I-Tech AB

STO:ITECH

Earnings Call Transcript 2023-Q1

[Operator]

Hello, and welcome to today's webcast presentation with I-Tech. With us presenting today, we have the CEO, Philip Chaabane. [Operator Instructions]

And with that said, please go ahead, Philip with your presentation.

[Philip Chaabane, executive]

Very good. Thank you so much. And again, very welcome to I-Tech's quarter 1 report of 2023. We will walk you through this quarter, a quarter which is strong, sustained growth with increased profitability, reflecting the clear numbers that are given comparing both to the same quarter last year but also to many other quarters as these are record numbers we're talking about.

So very strong macro trends are clearly fueling our growth, and thus trends within shipping and more the transition to more efficient fuel in the industry and gaining that efficiency lowering their emissions to ag. That's the under main driving force that is clearly so that it gives good momentum for strong hull performance technologies, which is the area where I-Tech is operating with it.

So the 112% growth compared to last year, the 33% EBITDA are amazing figures. Really strong EBITDA, certainly, and that comes from strong not only growth but also cost control, so to say. Come into that more later.

This chart itself shows that we've been active in a Nordic collaborations, both with customers and other industry partners. We are focusing on operational excellence, meaning producing our most important delivery in time all throughout, which is important to gain trust. The industry is clearly focused on the 40% greenhouse gas savings by 2030. That is obviously the macro trends I'm talking about. And that is changing the game a bit for their paint going from more simple kind of products and sales processes to much more advanced sales processes with the products containing more technology.

And the part of the world that is mostly driving this is the Asian yard markets, although European-based owners are obviously clearly driving it. The actual change on the hull is mainly occurring in Asian countries.

As Selektope is, hence, as a consequence in the air or in the sea as it should be, of course, being a technology that drives hull performance to new levels.

Sorry. So for you, our [indiscernible] company, I-Tech is listed on Nasdaq First North. I-Tech is interface technologies. We are relying on a strong IPR that includes patents but also regulatory approvals throughout the countries that are important for the shipping industry.

The products we have is an ingredient technology, spun out of our sciences within biotechnology. We call it Selektope and is part of a marine paint system, so-called antifouling system. And the effect of using our technology, and the reason why we believe so much in what we're doing is because there's a clear contribution to enhancing shipping efficiency by actually cleaning hulls as smooth as possible over a long period of time, meaning avoiding attachment of marine biofouling. And hence, this is also linked to a more sustainable industry as there's less emissions to air. And hopefully, we can even reduce the transportation of invasive species or alien species around. All this comes into the purpose of what we're doing, which is so important to keep motivation at the top.

So elaborating a little bit more on those things. Shipping is to many of you know this maybe, the biggest transportation sector does it mean it accounts for the biggest CO2 footprint as it's already very efficient given the size of the vessels and the amount of goods you can freight on them. Yet, there's some 100,000 vessels that are operating out there, not only commercial vessels, but yet 100,000 vessels are in some way responsible for 2.6% of global CO2 footprint. That is roughly the size of Germany's total emissions. So it's quite a significant industry in this parameter looking at these figures. Yet there is a huge potential to say that and not only will they say due to regulations. It's also so that it's identified through measures over the last 10 years or so that the coatings itself still have a quite potential, high potential to save more CO2s in rough numbers, the industry is talking about 100 million tonnes of saving potential compared to a benchmark level at 2008 and then focusing on the hull and hoping then that all ships in the future will have the optimal coating condition.

But it's not talking about fuel and emissions to air, it's also about trying to reduce the risk of transporting alien or even sometimes invasive space between marine ecosystems. This is an issue when the foul is hand. The risk increases dramatically and authorities. In some countries have implemented restructures, meaning they will inspect or receive some sort of risk assessment from the ship before arriving at port. And that may end up in denial of port approval and then hence, a cleaning operation somewhere out in ocean, all to protect the marine ecosystems. And then more focused for the coating industry is obviously to take care of those 2 first items, but then try to do a good job as they can in optimizing their own products to avoid excessive leaching into the Asian oceans of chemicals, and also to optimize their own CO2 footprint building up and producing the painter of course. But in this case, we we focus on trying to reduce the emissions to see together with the industry by being part of the optimization potential in reducing this. So Selektope is a clear candidate to address all of these 3, and that's really one of the good aspects of a very long-term perspective for us.

So what is then Selektope. It's a biotech approach, as mentioned. It is spun out of research in this scientific domain from Gothenburg University and then also Chalmers. We call the product Selektope. It's actually a molecule with the generic name melatonin. It has a receptor stimulating behavior so the barge [indiscernible]. So as long as it is added to paint metrics and the transition of the molecules from the paint to the surface is controlled, then there will be repelling effect of this paint towards this organism that will otherwise settle and constitute a huge extra drag factor in moving the ship through water, and that is then very contract productive in terms of saving fuel and making emissions reduced.

The technology has been around some time, and it's not tested on a lot of different vessels. We're talking about some 1,000 vessels having or have using the technology. And the figure here, there's an extreme case where ship has been exposed to very static conditions over a long time using technology where you can see how powerful it is. And it's throughout the years have we adopted into some 20 products plus at 6 of the biggest paint makers in the world.

This is what we do. It's a molecule-based product sold as a powder into the chemical factories and they then are responsible for a technology bringing the best out of the product into their paint systems. We are basically facing 9 big customers. If you talk commercial shipping or at least industrial shipping included. They represent almost 100% of that market, 6 of them are clearly dominant, making 80%, taking 80% market share together. The good thing here is that we are customer -- sorry, suppliers to 6 of those 9 biggest. We are running R&D activities, and they are themselves running R&D activities, sometimes with less involvement ourselves throughout all these customers. So there is activity ongoing at all these different 9 customers.

Some of the 6, again, mentioned, have new building products on the market. There are specific paint container Selektope to resist the long -- or to sustain the long outfitting periods that are normally associated with our new building program. Some of these 3 of them are the plant makers are also offering products on the dry docking market, which means longer life expectancy, 5 years compared to maybe 1 year on the new building. and the transition into these dry docking area is very important to drive further volumes in the years to come as that's the largest market. There is some 10,000 to 15,000 dry docks going on for the year compared to some 1,000 newbuilding projects per year. So we really need to see the -- and move towards this direction in the years to come.

So far, it looks very good, given the R&D activities, and we're confident that more will come. And we remain quite confident that within 12 months, something will happen on the product launch side in either of these 2 areas should be said.

Then as they have performed the R&D in our general generic and obvious themes as they try to provide a higher overall performance, of course, to the shipowner meaning not only hard fouling, but also sfot fouling performance to the pets. And also trying to optimize, as I mentioned, in this case, referring to optimizing by cider loading, reducing the amount in weight of biocides used in a paint to make to perform at a certain level, and that is then without compromising this performance.

And then there are different novel coating systems or half novel coating systems that are being used, and we see a tendency to try to adapt the technology into that area as well.

And all of this is obviously promising. The important remark things take time in this industry. It is not done overnight and Norway or in a multiyear development process to say the least.

Looking into shipping as such because the macro trends are after all the ones that are driving the demand for improvement and stimulating the innovation throughout the value chain. I-Tech representing the innovation part of that still. You can see that shipping is improving, although maybe not as fast as many would hope or expect, but compared to 2008, there is a sharp improvement where the industry was roughly assumed to have an impact of about 1 billion tonnes -- of metrics tons of CO2, indicating a 3.2% footprint of the total of the work is now down to 845 according to Carson with then a footprint of 2.3, and this is expected to go down to 2.1 in following this year. Yet there is step to be made, right, to reach 600 million tonnes, which is a target for the industry by 2030.

Alarming, I want to maybe see that some of these improvement effects are given by itself as other, the total global CO2 is increasing, not decreasing, and that itself is helping the industry look better, but they are clearly the -- I mean, the shipping industry is clearly making some progress.

And some of that is with slow steaming coming in. The next steps will be fine-tuning various kind of efficiency technologies where hull is one part of that. So we'll come back to that soon. We can also say that more cargoes being moved yet, they keep the CO2 emissions under control. So more -- so larger ticks are put in place helping this figure. And in fact, it is -- of all the transportation means the most efficient from a CO2 standpoint, way to transport goods. But that doesn't mean that there's not room for improvement. There's actually a 245 metric ton CO2 needed to be shaped from the industry on a yearly basis by 2030. So we're really sticking to these macro trends as an underlying factor to what we and my others in the industry are seeing as value drivers for the products.

As mentioned, it's not about the hull at all alone. It is about the combination of different investments that shipowner to consider. It could be many different areas.

The hull is obviously important, and it is super important if things go wrong. Hull with a lot of fouling will outplay any other investments as the negative effect of heavy fouling is so high that other investments will not show their effect in that situation. So optimizing the hull always choosing the right coating, maintaining the coatings in the best possible way is very important to gain efficiency of other investments.

At the end of the day, the big transition that's needed will come from transition to other fuels, used on board ships. And they would be more expensive as they have lower energy density than current fuels likely at least, meaning that the optimization work of the ship is much needed now rather than later to enable this transition to be a smooth as possible. So in one way, we and others are enabling the transition to super fused like synthetic fumes or hydrogen or whatever the industry needs to go to. And we, therefore, also hoping that itself is a driving factor in not only the current or short-term effects of the investments.

So looking into the quarter, really strong figures, SEK 30.8 million in net sales compared to SEK 40.5 million the year, same quarter the year before. Clearly taking a big lead, a big portion out of the full year net sales last year. So we're really having to work on interesting situation.

Gross margins, very much on the same level. EBITDA is improved. And this is a strong figure. The SEK 10.3 million is really, really big for this quarter compared to SEK 10.0 million for the year, full year last year and to SEK 2.3 million for the quarter 2022. And cash flow is good as is the cash balance.

The growth is obviously containing currency effects. And the noncurrency adjusted -- the currency adjusted effect is minus 2% in this quarter. That shows a strong growth on the organic side.

And we should also mention that the growth at our key customer is still high, so 100% growth at our main customer who has somewhere around 85% of our revenue. Still growing compared to the first quarter last year, but not only that, our second large customer is also growing in this kind of magnitude, although from lower levels. Still very promising that we have such high attention from, in this case, Asian dominating paint makers.

And we see a higher -- slightly higher cost level in this quarter compared to the quarter 1 last year, showing that we really keep costs under control. this quarter. Some are just slipping over to quarters, so expecting higher costs maybe in the quarters to come. Let's see. There are some of those clear effects, but let's see how that plays out. This quarter, now, was really strong when it comes to keeping costs under control.

So giving you a feel of the 2-month rolling situation. We see the obvious growth, which is the key focus area in [indiscernible] seeing a large growth up until the COVID period, and it's flattened out and now back in short growth. Obviously, we're experienced enough to understand that there will also be business cycles coming around, but for now, we're really enjoying a really good period here.

And EBITDA is continuing to be increasing to new high levels, as mentioned. And actually, since quarter 3, quarter 4 2019, we've been on the positive side. Now really on the positive side, proving the business model where growth is occurring without costs growing in the same magnitude.

And this is exactly what this business model is expected to generate over time that when in accordance with different figures may be a bit over time, this is a clear indication that we can deliver a very interesting and compelling business plan and business model.

One part of this quarter was moving, transitioning to other -- new facilities quite nearby where we were looking at it before within the AstraZeneca Bioventure. Now we're a stand-alone in our old premises, tailored for our operations, our size. We're located in the GoCo Go Collaborate house in Gothenburg, which is not only house. It's a full area with biotech and health science companies of different sizes or trying to create as innovative atmosphere as possible to help each other, find new ways to grow and solve problems and so on. So this would be an exciting year when we see more of these companies moving into this location, and we currently very happy to be here. So a bit south Gothenburg still in the municipal of Mölndal. So feel free, will come and visit us. We look forward to show you also our new premises.

Looking at the business growth. On the opportunity side, we said we see the stronger at trends. There are short term. They are very long term. This industry has targets reaching all the way to 2050 in terms of CO2 savings, and it will largely be extended beyond that. We also see high activity within several customers, trying to capture this opportunity, transitioning from maybe moderate grade products of high-end products, and that is technology-driven, and it's also productivity around other ways of making fouling away from the hub. Many of these are fully compatible with the Selektope strategy.

Regulations are in place. It is both from IMO level, but also on EU level. So both looking at the ship design, the ship maintenance part, but also the EU emission trade fees that will apply if not reaching certain improvements.

So on the challenging side, there was challenges. We are seeing some indications of ramp-up challenges at your and the dry docks were mainly driven by lack of -- or difficulties to find staff, sometimes also material shortages could be an issue. And we're seeing that there's a higher volatility in the timing of when projects were expected to be finished and actually finished as a consequence of this. So that maintain also for us as we're relatively dependent on the newbuilding market throughout the year. So far, we don't see that, but it may come as projects on newbuildings are made and being pushed out. Let's see. It's something we're hearing, and we hope that communicate about that.

Also on the challenges side, more on the long-term side, slow steaming in the regulatory processes, talking about EPI as an example, but also EU are slow, pushing out dates. And by these very long processes, there's also time to introduce new criteria, other views to evaluate serving criteria, which gives it a sort of moving target kind of thing. All this is just very annoying, of course, when you want to invest towards fixed target, fixed time line. That is not at all of what's ongoing. And of course, that's a challenge itself. And to really make a big step in the business, we need to have a much stronger impact or presence, I should say, in products selling to the dry docking, the 5-year systems than what we have today. We see a good trend towards that direction. We're confident it will come. And when it will come that will fuel our growth further over a long period of time.

That was my last content slide. So I thank you for tuning in, and please read more at our different board pages, I-Tech one is the financial one for investors to read about. Case stories or the product itself, please visit selektope.com, which is the brand of our products.

So by that, I thank you and open up for questions.

[Operator]

Thank you very much, Philip, for that presentation. Now I'll jump straight into the Q&A section. I will take the first question.

Would you expect that the growth from today's level will be driven by your CMP and your second largest Asian customer or from customers named 3 to 6?

[Philip Chaabane, executive]

From today's event, we still see a potential to grow from car to the 2 biggest ones. There is yet more to do. They have many products launched in different parts of Asia, some also in Europe. And those products will be the ones driving growth over this year.

The other customers mentioned will contribute step by step more the year to come, 2024 likely into 2025 than this year. That's what we predict at least.

[Operator]

And what do you see as the largest challenges in the coming year for I-Tech?

[Philip Chaabane, executive]

Challenges is both kind of industrial, so to say, let's see where all this price kind of things move. We have been very fortunate so far to avoid hiccups on that side. And then there's a constant try to explore technologies, and there is sometimes a negative trend towards chemicals and use of chemicals in general. It's important to be alert on those and really put forward how well assessed our current chemicals are. I don't think there would be any challenge in the short term, but on the long term, maybe. All in all, those are minor compared to the really strong upsides that we're now seeing following years and years of development. That's not something that makes will step away from it. But if I have to answer your question, those are the ones I would highlight.

[Operator]

Okay. And could you please break down the revenue from maintenance and new builds?

[Philip Chaabane, executive]

Yes. It is a bit difficult to do that as we don't have transparency and most of the volumes is to Chugoku Marine Paints, our Japanese customer. They sell in all markets. I have a clear update from them as of this quarter on how much went to what kind of type of operation. But I would assume we're on that account, maybe 50-50, maybe 60-40 even a new building versus dry dock for the other ones, clearly much more newbuildings. So maybe, let's say, 65%, 70% new building the rest dry docks and guests from our side.

[Operator]

And how large is your market share as of today? And what's the reasonable market share to aim for?

[Philip Chaabane, executive]

Our market share is still very, very limited. There's a lot of work to be done. We are around more than half maybe 2%, depending on how you account and measure. We should be applicable in most antifouling coatings of premium range, which we think will be the growing segment. So without putting out a fair number of our market potential, I think this conclude that there is enormous potential out there. If we get into the dry docking products, that we now expect to hope we will.

[Operator]

And on just dry docking, what is the time frame for seeing significant revenues from dry docking?

[Philip Chaabane, executive]

Yes. We're also trying to chase down that. That's one of the most important things. We think it will -- it happens gradually, as I mentioned, 3 of the 6 customers are on the dry docking. For them, it's about proving and getting good feedback from the market of products work, as I mentioned, I think in many other quarters, this is not an industry where products are replaced. And all of a sudden getting huge volume. It is so that every product has to make its own way and own recognition into the shipowners and management firms to be a candidate.

And on top, the premium products are more tricky to sell. They require higher guaranteed packages and more proof of performance, track records and so on. So it takes time.

I think that the growth ahead will, let's say, from 2025 and onwards will come mainly from the dry docking side rather than newbuildings side. That's the estimation.

[Operator]

And what were the main drivers for your increase in net sales?

[Philip Chaabane, executive]

Well, it is the effect of the many good products that were lost during COVID. They have now been performing a year or 2, and that confidence is now given onwards to the shipowner. Also we mentioned one interesting maybe detailed things that Chugoku lab launched, I think it's called M1 PLUS products during COVID, which we were open with to communicate. That is being specified, very often on those ships on the flat bottom which is then 1/3 of the surface. That is a more high-speed uptick way of introducing our technology as it's part of a larger system, and they can go with this one for basically all premium ships independent and what's on the site on the vertical side. So we see a higher uptake of that kind of product. And on top of that, just to increase shipping activity with a premium focus in Asian countries where we're shipping and opting to Japan, Korea, China, Singapore. So those countries are driving the business.

[Operator]

And could you give any indication of cost level going forward? Should one expect that current stable development continues?

[Philip Chaabane, executive]

Yes, that's what one should expect. We have maintained this level in gross margins around. If you talk gross margins has been stable for some time. In terms of that, yes, it would be stable.

Cost on the other side, we do see a variation between quarters. This quarter was tight on cost. We have moved to new facilities that has a certain impact. We have from time to time, regulatory costs that will come up when we need to invest in studies or processes or administration. There is increased activity on the collaboration side, which will drive R&D costs, of course, for the sake of getting to market quicker and helping customers solve problems and so on. So we will take on a higher cost in the quarters to come. It is not -- it would vary, but it's not significant, so to say.

[Operator]

And have you seen any movement amongst new paints or ingredient technologies worth mentioning?

[Philip Chaabane, executive]

Ingredient technologies, no, we don't see any movements and no one else would probably say anything else. It's clearly a really difficult task to find other ingredient technologies that work. I mean as you have seen from I-Tech, it's a 20-year story, to get a more close to revenue scheme. On different paint systems, there is in the Northern European side, a lot of talking about so-called silicon systems. That are quite popular. Many of those do contain biocides still. And of course, that's an interesting area to look into yet. On the global scale, that's a marginal volume going into that kind of products as they're still have some limitations and challenges around them. And they have their place, while the current systems are their place in that place space is much bigger clearly.

And that's what we can see. If you read presence on, you will see attempt to do ultraviolet light systems, ultrasound systems, let's see where all that goes. That's the technology press around this hull performance solution, so to say, yet early stages there.

[Operator]

And do you have any update on the work towards leisure paints with Petit marine paints in the U.S.?

[Philip Chaabane, executive]

Well, I don't have much update other than what I expressed on the challenge side that we're suffering from a very slow steaming regulatory processes where, this come out is not only Selektope but the whole marine coatings industry that's facing this enormous delays. It's not a month delay. It's like missing their tires by 2 years in terms of responding and that is extremely troublesome. And until we have responses back and have a clear pathway forward, there won't be much activity. What has been done under, in meanwhile, is obviously technology, improving paint formulations, optimizing paint formulations and all of that has been along the plants are performing as they expect. So it is really a regulatory administrative issue right now.

[Operator]

Okay. Thank you very much, Philip, for presenting for us today, and a big thanks to all of you who follow along I-Tech's Q1 presentation today. And I hope you have a great rest of the day and until next time, and thank you, Philip.

[Philip Chaabane, executive]

Thank you.