, good evening or whatever time it is at your location. My computer states it's 1-minute past, past 8 in Oslo. So let's start and [indiscernible] I want to wish you all a warm welcome to this Circa Group.

We released a presentation of the quarterly results for Q2 2024. There are traditional disclaimers, so you can get -- there are the traditional disclaimers, I won't go through that. We can take the next slide.

The agenda today is more or less traditional one, I will make an introduction of the situation in general, followed by Philipp Morgenthaler covering [ HCV ] and ReSolute sales and progress during Q2, followed by Alessandro covering the market and product development during some time and then still have Erik on finance before my closing of the presentation with the outlook before the questions and answers session.

Then let's take the next slide. The topics are the same that has been covered before because the key focus of the operations and the management and the Circa has been the same as reported already in previous quarters. And during Q2, the focus has very much been on the funding and finding the solution for the funding situation. As you have seen, and as you have been able to take part of the releases during Q2 and also the release on July 21, now we now know that based upon price escalation, further delays in the project as well as the decision to seek a funding solution covering the needs up until end of 2026.

The company is now seeking a funding of altogether EUR 60 million. That is the state and the fact and that is the, should I say, the most difficult topic we have in front of us. Looking at the business plan and what we see in the market, we actually have an interesting development looking at market progress, market response and that is the fact that there is an opening for a bigger focus and effort on our side for high-value applications that has a very positive impact on the business plan that we see in front of us for the coming 5 or [ 61st ] years up until 2030 that we have tried to envision and that really supports the views on the Circa future with the ReSolute units up and running.

And the third thing I want to bring forward is the fact that we have a strong French support on many fronts, our order is a -- progress and materialization and finalization. One part of that is the fact that we also have an opportunity now with certain preconditions to achieve a loan-based funding and [ fine ] solution from France, [ Beta ] constitute part of the altogether [ NOK ] 60 million that we are needing. Progress on that front, this is an alternative to the loan opportunity, we also have for the Finnish export that Finnvera that has been communicated already that some time ago.

Both opportunities do exist line by [indiscernible], we would like to leverage an implant. Going further down to ReSolute, Philipp will go more into details, but certain things I want to highlight briefly and my part for the first thing during Q2 and since our previous quarterly release and presentation, this work at the site has now stopped based upon the fact that we can't go any further without the environmental permit in our hand.

The positive thing, looking at a longer-term perspective is that we have been able to renegotiate the rent -- lease rent agreement with Gazel Energie, our landlord at sensible where we are building the solutes. We had a 9-year contract. We have now been able to extend that and are in agreement in Gazel and [indiscernible] extend that to 15 years be it an opportunity for us for further extension post the 15 years.

Like I said, a very good long-term achievements, talking about the future of the company. The French support actually is on multiple dimensions and multiple fronts. I mentioned the financial support to the banks. We also have a very strong local support, regional support, but also a national level, you could say, political, administrative support. There is a ministry appointed official called The [ Jet ] who is very strongly at our side, supporting us opening doors and paving the way for solutions for the issues we have especially talking about both funding and the environmental permit, strong support, really strong support highly appreciated.

And having said that, the close operation with the authorities locally and regionally, for achieving the environmental permit is also very much ongoing, continuing. And right now, the view is that the environmental permits will be in our hands by the end of this year during Q4. I will go further to the markets that will be covered market applications and commercialization more detail again by Alessandro, but I want to state that there are multiple from active towards distributors and users as well as potential contract manufacturers and contract manufacturing and research organizations that we would need in our network to facilitate the high-value applications and production and distribution of those.

That is important is also that the company continues to be very [ recently ] present in different type of industry events, in customer events and that will continue during the fall something that has happened during the summer was, as an example, Alessandro participated in the transform project event in Dublin, Ireland, as you know, pharma is the industrial, big interest to us and with lots of potential and our presence and visibility in conjunction with that is important.

And let me state that to support the business plan to be able to leverage the plans that -- the views that we have, that we have identified related to the high-value applications, that is a key thing and we have multiple opportunities there as well and good progress. And I know that Alessandro will share more light on that in this portion. With those words covering funding related to the business plan, implementation, the finalization of ReSolute as well as the present status of market application and commercialization.

I will then leave the floor over to Philipp that we'll give more information about the status, progress and ongoing activities at both FC5 and ReSolute.

Philipp, the floor is yours.

[Philipp Morgenthaler, executive]

Thank you, Bertel. Good morning, and good afternoon, everyone. Please next chart, Erik. So update on FC5, we have been able to finish a few of the projects we have been working on and we have been talking about in previous meetings. So the installation of the lab scale LG installation facility has been completed now. So we are able to produce high purity level cost or now to support development work, so the production of [ levomicosinor ] with a purity of greater than 99% has already been achieved.

We were able to produce about 3 liters of that product now on a weekly basis. which as I said, can support all further development activities for new derivatives. We also have completed the implementation of a basic quality management system according to ISO 9001, this system will also form the basis for future implementation of quality management systems across also ReSolute.

With this quality management system, we have been able to close all the open topics from the pharmaceutical customer audit we had last December. So we are now officially qualified by a Chinese pharmaceutical customer. And knowing that the requirements of the Chinese pharmaceutical industry are tougher than the ones in the United States or in Europe. This is a great accomplishment and shows the level of systems we have implemented at FC5.

We have also worked on the operational costs. We have done trials to reduce the sulfur in consumption, which is one of the major material costs we have we have been able to reduce this cost by the consumption by 30%, which will have a significant impact on OpEx going on. Also, the operations in Tasmania have been pushed on hold, and the team has been reduced to a minimum required to keep the lab activities going and to maintain the plant.

This was the update on FC5. Next chart, please. Erik.

So in at ReSolute, as Bertel mentioned, we have a great support from the government, not only from the [ VA ], but also on the [ pre-effect ] [indiscernible] actually organized an event, a public event at the site in order to create awareness for Circa's activities and funding activities. We took the opportunity of the unloading of the distillation equipment. And in the middle picture, you see in the center, you see the pre-effect on his left, you see the sub-effect on the far right. You see the president of [indiscernible], which is the local community organization a great attendance. We have a coverage of radio, TV stations and newspapers, also going into Germany, the events trading interview with the [indiscernible] which is actually the that the public broadcasting agency in all over Germany.

So a lot of attention created, which hopefully is paying off. Next chart, please. Erik. On the ReSolute, the civil works at the quotation for the civil works is pending. We have an agreement with one of the subcontractors and that they will complete their part of the work, which is the roads and the underground network. The rest of the quoting is going on. So once we have the permit, we will be able to continue works immediately.

Mechanical erection and piping works have not been awarded yet. Discussions with vendors are passed. And as Bertel mentioned, the lease extension with Gazel, which is a great achievement. On the equipment side, we have, the majority of the equipment is there. 95% of the equipment from the major packages boiler paralyze and distillation are at the site wood yard and hydrogenation equipment is fully built and stored at locations close to the vendors ready to be dispatched and received at Santa word.

Balance of plant items are partially completed and delivered smaller packages are yet to be awarded. And with that -- with those then the engineering can be completed. On the permitting side, we have received the comments from the Missions régionales d'autorité environnementale. So we have two agencies. We have [indiscernible] in the end will grant the -- or we'll make a recommendation to the pre-effect to grant the permit, but we have this Missions régionales d'autorité environnementale, which is actually reviewing the file we have received their comments on the 18th of July and have answered all their questions.

In order to show his support, [indiscernible] invited all relevant stakeholders, including use to a meeting on the seventh of August and he reiterated his commitment to contribute to signing of the permit in October. He made it clear to all the participants of the meeting that this time plan must be kept and he was making pressure on his departments in order for us to get this permit.

As a result of that, the commissioner for the public inquiry has been nominated and he visited us last week at the site. We also support -- a clear signal to support will do everything I can to actually support the time plan. The public inquiry will now start on the 26th of August and go for 1 month until the 24th of September. Then we have to go through a few formalities final report of the Commission final report of DREAL.

And then these documents they will go into a [indiscernible]. The [ codes ] is the case then risk unit technology. So the environmental conciliate and sanitary risk meeting has to take place. And once they go there to give screen lighter prefect the permit immediately as he has it on his desk, and we expect that by -- still by mid of October, to happen.

So progress on permitting now going into the final stage of the public inquiry next Monday. And with that, I would like to hand over to Alessandro for an update on market and R&D. Thank you for your attention.

[Alessandro Napoli, executive]

Thank you, Philipp. Good morning, good afternoon, everyone. And I would like to start the part of the presentation on the market and product development activities with the highlights in Q2 2024. We see continuous demand and requests for pricing or pricing of Cyrene and we are engaging in sampling activities with direct customers. So this is confirming the interest from the market in Circa's products.

As mentioned by Bertel and also by Philipp, we are increasing their attention and the activities in the space of pharmaceutical applications. And so we are setting the stage for a number of partnerships to develop what we call the intermediate business, which means all the products that are derived from the or from the Sarin molecules. We're also engaging with global players, especially in the cosmetics, so fragrance and flavors space.

So we are moving into collaborations to develop further this part of the product line for Circa, which is the derivatives or whatever is modified from LGO. As well, we're exploring partnerships in solutions in carbon capture and storage. So materials that can be renewable that can also function as a carbon capture systems in large industrial installations. At the same time, we still have activities in what we consider more the larger market, which is in solvents, which is, for example, the coating part.

And again, I will stress in the next slides the importance as well how we propose our solution to the customers. In terms of distribution, I think, again, we see orders from new base and American-based distributors, which is suggesting that there's continued development at their customers. We are also to be able to develop this [indiscernible] we are engaging with contract manufacturing organizations to be able to scale up what we think is the process to modify LGO.

And at the same time, we are also signing agreements to develop the business of solvent but focusing on solvent plants. And this is something that we see a potential for Circa and for Cyrene to enter into customer applications. The outlook for the next quarter is definitely we shall see and we will see results from the recently signed agreements. Definitely, we already see, as announced in the previous quarter, the collaboration with the distributor base in Australia that we see engagement and interaction with customers. So that's very extremely important.

We're going to finalize some of the other agreements of one or the derivatives that we are -- that are currently under negotiation. And we should expect as well -- we will expect some results of the process moment activities with the contract manufacturing organization on the intermediates. If we go to the next slide, and I'm going to start explain as well the increased attention on the on the pharma or the specialty chemicals market, I would like to spend one slide on this because this is basically has been mentioned already earlier, and we are putting an increased effort in the space.

So we know that the intermediate market in general, especially the [ pharma ] meter market is even larger than the solvent market. The fragrance of [indiscernible] chemicals market has showed [indiscernible] difficult, which for the chemicals in the [indiscernible] resilience. And this means that this also those are markets that are growing and are very solid and are less dependent on economic downturns. At the same time, those applications in this area are much more open to innovation, so less price sensitive. And therefore, we see great opportunity for innovation and for positioning our products. The fact that we are offering not only chemicals from renewable stores that are potentially lower toxic than existing solutions, but also new, completely new -- this is an added value that we are stressing with our potential customers.

Now how do we get there? I mentioned already, partnerships are extremely important. We are not in the position to develop everything by ourselves and we need to work together with customers to develop specific intermediates. The process development and being able to upscale those products is extremely important. And that's why we need to collaborate with contract manufacturing organizations. We have active projects like Transform, which is active until 2026 because the European-funded project, addressing the generation of building blocks or pharmaceutical ingredients out from renewable sources. And this is an important project that is allowing us to explore different routes for developing those intermediates.

And very important as well why we are interacting with customers we need to select, which are the applications, the markets, the customers that are accessible to us and focus on them without disbursing energy, so maybe markets and applications that are not targetable by Circa, I would like as well in the next slide now to give a general overview on how we're developing a sustainable and profitable product pipeline. And the element of volumes. So we know that we will have capacity up to 1,000, 100 tonnes, that's coming with ReSolute, and we know that for a number of applications that we have targeted, we have the potential to reach those volumes, especially expanding the applications to consumer products, which are supported by the favorable outcome of the [indiscernible] studies that are currently on [indiscernible] being finalized.

At the same time, we need to increase the distribution partnerships in other regions outside Europe, in the Americas and in the APAC region, always continues to evaluate and we are evaluating the distribution of partnership, the partnerships in Europe to make sure that we can accelerate the promotion of our products and also the qualification activities with customers. Any other additional opportunities that we have on funding, European funding or funding for projects that are on a later stage means that they're more advanced and are important for the market development, we will capture those opportunities. Now how do we get to being able to increase the average selling prices of Circa's products?

As I mentioned earlier, solvent plants are able to offer a competitive solution, increased performance to customers. And therefore, this is something that we are targeting at the moment. So making sure that the customers have a solution that can match their performance requirements and cost requirements as well. Also, activities ongoing to adapt to the solvent rate. This is -- this means that we are able to offer a solid rate and to match requirements and performance that certain customers, but we're also able to offer higher grades for other applications.

The development of this -- of the intermediate part of the business is also ongoing in partnerships. And this is also we are able then to establish the value proposition together with the customer and also to reinforce any business case because we have the support and the interaction with potential customers. The scale-up is extremely important that we know the cost to manufacture. So that's why the all the work we're doing with [indiscernible] manufacturing organizations are so important.

And I let the stage to Erik. Thank you for your attention.

[Erik Berger, executive]

Good morning, good afternoon, good evening. I will dive right into the numbers. The good thing is that a lot of progress has been made both on the ReSolute and last not least, the sales and marketing. However, we are still without substantial revenues the little revenue we have is basically grounds being offset against operational expenses. And we are continuing to receive a lot of equipment and also engineering through the second quarter, which is well reflected in the half year accounts that were published this morning.

We have, during the second quarter and well into the third quarter, done [indiscernible] to reduce the cost spending, the so-called burn rate. However, a lot of equipment has been ordered a long time ago, and we are seeing deliveries of that through the summer and into the fall. The balance sheet is good and healthy. There is a good equity to assets ratio. However, it is going down as we are spending money on equipment and engineering even though that we've taken that down to the minimum level at this time, also has to do with the fact that we wouldn't be able to do much except storing equipment at ReSolute without merchant permits. So in other words, most of the summer has gone through and most of the quarter or at the end of the quarter, went into managing cash and taking down costs. so that we can keep on operating diligently and healthy.

The largest project is, of course, a project ReSolute. There was an unpleasant surprise in finding that the project cost was very much higher than what we had anticipated. However, with the good efforts of the sales and marketing and the new product mix, we're seeing that the resale plant should become financially viable with healthy economic numbers. And even though the plant is built for 1,200 tonnes a year, the sales and operational numbers, including EBITDA is based on approximately 2/3 of that capacity.

So there is a surplus capacity that could also yield extra revenues and depending on the -- depending on the product mix, strengthen or weaken the EBITDA, but it should stay healthy as well. That's basically what I want to highlight, cash management. Cash management and cash management is really what is occupying me together with the activities, fundraising and keeping the French authorities helpful.

[Bertel Karlstedt, executive]

Okay. Thank you, Philipp, Alessandro and Erik, those presentations. Those details and facts kind of sets the scene for the outlook portion that [indiscernible] as the last portion tomorrow this morning. And the topics that we cover are the same that we have been covering during the last quarters, business plan and funding ReSolute and markets.

And on the funding side, and go about it this way. The business plan is a function of the funding. The funding needs to find its solution, and we actually are looking into all options that are out there -- the options are perhaps slightly increased by the fact that we have good AGM resolutions from the recent AGM meeting to support us.

But let me say, all options are looked into including potential option of selling assets as well. As Erik brought forward. Cash situation is stretched awaiting the funding solution to come about. That also means that we, as a company, we need to act really diligently towards all our operating stakeholders, and that is something that we need to do in this situation that will continue, that has been ongoing through the summer already. And that needs to continue throughout the fall and up until this funding solution is in its place.

And from a business plan perspective, a good, I could call it symbiosis between our internal work on high-value applications and what we see in the market. the interest, the progress and the eagerness to develop joint [indiscernible] that Alessandro brought forward is the foundation for the revised business plan that Erik showed on his last slide. your view on the profitability of ReSolute and as a consequence of that, the foundation for Circa being a healthy company going forward with ReSolute up and running.

So focused on funding while awaiting the funding to come into place, securing the operations diligently and taking development further towards the business plan that we have created. Now we brought forward the details on ReSolute. And in the case of ReSolute , as we have heard, it's all about securing the environmental permit by the end of the year and securing a funding solution prior to that, and then we can continue the implementation and the finalization of ReSolute readiness is there and the is still to have the units up and running by the end of 2025.

And finally, Alessandro share details on the market by stress the need to come to a situation that we would have offtake agreements that would open up so much the discussions with funding, but we also know that offtakes are difficult to get at this stage of the company development with the units still not operational and the volumes still not out there, but the efforts will continue to lengthen the list of distribution agreements that we have secured and hopefully also get an offtake agreement or a few of them as soon as possible.

And to support that -- to support the business plan, the continued effort internal, externally on the high-value products will continue. This is the outlook, funding supporting the business plan the business plan needs for ReSolute unit and the market's commitment and continued traction and efforts in the marketing place in place.

With those words, I would thank you all for your participation and that you'll listened in. And now we come to the questions-and-answer session. Any questions by anybody online or I guess there is a chat opportunity as well, but let's check. Any questions anyone, please? Anything in the chat either?

Okay. if there are no questions, there will be no answers as either. One more time, I appreciate. I thank you for your participation, your interest and we look forward to your interest and support in the future as well. With those words, thank you one more time to Philipp, Alessandro and Erik for your contribution. Thank you to everybody who made this situation, this event and the material available for us. Thank you all. Have a good continuation of the day. Thank you. Bye-bye.