Circa Group AS

OSE:CIRCA

Earnings Call Analysis

Circa's Q4 Financial and Strategic Update

Circa Group reported Q4 operating revenue at EUR 1.7 million, driven by grants and product sales from the FC5 plant. With a cash balance of EUR 11.4 million and additional grants of EUR 10.2 million pending, the company estimates a EUR 40 million capital need for its ReSolute project, aiming for production in Q2 2025 and positive EBITDA thereafter. Strategic partnerships, especially in the agrochemicals sector, continue to be a focus, with progress in regulatory approvals and committed off-take agreements expected soon. The company targets to maintain market confidence by finalizing financing solutions, including securing EU grants, while advancing towards the start of ReSolute's operation.

Introduction of New Leadership and Agenda for Circa Group's Future

The Circa Group's Quarter 4 2023 Earnings Call marked the first address by new CEO Bertel Karlstedt. Setting the stage for further discussion, the call promised insight into financials, progress on the ReSolute project, and product development, concluding with future prospects.

Financial Overview: Revenue Sources and Capital Needs

The company reported Q4 operating revenue of EUR 1.7 million, derived primarily from grants and product sales from their Tasmanian plant, FC5. With increasing fixed assets valued at nearly EUR 29 million and a year-end cash balance of EUR 11.4 million, they identified an additional capital requirement of EUR 40 million. This capital will support the ReSolute project, fulfilling its plan to begin production in Q2 2025 and reaching a point of positive EBITDA following its ramp-up.

Operational Highlights: Production Efficiency and Strategic Partnerships

Significant strides were made with the FC5 plant, which saw a 44% boost in output achieving 712 kilograms per month. A successful audit by a pharmaceutical client suggests the plant's potential to serve high-value markets. Concurrently, strategic engineering and partnerships advanced the ReSolute project, with equipment deliveries underway and environmental permit processes on schedule. Moreover, collaborations for the development of their FC6 site, and agreements with Valmet and Ekato were emphasized for their role in the company's expansion strategy.

Product Development and Market Penetration Efforts

Efforts in product development sustain momentum as the company collaborates with industry players under confidentiality to explore the applications of their LGO platform and the solvent Cyrene. The ongoing regulatory activities include REACH Annex IX compliance for Cyrene, while distributors have reportedly begun to match the entire output of the FC5 facility. Additionally, externally-funded projects demonstrate progress, particularly in exploring LGO derivatives for pharmaceuticals. The company distinguishes between early-stage innovation pipeline projects and opportunity pipeline projects that are nearer to commercialization.

Outlook: Business Plan Progression and Financial Strategy

Karlstedt reemphasized the company's commitment to increasing FC5 production, continuing funding efforts for ReSolute, and pursuing new financial solutions, including EU grants. ReSolute remains on target to start production in Q2 2025, with noted milestones including the environmental permit process. He stressed the importance of finalizing distribution agreements and partnership arrangements in France, Finland, and Thailand. Overall, the company aims to maintain a strong presence in the industry, reinforcing faith in their business model and strategic execution.

Shareholder Concerns and Management's Commitment to Transparency

In the Q&A session, shareholders sought reassurances on share price support and clarity on the company's strategy to manage potential dilution from the proposed EUR 40 million capital increase. The CEO underscored his holistic approach to driving the company's growth across various domains, aiming for a long-term positive impact on share prices. The management acknowledged the need for timely information dissemination and committed to leveraging press releases and investor presentations to maintain clear communication with stakeholders.

Earnings Call Transcript 2023-Q4

[Bertel Karlstedt, executive]

Good morning, good day, good evening to all of you wherever you are connected from -- connecting from. It is past 8:30 CET Time. So let's start.

A warm welcome to you all to Circa Group's Quarter 4 2023 Quarterly Presentation. My name is Bertel Karlstedt. I'm the new CEO for the company since January 1, and it is my pleasure to be addressing you all today.

Next Slide. The traditional disclaimers, and then we go directly to the agenda for today. I will start with the introduction, followed by Tone covering finance, Philipp covering the FC5 ReSolute and FC6 progress and status. Alessandro will address product development, and I will then close the presentation with the outlook before we go to the questions-and-answers session.

Next, please, Tone? When we look back, one can state that we have continued a strict focus on the essentials, and I have grouped my presentation under 3 headlines. The first one being the implementation of business plan, including funding, where we are progressing with our advisor, Pareto, on the launch process to secure the funding for the finalization of the ReSolute project during this year and with the start up early next year. We have also been continuing with an active relationship building and seeking opportunities for additional financial support from France. Whether it is banks or grants possibilities, there are opportunities in the market and we are pursuing those. And we are also building awareness and relations, looking at the further implementation of business plan aimed at FC6 investment decision further on. And we have found and we are working with site alternatives, France, in Thailand and in Finland alike, 3 sites that we are looking at for the time being for the more medium-term business plan implementation.

The second bullet is, of course, the key topical finalization of ReSolute. Here, I want to state that the project execution progress is as planned, and we are in continued discussions with key partners regarding future operation, and you could say, life cycle approach based set-ups and cooperation and support agreements with both GazelEnergie, as well as with Valmet. More on that topic from Philipp a little bit later. And I would also state, which is very important that we have been conducting, and we are in close and constructive cooperation with the authorities, as well as the regional and local stakeholders for ensured progress and outcome of the ongoing processes, as well as for the future operation of the site and the plant in ReSolute.

The third topic I want to address is related to market, applications and commercialization. We are aware, first of all, the progress and the work continues in achieving multiple agreements for distribution of Circa products, both Cyrene and LGO. And we have also had a very strong presence -- a visible presence by Circa in the market in multiple chemical and chemistry industry and customer events. These are both market-driven efforts from the company, and they are supported also by a more science-driven approach and efforts conducted at the CRCI Institute in York for identifying new application opportunities for Circa and its products going forward.

And lastly, I want to bring forward that with Alessandro on board, we are also now really sharpening the focus for the commercialization efforts for selected applications and products. So, progress on all 3 main fronts; funding, ReSolute, as well as market and customer-driven approaches.

With those words, I would hand the floor over to Tone on finance.

[Tone Leivestad, executive]

Thank you, Bertel. Good morning, everyone, and good evening.

So, we released the quarter 4 financial report this morning, and I will go through a few of the key figures in these first slides. So, these are the figures from the income statement, where we had operating revenue of EUR 1.7 million in 2023. The revenue is mainly consisting of grants received, as well as products from the FC5 plant in Tasmania. Grant income is included in accordance with the expenses for the actual period. And all expenses are in line with expected quarterly run rate also this quarter.

If we look at the balance sheet, our fixed assets has grown quite a lot during 2023, as one would expect. The gross amount is almost EUR 29 million for the rest of the plant, which is offset by EUR 5.6 million in grant contributions. Our current cash balance at year-end is EUR 11.4 million. And in addition to that, we have awarded grants not yet received of approximately EUR 10.2 million. That's not included in the accounts. Cash spending is in line with the expectations and our forecast.

Then I've included this slide with a lot of information. It's also part of the Investor Presentation that we have shared with you this morning. And we also shared with you updated estimates on the capital need for fulfilling the business plan for ReSolute on time. As you can see from this table here, with the cash at hand and awarded grants, we have estimated a need for new capital of EUR 40 million. And that will go to the remaining CapEx of ReSolute, which is approximately EUR 44 million and the OpEx for ReSolute-- operating ReSolute and also the organization that we have. So, this estimate will bring us not only to start our production in second quarter 2025, but up to the ramp-up of the production of ReSolute and the positive EBITDA.

So with that, I'm leaving the floor to Philipp, who will share update on production.

[Philipp Morgenthaler, executive]

Thank you, Tone. Hello, everyone. I'm happy to give an update on the activities at the different locations.

Next chart, please, Tone. So on FC5 in Tasmania, we have made significant improvements over the year. The output improved by 44% from just below -- slightly below 500 kg to 712 kilograms per month, totaling now in 8,540 kilograms of Cyrene introduced over 2023. We are still having continuous improvement activities ongoing. These came out of a value stream mapping exercise we did at the beginning of 2023, which in the end led to these improvements. We also have had our first customer audit at [ all our ] FC5. It was from a pharmaceutical customer, and this audit has been passed successfully just at the end of the year. Also, at the end of the year, we had a gathering with the entire team and made an improvement plan on how to improve, increase the production for further 40% to 1,000 kilograms per month. So, FC5 good improvements, but still more to come.

Next chart, please, Tone. On ReSolute -- generally, the CapEx estimate remains at EUR 73 million. And as Tone already mentioned, the overall time plan remains also unchanged, with the plant ready for start in the second quarter of 2025. At the site, we have -- after the signing of the lease agreement in the last quarter, we have now also signed a lease agreement for the construction yard. The construction yard is approximately the same size as the plot we are installing. And this construction yard is used to install the base camp, laydown area and also pre-fabrication area for all the contractors. Base camp will be installed soon.

On the permitting, also progress there. We have received the questions from DREAL, and we have answered all of them and uploaded the official answers to the [ ground ] web page. Feedback from the relevant authorities is expected here within the next couple of weeks. After this feedback, the process will move into the next step. And at the end of February, this all is in line with the established plan. On the organization, we are now continuing to hire a Site Manager and an EHS Manager for ReSolute. These recruitments are ongoing, and then we'll strengthen the team and help us to set up then the whole manufacturing team at the site.

Next chart, please, Tone. On engineering, procurement, manufacturing, these activities are ongoing as planned. Procurement plan is executed for the balance of plant items. They are ordered as needed according to time plan. The equipment for woodyard, distillation and hydrogenation are expected to be delivered in the second quarter, most of them at the end of the second quarter. And we already have scheduled the factory acceptance test for the hydrogenation equipment, which is now planned for end of Q1 2024. So, factory acceptance test is one of the first steps of the commissioning of this plant.

Valmet deliveries are ongoing. We have received 75 shipments, and the last deliveries are expected to arrive at site in May '24. You see in the below pictures, the top pictures are Valmet parts on the left, the big boiler parts already sitting on the construction yard at the site. And on the right-hand side, rented warehouse, 5 minutes from the site, which all whatever you see there is all for the Valmet package. The pictures below show the hydrogenation skid. So, this plant will be delivered on 2 skids. These skids will be manufactured entirely completely in a warehouse in Germany and at our supplier, Ekato. We'll then have the factory acceptance test and will be delivered as built to the site where they will be connected later on. So, this manufacturing also you see has been made significant progress.

Next chart. On FC6, we are in the evaluation phase of some areas on some sites. We look into different sites in different regions of France. We also have continued the discussions with the National Power Supply of Thailand to evaluate the process and the timeline for the establishment of the site, including all the required steps for the permits. Additionally, we have signed a memorandum of understanding the Finnish Vataset and Kemijarvi Biorefinery to evaluate the establishment of a Circa Furacell facility at their site in Lapland. And with all these activities, our partnership agreements with Valmet and Ekato will ensure continuity in the scale-up of the main packages for the next site for the FC6. And also that wood fractionation trials, which have been mentioned before, they are ongoing with VITLAB in Greece. This in short, an update on the manufacturing and project activities for myself.

And I will hand over to Alessandro now for product development. Thank you very much.

[Alessandro Napoli, executive]

Thank you, Philipp. Good morning, good afternoon, everyone.

So, I would like to give you the highlights related to product development and market development. Okay. So, one area that remains very important for Circa is to build partnerships with customers in order to develop the market and the different applications of the LGO platform and of Cyrene and as a solvent. So, some of the highlights include interaction with oil and gas players, and we are moving into, let's say, technical discussions under non-disclosure agreement. Definitely, an application area in a market, which is of interest is in the agrochemicals applications and where we know that the biodegradability of Cyrene and the versatility of the LGO platform is of interest. So, we continue interactions with some of the key players in this space. And of course, those partnerships are aiming at accelerating the adoption of the product.

Another important area, of course, in developing the market and application is the regulatory activities. So, we have testing on the Cyrene for the REACH Annex IX, which is the tonnage band up to 1,000 tonnes for Cyrene. This is ongoing. We completed in Q4 '23 dose range finding study, which did not highlight any major or any concerning results. So, this looks good at the moment. And we have now up to until March additional studies, tox studies which are ongoing.

Now in terms -- specifically on the commercial development, Philipp mentioned before about the QA that has been passed in our plant in Tasmania, FC5. And I think this is also a good sign that a high-value market like pharmaceutical intermediates can be served by our production facility. We definitely are seeing more interest from the intermediate role, both of LGO and Cyrene, which for us is reinforcing the idea that this is an area where we need to have a lot of attention. At the same time, we are focusing our activities to help distributors to propose the products with customers and to have a high acceptance level -- to increase the acceptance levels of the products with their customers.

And we also observed that there is an increase -- potential increase in volume of material from distributors that are covering now the entire FC5 output. Concerning the externally-funded projects is an important part for Circa in the development of the products. We have good progress on the TransPharm project, looking at the derivatives for pharmaceutical ingredients. The Champion project, which is another EU-funded project is ending now in June. And the ReSolute project in terms of applications, I think we are also increasing the involvement of an important partner to investigate the LGO derivatives.

In the last presentation -- in the last quarter presentation, I started to introduce the concept of the innovation pipeline. What means that all the activities that are still in the early stage of definition and feasibility. And we have a number of projects there. And as an example, using Cyrene to extract natural products to substitute other solvents, or, for example, the LGO derivatives for pharmaceutical ingredients. Those what we define as innovation pipeline. While all the projects that are closer to commercialization, we define them as being an opportunity pipeline, which have shorter time to the commercialization. And here, it still is an overview on the pipeline that we keep maintaining with high-priority projects that have value for Circa.

And with that, I will give the word back to Bertel.

[Bertel Karlstedt, executive]

Thank you, Tone, Philipp and Alessandro. And let me then pull it all together and give a view on the outlook for the upcoming key topics as we move forward. As you have heard, the company is progressing according to plan, and I dare state that the market preconditions for the business plan to be successful is unchanged for us. With the same split I had in the beginning talking about business plan, ReSolute and market-driven topics, I will then start with the business plan implementation.

3 different phases, you could say, as we've heard from Philipp. The plan is there to ramp up the FC5 capacity to meet the demand that Alessandro also briefly touched upon. We are continuing the initiated funding process for ReSolute finalization that we heard, also the details from Tone. And like I mentioned earlier, we are evaluating opportunities and trying to secure new financing solutions and new EU flagship grants for both short-term and medium-term next steps of the business plan of circa. So, many things that we'll continue to work upon and secure during the upcoming months and quarters.

On ReSolute, 2 very distinctive milestones that we need to secure. First of all, the environmental permit process that Philipp also touched upon and, of course, the fact that the start of production is planned to be in Q2 2025. And on market, partners and commercialization, one topic on each. We need to secure the distribution offtake agreements that we are in negotiations with key customers regarding and that we foresee to happen shortly. On partners, we are making progress in the medium-term implementation plans for our business plan, and we need to conduct and finalize the things related to the France, Finland and Thailand opportunities that are there with different partners, business partners and regional stakeholders in the picture.

And finally, on commercialization, we will continue to have a strong presence and visibility and high profile in upcoming industry events. So with these 3 topics, business plan, ReSolute and market-driven topics, we will take the company forward during the upcoming months and quarters.

With those words and with that presentation, I propose that we then move over to the questions-and-answers session of the presentation this morning. And we open the floor for questions from anybody out there. Please?

At least one hand raised, I can see. Who is that? Let me check.

Yes, Chris?

[Unknown Analyst]

Bertel, can you hear me?

[Bertel Karlstedt, executive]

Yes, we can.

[Unknown Analyst]

Yes. Okay. Thanks very much for the presentation. First of all, welcome to Circa Group, which I know you know quite well. My concern, I think from the shareholders' point of view is within all of what we've heard. There is no addressing of the value of the company and the share price within the company and the market. What do you see as being the role of yourself and in supporting directly the share price? And what process do you see for valuation when we come to a dilution event such as being proposed of EUR 40 million?

[Bertel Karlstedt, executive]

Well, first of all, Chris, thank you. It is my pleasure to be at the helm of this company, which I dare state will have a good future when we are and not if, but when we are implementing the business plan. My role, as I see it is to, in the multiple dimensions of tasks we have in front of us, to ensure that we are able to safeguard, secure and progress as planned, whether we are talking about technology production, whether we are talking about market and customer commitment, whether we are talking at financing stakeholder interests. It is a multidimensional task that we are all embarking upon. I have the pleasure of having a good organization with me.

On the dilution effect, I won't speculate. Let's see what the funding process will be, what the solutions are going to be and how that will affect the shareholder -- the share price from where we are today. But I think what I want to focus on is the medium and long-term projections and business plan that we have, that will strongly support a positive development of the share price as we move forward and implement the business plan as we have it today defined.

Did that answer -- I hope that answered the question, Chris.

[Unknown Analyst]

Well, it was an answer to the question. I will leave it at that.

[Bertel Karlstedt, executive]

Any other questions? No other hands raised? No other questions this morning? Now, we have one. [ Yonas Posch Granvik ] has a question, please. Go ahead.

[Unknown Analyst]

So, I have a request. And there's a lot of shareholders in this company that would like more information. I think it could be good to give a bit more information going forward a bit quicker because what happens is that people lose trust in this company. And it's such a great company. So, I think a bit more information when you have it would be great.

[Bertel Karlstedt, executive]

Okay. I can understand the background for the question. I think the company, of course, releases -- press releases on key topics whenever we have something that is of the material nature, that it should be told about. And, of course, we have a quarterly setup for presenting the results and the development of the company. I think those are the 2 tools that we have to work with for a stock-listed company; quarterly reports and then press releases as seen, needed and actually demanded from us as well on material topics related to the company's progress or situation in general. And of course, it is in our interest to be out there with press releases as fast and as possible on topics.

Tone?

[Tone Leivestad, executive]

And just to mention, we have the updated Investor Presentation this morning, which was also updated half a year ago, which is quite extensive with information. But we are making note of your comment, Yonas.

[Bertel Karlstedt, executive]

Thank you, Yonas, for the question. Anybody else that would have a question for us this morning?

If not, then I think it is time to thank you all for your participation, your interest. Thank you, Takk, Merci, Kiitos, whatever language. We appreciate you being present. We appreciate your interest in us, and we are looking forward to be able to communicate to you again during upcoming quarters and in between with good press releases. Thank you all. Have a good continuation of your day. Thank you.