I-Tech AB

STO:ITECH

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Unknown Executive]

Hello and welcome to today's presentation with I-Tech. With us presenting today, we have Magnus Henell, Acting CEO; and Cecilia Ohlauson, Director of Regulatory Affairs. If you'd like to ask any questions, you can use the form that is located to the right and we'll take that up after the presentation during the Q&A.

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

[Magnus Henell, executive]

Hello, everyone. A very warm welcome this August morning with a little bit bad weather outside, but hopefully nice warm message from us here. Today, I'm here Magnus Henell in the room as acting CEO and also Cecilia Ohlauson besides me. So we're going to lead you through this webcast and the Q2 report of I-Tech. I would like to start by, for those who haven't listened to us earlier that much, give you a short background on what I-Tech is, what we do and why we do it. And I think most of you know that we are a listed company. We've been on the Nasdaq Stock Exchange since 2018. We're basing the company on a unique and protected technology, i.e., the Selektope. And what does this product do? We have sort of a proven ingredient biotechnology in Selektope that we add to the mixture of paints and when added that and when the Selektope is attached to the cell or on the surface of a ship, it repels all the [ barnacles ] that try to settle, which is very unique.

Most of the biocides out there today usually kill the organism not repel them. So after a few hours, they go back to their normal state. And the purpose of this is of course to improve shipping and improve by enhancing the power of coatings i.e. make sure that we have the best coatings available. And the result of this is that we produce lower emissions to air and sea by reducing the carbon footprint from the fuel burden in the ships. And I-Tech as a company has a strong growth behind us and we have hopefully a stronger growth ahead of us. Today, we have more than 30 available products on the global paint market so to speak. And 6 of the 9 largest paint companies actually produce commercial paints sold to the shipping industry. This has led to that we have produced and delivered more than 20 metric tonnes of Selektope. And you should remember, I haven't said it today but earlier, that we only use as low as 0.1% of the total volume in the paint bucket is Selektope.

So 20 metric tonnes goes to a lot of paint and in fact there are more than 2,500 ships out there using Selektope today. And with such a good product, we also would like to have a good market opportunity and we do have. We estimate that the total market opportunity for Selektope is somewhere between USD 350 million and USD 500 million, which is far from where we are today, but hopefully we can gain over the years to come. And just a glimpse of the quarter. We are continuing growing both in turnover and profit and in fact it is our best quarter ever again. On the sales side, it's driven a lot by Japan and Korea, which are our most significant markets today, contributing with 35% respective 50% of the sales. And for the quarter, we amount to almost SEK 43 million in sales compared to the SEK 33 million last year resulting in an EBIT margin of 24%, slightly above last year. We'll come back to the reason why it's not more later on.

But it gives us a solid or a very good net result of almost SEK 9 million compared to SEK 7 million last year. So looking into why we are on the market today because we know that there is a huge demand for reduction of emissions. Today, the seaborne trade stands for almost 3% of the global carbon footprint and we know that there is over 100 million tonnes of CO2 in potential savings only on the coatings. Coming from the base today of 800 metric tonnes roughly in carbondioxide emissions from the shipping, that is a significant part. And the role of Selektope can really make a difference in these savings for coatings. The second part of why, this actually to protect the marine ecosystem. Today, we know that alien and invasive species are regarded as the second biggest cause of extinction of species.

That means if we are having fouled hulls in Asia or in other places in the world that are bringing organisms into the oceans close by in another place, that is a significant risk of actually introducing new invasive species and also the extinction of other species. So that is a really focused area of us. And the third part is the material optimization. All the trends are moving into more optimized biocidal composition and what do we mean by that. It means that we're trying to reduce the biocides that are in the paint. As I said before, we only use 0.1% of Selektope gaining across the same effect that 30%, 40% or 50% of corporate by reducing a lot of other biocides in the paint bucket where we can also increase or utilize a much better material. Then looking into the general trends. As I talked before, there is a huge need of reducing carbondioxide. Not to blame the shipping industry.

But the shipping industry as such through IMO, which is the International Maritime Organization, it's a UN body; they have set the target that we should get to net 0 or close to net zero of greenhouse gases by 2050. I said also earlier that we are today producing 800 million tonnes of carbondioxide. That should be reduced by 40% until 2030 and the base for this 40% reduction is actually 2008. So we should reduce it from the more than 1 billion metric tonnes that we have to '28 and down to just above 600 million metric tonnes in 2030. That's the difference of almost 200 metric tonnes that are to be reduced only to 2030. And then we have another indicative checkpoint that we should be on a 70% reduction until 2040 and then finally, the net 0 by 2050. Of course we can't do this alone, but Selektope is an important part of making sure that we are utilizing the best systems for the hull and giving the best result with the lowest emissions.

And to sort of make sure that this happens also, there are a few initiatives introduced. One is that they have introduced a Carbon Intensity Index, which is an operational measurement where you have a classification of each ship and how well they operate and how energy efficient they are operating the ship. So that is ongoing and it's an ongoing reduction in order to keep the high grades. Then we have the Energy Efficiency Index, which means that you're looking into how well you have designed the ship. So that is what the shipyards are looking into when they are designing and producing the new ships. And then we also have the upcoming EU Emission Trade System, which also will start to cost a lot of money to have the carbondioxide emissions. So now we've given you a slightly good view I hope why we're doing this, what we're doing and how we're doing it. But also I will come back to the customer development and the quarter as such. But as most of you also are aware of, we are in a position right now with the renewal of our certification in EU.

So Cecilia will give you a good overview on what we have ahead of us in that sense.

[Cecilia Ohlauson, executive]

Thank you. So this is where we're at at the moment. We're in the middle of the picture at the socioeconomic analysis process. So we have gone through working group meetings and we have received a BPC opinion where ECHA and the member states agreed to the initial proposal made by Norway, which means that for Selektope to remain on the European market, we need to demonstrate that Selektope is needed for the maritime industry. And as you can see, we also include medetomidine because that is the name that was used during the assessment. So this is the active substance name for Selektope. U.S. stakeholders can provide input to this process and I will talk a bit more about that later. Once the socioeconomic process is done to demonstrating Selektope, that will be discussed by the Standing Committee on biocidal product, which is organized by the European Commission and is consistent of the member states.

And they will look at what has been submitted both from us and from other stakeholders and then basically they will consider is there enough input or has a need for Selektope been demonstrated that could sort of override the recommendation from the BPC recommending that Selektope should not be approved in Europe. Following that discussion; it could be 1 discussion, it could be more discussions; so therefore, the timelines are not exact. This will then move into a voting procedure where the member states then vote on if Selektope should remain on the European market or not. So the socioeconomic analysis and the process. So as I mentioned, ECHA has concluded that meditominine, the active substance in Selektope, should not be renewed on the basis of endocrine disruption. And as we previously communicated, we still believe that this conclusion is flawed and that the scientific assessment has not been thorough enough.

However, independent of this recommendation, Selektope can still be approved if certain conditions are met and there you need to show that a nonrenewal will have negative impact on the EU; it could be negative impact on society, it could be financial negative impact, it could be environmental negative impact. And all this information is then collected in a public consultation where interested stakeholders such as paint makers, shipowners, ship yards, et cetera, can contribute. This is a standard process. There has been numerous consultations previously and there are consultations ongoing as we speak. Looking historically, a majority of those substances has been renewed. So we are positive. Looking at why Selektope should remain on the market. It brings socioeconomic benefits, which we have also shown in an extensive report that will be submitted from I-Tech.

And what we can see is Selektope helped reduce fuel consumption in ship, it limits the greenhouse gas emission, it helps prevent spreading of evasive species as Magnus talked about. But we can also see an overall benefit for the environment if Selektope remains on the market since it will help reduce the use of biocides for example and lower amount [indiscernible]. So the public consultation will open soon, exactly when is something we're not informed about, unfortunately. What we know from the moment is that commission expects it to start end of August, beginning of September. Of course we will inform all our stakeholders when this happens. It will be launched at the ECHA website and any information that you would like to submit can be done so confidentially if you would like. So what type of information are we looking for? Well, details on medetomidine and Selektope's economic and environmental benefits for the world's shipping industry.

Of course European Commission and ECHA are most interested in information around EU. But of course shipping is a global business so we are interested in any information highlighting the need of Selektope. Other information that could be submitted is proof that medetomidine does not have endocrine disrupting properties when used as an antifouling substance that this has no relevance in this use. Information about or concerns about the lack of rigor in the process could also be submitted. So generally any kind of support is appreciated at this stage.

[Magnus Henell, executive]

Thank you, Cecilia, for that very good run through of the current challenge we are in and the process with the EU renewal. As you say, we're looking positively into this entire process and hopefully we can gain so much support from our stakeholders in order to continue having an approved substance in EU as well. Having said that, let's start to look into the more forward-looking commercial stuff in the company. And this is a slide that I think most of you have seen earlier, there are really not any major changes today. In the middle of the screen, we have the 9 major paint manufacturers named as A to I in the world. I would say that they are representing more than 90% of the global antifouling market. And as you can see, we have ongoing R&D with all of them. They have projects in order to put products in the market if they haven't. They also have projects in order to put new products on the market.

And of those 9, we have 6 of them with, as we said before, commercial paints on the market. All 6 of them have products for the newbuilding market. But I haven't described it today, but generally, the newbuilding market is roughly 1/10 of the dry docking market. So it is very important to also get into the dry docking market and as you can see, 4 of them have products on the dry docking market today. And I think 1 other important matter is that another 2 are looking into launching new products within the coming period and we're really looking forward when they are introducing them to the market. So overall, we have the global framework that are driving the increased share of wallet for these premium antifouling that the Selektope containing products are. We have also another driving force, which we haven't talked about earlier or we have talked about it, but not today.

The implementation of the Korean legislation where they are demanding that not more than 1% of respective biocide can be introduced in paint. This is legislation coming into force next year I believe and that will drive the need for Selektope-like ingredients to put in the paint bucket but you can't have more than 1% per biocide. The reference is of course that you have copper today is 30% to 50% of the major copper-based paints. Other biocides are introduced by 7% to 8% levels in order to reduce the full effects of them. So there will be a challenge without Selektope reaching all these targets in the legislation. And we also have a strong sales development. As you can see on the left hand side, we have sort of a pie chart of the portions of our sales for respective customer for the first half year of 2023 and the first half year of 2024. And as you can see in '23, it's almost only 2 customers show.

In '24 we have at least 5 customers show in the pie and what has happened compared to last year. Well, CMP has increased once again very well. They are up 35% between the years. One of the major things we believe that is behind this growth is the products they introduced during 2021 and 2022, which really are gaining footprint today. Our second largest, which sometime will reveal the name when talking about it, and it's KCC, which they are relatively flat although on a very good levels when we compare between the half year '24 and the half year '23, but they're showing indication for increasing volumes over the coming periods as well. And then as we have disclosed earlier, PPG have launched a new product and they're continuing to grow their sales. They are our third largest customer, the grey part down now to the left, and we're really looking forward for them also to gain footprint.

And the fourth customer that we can talk about is Kansai that more than doubled in sales between the years here although from quite low levels, but we also know that they recently registered additional 3 premium products in Japan which contains Selektope. So we're also looking forward for them to start growing even further. Then coming into the quarter and actually I borrowed the headline for this slide from previous webcast where we actually stated it was our best quarter ever. Now it is our best quarter ever again, which is really nice standing here front of you and discussing. As you can see on the rolling 12 months revenue part, we had a small dip in Q4 last year, but we're now on the growth track again. The EBITDA is on a solid level, we are growing it a little bit compared to Q1 and not compared to previous year, but that is also 1 of the reason. One of the reason is of course the EU process that we're into and I'm coming back to that later on.

And then it's also good to see that the part of sales that are going to operating cost doesn't increase at least. We keep it on the same level as previous quarters, but we have possibility of reducing them even further moving forward. And in numbers we have, as we said before, continued strong growth in turnover and profit and we have a growth from SEK 33 million last year to SEK 43 million this year with the maintained gross margin. We have strong EBITDA. We have slightly weaker operating cash flow and that is very much dependent on that we had a lot of sales late in the quarter, which means that all the accounts receivables were actually almost doubled. The accounts receivable compared to Q1 this year will of course have an effect in Q3 where they will be reducing it. We have a strong cash balance in the company although we actually did send out a dividend of almost SEK 18 million earlier during the quarter.

So other comments of course have been into before. CMP continues with very strong growth, for this specific quarter up 30%. And as I said before also, we have the significant growth in Japanese sales where we are up 96% for the first half year in '24 compared to '23. Coming back to the EU. As I just need to mention that in this EBITDA result, we have more than SEK 3 million extra costs for the first half year, which gives that we should have had around [ SEK 15 million ] in EBITDA instead of the SEK 12 million we have today. And it will continue for the coming periods as well in roughly the same pace I would say. But we are not -- since we have lot of cash, we have a strong result in the company, we are using all the efforts we can in order to support the EU renewal process and don't save where it shouldn't be saved so to speak. And to finalize this presentation, just a very short review of the business outlook.

As I said, we have the general trends towards copper reduction continues to drive the demand up. We have the EU ED process. We're entering in a very intensive place with the upcoming public consultation. As we discussed in previous calls, we have operational improvement projects. They will continue during fall and we anticipate that we show some impact on the [ costs ] actually increasing it a bit towards the end of the year. We also communicated that we have started up work on strategic search for new business opportunities and we have now also initiated this work more intensively and also have a dedicated resource in place where we have hired a business developer in [ Peter Fanakan ] who is joining us earlier during Q2. And finally, I would like to also here take the opportunity to welcome our new CEO that is going to replace my temporary role by mid-September. So then we are in full speed in all areas of the company and should continue the nice work that everyone's doing.

And with those words, I think we conclude the presentation for today and ready for questions.

[Unknown Executive]

We'll start with the first question here. Can you elaborate on the new antifouling product introduced by PPG in Korea and its market reception so far?

[Magnus Henell, executive]

We don't have a lot of information from PPG, I must admit that. We can actually as of now only see what kind of impact it has on the sales for us. Of course we will try to have follow-up discussions during the fall with the customers, but we know that they have made very positive test with the product before launch and I don't anticipate any other results from the ongoing commercial applications.

[Unknown Executive]

And how long is the next step in the EU regulatory process expected to take?

[Cecilia Ohlauson, executive]

Sorry, I forgot to say that. So this public consultation around socioeconomic benefits is a 60-day process from launch until end. So basically during 60 days, stakeholders have the possibility to engage and submit information. The review phase is not fixed in the legislation so it's not really controlled how long it could be. We expect it to take 2 meetings and then we can look at the commission schedule for that committee and give some estimates. If everything sort of doesn't get stopped anywhere or something unexpected happen, there should be a recommendation for decision in June next year at the latest. But as we've learned in the past, timelines and the European community can be very unpredictable. But the first process is 60 days.

[Unknown Executive]

Okay. We'll take the next question here. What are the key factors driving the strong growth in turnover and also profit? And how sustainable would you say that these rates are in the coming quarters?

[Magnus Henell, executive]

Well, I think I explained quite a bit about the drivers, but of course it is an acceptance on the market for the products that have been put to the market. Analysts can see [ Seabird ] was the first company out there, is also gaining the largest traction on the market as well. And it's only also how they combine the products in their offering. I would say it's both an acceptance from the market as well as how the paint companies put forward products. And I would say that of course we can't anticipate 30% growth in eternity, but of course we anticipate. We are coming from a very low level or from a low market share somewhere between 1% to 2% of the market and of course we are looking forward to gaining a larger portion of that moving forward, exactly on which levels is very hard to predict.

[Unknown Executive]

And what would you say are the key drivers for the strong growth in Japan?

[Magnus Henell, executive]

I think it is the products that CMP launched in '21 and '22 where they have introduced to the Japanese shipyards. They are almost going standard with one of the products, the MX product, where they combine that with a more sophisticated CF premium paint on the sites when they have a little bit less sophisticated paint on the bottom of the ships. So that combination has been a real market penetrator for CMP on the Japanese market.

[Unknown Executive]

And could you also elaborate on your strategic search for new business opportunities?

[Magnus Henell, executive]

Of course I would like to stand here and say that we have this, this, this and this project ongoing; but I can't because it is too early to say. But we are looking into partnerships, that or investments with potential new substances to bring to the market or with combination of substances, et cetera. So hopefully, we can start to elaborate a little bit more on it during the fall. But we have a number of sort of opportunities that we are looking into right now, but I don't have any more solid and I don't want to stand here promising anything that we can't keep later on.

[Unknown Executive]

And given the ongoing registration process in the EU and ECHA's recommendation to classify Selektope as an endocrine disrupting substance, how do your legal and regulatory advisers assess the chances of reversing this decision in the upcoming phase?

[Cecilia Ohlauson, executive]

Well, we and they are optimistic. Of course it's difficult to assess exactly how big their chances are. Since looking at the endocrine disruption, it is quite a new criteria included in the legislation so we can't really compare to other substances facing the same classification. We can look broader towards other classifications that would result in the same outcome and there we can see that there have been cases that have been revised, which is 1 of the reasons for our optimism.

[Magnus Henell, executive]

I just want to add that in the ongoing process with the socioeconomic analysis and the public consultation and until they come to a decision, there we can't revise it. That are actions that need to be taken after the final decision in such cases.

[Unknown Executive]

And considering that Selektope is described as important to meet new legal requirements of a maximum of 1% mixing of each individual biocide, how do you see your competitive position going forward?

[Magnus Henell, executive]

I think you are referring to the Korean legislation. And in Korea, we are very competitive I would say. We know that there are tests ongoing with several products with Selektope in them because we are really the only one that actually fulfills the 1% criteria today. As I said before, all other biocides on the market, and I say all biocides, need more than 1% to gain their full effect. We are the only one that actually gain our full effect on a much lower level than 1%, i.e., 0.1% level. So we're really looking forward for it as well.

[Unknown Executive]

You mentioned earlier strong growth in both Japan and also in Korea. Could you provide any more insights into what is driving this growth and how do you see the potential for a continued expansion in this market? And specifically, how do you see the opportunities to further increase market shares?

[Magnus Henell, executive]

I think I answered the question already for Japan. But looking into Korea, we believe that the upcoming legislation is 1 part that is actually driving our sales because they are already now looking into the products that are coming to the market next year. But of course they want to put -- the products they apply on the ship should be there for the future as well. So we believe and also it's strongly driven by the proof we have that the Selektope containing products really work with the hassles during newbuilding as they have in Korea. We should remember that that was actually the starting point for Selektope to come to the market. That was the enormous barnacle growth they had on the ship hulls when laying for anchor during the outfitting period, which could be 6 to 12 months, and they had huge problems before where they almost didn't make the speed trials, et cetera. Now Selektope is in the market and continued growth. We are getting quite a large share of the newbuilding products in Korea. It's still got potential to grow, but of course we can't grow in the same magnitude year-over-year.

[Unknown Executive]

And do you expect that the regulatory cost will accelerate from this point for the remainder of the year?

[Magnus Henell, executive]

No, we don't really foresee it to accelerate. Of course it could be a slightly higher pace, but we also don't foresee that we can reduce it very much. So I would say that we anticipate around the same level as we are for the first half year of this year.

[Unknown Executive]

And how do you see the development of the EU registration process for Selektope? And could you provide any more details or color about the upcoming public consultation phase and what measures do you plan to ensure continued approval despite the classification as an endocrine disruptor?

[Cecilia Ohlauson, executive]

Yes. So what we are doing at the moment is we have prepared as socioeconomic analysis of Selektope. We have commissioned a large consultative firm Ricardo to do a more or less independent analysis of Selektope. What would be the consequences for Europe on 2 cases? One, the Selektope remains on the market as is and one that it's no longer available in Europe and then looking at environmental consequences, consequences for human health and society and consequences financially. So that report will be submitted from I-Tech in the public consultation. We are of course also working on engaging stakeholders, especially our customers, which are the ones that can on a sort of firsthand basis describe why Selektope is needed in Europe, but also on a wider scale such as ship owners, shipyards or similar. Also engaging trade organizations, which gather the industry and which can really defend antifouling biocides and why you should diminish the already small toolbox because there aren't that many substances around that can protect the antifouling. So all of these activities will be ongoing. Of course we will also try and engage the member states in Europe explaining why Selektope is relevant.

[Magnus Henell, executive]

I think we also maybe should add to this that Selektope is not the only biocide that are under investigation sort of in EU. In fact all of them are either under sort of renewal or will come up very soon. So it is a clear risk if EU continues to do that there are no toolbox left and that will have significant environmental impacts for Europe.

[Unknown Executive]

Okay. We'll take 1 final question here. What does the competitive landscape look like for Selektope and are there any new technologies or products that you see as potential threats?

[Magnus Henell, executive]

I think the competitive landscape as we know haven't changed that much over the years that we see. Of course there are initiatives such as UV lights, such as house cleaning robots, et cetera; but we really don't see them as real competitors today because it most likely will be a niche market for them. But otherwise, it is the ordinary and premium antifouling paints such as copper-based paints, such as maybe aquina-based paints. Aquina and copper are both complementary to us, but of course also competitors about the market. In regards to new biocides coming into the market that has an effect, we really can't see anything arising that is worth mentioning here.

[Unknown Executive]

Okay. Thank you very much, Magnus and Cecilia, for presenting today and also answering all our questions. And also a big thanks to everyone who followed this presentation with I-Tech. And I wish you all a great rest of the day and we'll see you in Q3. Thank you very much.

[Magnus Henell, executive]

Thank you very much. Have a good day.

[Cecilia Ohlauson, executive]

Thank you.