I-Tech AB

STO:ITECH

Earnings Call Transcript 2022-Q3

[Martin Westerlund; Finwire Media;IR]

Hi, and welcome to today's webcast presentation with I-Tech. Today, we have the CEO with us presenting, Philip Chaabane. My name is Martin Westerlund and I'm from Finwire. If you have any questions for Philip, please use the form that is located to the right.

And with that said, I'll then hand it over to you, Philip. Please go ahead.

[Philip Chaabane, executive]

Thank you so much, and all very welcome to our webcast regarding the third quarter of this year, 2022. We, at I-Tech, are proud to present this strong quarter, a quarter with a very strong movement in the positive direction. Actually, the strongest quarter so far in basically any aspect. We will obviously dive into that. Other things that has happened over the quarter was a good technical conference, maybe not so big in the investor sector. But from a technical standpoint, we're happy to see that I-Tech is in the center of bringing this industry together discussing technical matters.

Knowing that there's no real obvious platform for this industry to discuss together, our mission is to bring people together and make sure we enhance each other's capability to continue to innovate, and we're happy to take the lead in this initiative. So, therefore, some proudness on that, and if you have followed us on LinkedIn, you have seen a lot of that. We also now acknowledge finally, I should say, some strong contributions or at least starting to see the contributions from the larger number of premium products that now are available on the market. As you know, some of those came out under the COVID times in 2021, and that has been an interesting time to see when they actually show up in our numbers, and now they do.

So that's the introduction to the quarter. I'll walk you through as many aspects as I can. Initially, there are a few slides on who we are for those who may be new. So I-Tech is a Swedish-based -- actually Gothenburg-based biotech company acting in the coating technology field.

We're listed as a Nasdaq First North entity. We are relying heavily on strong IPR, that is patents, both in the backend and frontend. And it includes, in this industry and so difficult to achieve regulatory approvals where we are one of very few companies to actually hold regulatory approvals in the marine industry for any kind of compound actually, but certainly exclusively for our compound. So that sets a quite high entry barrier and a very unique position.

The purpose with what we do is to make shipping more efficient. It is to keep the underwater hull as smooth as ever possible over the duration of time, meaning avoiding marine growth that will enhance drag and create fuel losses. So the cleaner it is, the more efficient the ship becomes.

The sustainability aspects are obviously important. And that doesn't only account for what's going up to air, but also what's released into the water. So how is that done? It's through our one product, the ingredient technology, Selektope, that is part of an advanced coating system sold by global paint makers, meaning that we become a supplier to them.

The setup of all this, and knowing that a number of leading paint makers is highly limited, makes our business case very scalable. So we can reach high numbers without adding other investments, new investments or a lot of people. And all of this makes the company unique and very interesting to look at from an investor standpoint and also to working, of course, for us.

I touched upon the sustainability aspect, and that is the big thing in this industry as well as in many others. It's a right window of the opportunity right now coming through with this kind of technology, not the least because shipping is recognized to be responsible for some 2.3% to 2.6% of global CO2 emissions, equaling the total consumption of Germany as a nation, as an example. That itself puts some light to the industry that there is savings to be made, and forced to be made actually to make sure that global transport of goods can continue to occur without negative effects on the environment or on oceans as such.

In this case, looking at the antifouling coatings or any hull coating actually, the potential within the industry is claimed to be around 100 million tonnes of CO2 savings versus average situation on the fleet as of 2009. So if all those ships had the most optimal hull coatings, this is the number of CO2 levels that could be saved. Selektope is a part in that parcel, of course, and that's driving our motivation to go to work.

But it's not only about emissions to air, it's about what's going into the sea as well. So protecting the marine ecosystems is a detrimental part, and that's twofold. It's both what you release into the ocean, meaning approved active agents-biocides are clearly advantageous, and certainly those who are very specific, like Selektope has a very favorable profile in this area.

But it's also the combined effect of coatings and its ingredients to avoid transport of alien species, sometimes invasive pieces, which is recognized as a big problem on a foul hull. So that's an important area.

And the third area is, obviously, to preserve natural resources and try to use as little as possible to do the job, so to say. All the -- well, the limited amounts of agents available are all needed. The question is how to optimize the [ mattresses ] for the best possible output, both on performance and the leaching into the seas.

Selektope plays a role here, being an interesting candidate combined with most of the other agents. So these 3 aspects is important for us.

More in-depth then. What do we do? Well, as I mentioned earlier, it's a biotech inspired company, so to say. It started off with research in a very niche, almost a geeky, area called barnacle larvae understanding or sciences that combines biological sciences, chemical sciences and so on. To actually understand why these creatures settle and how they are built up to see if there's any way to repel them from a surface rather than use excessive amounts of, previously at least questionable, compounds to kill them.

The result of that quite extensive research at the Gothenburg University and Chalmers was a molecule that we now call Selektope, that's a part of the paint system and actually has a very repellent effect on specifically the barnacle larvae and to a certain extent on tube worms.

The specificity of the molecule makes it possible to use in tremendously small quantities, which is a big interesting advantage for the paint makers who then can find different ways of formulate. But it also gets into the scope of being possible to combine with a lot of other settings. So it acts together with other active agents in the paint to deliver its effect. So it's the first time ever biological science has driven into the pain system to actually create this unique effect.

And then needless to say, from the previous slides, it's also approved then on both the regulatory and -- but also in -- confirmed and approved by paint makers that it does work quite -- and it's also very powerful, as you see from the picture at the bottom here, where we have a smooth area with Selektope with no growth and a more traditional type of coating with a lot of growth. So Selektope acts as a booster or it can even replace and reduce amount of other chemicals in the paints to deliver the performance needed.

So obviously, we're in the shipping industry. The potential if all of the boats, the industrial boats and the big commercial vessels would use Selektope in every single liter antifouling, we would head towards the $350 million to $500 million market potential on sales of our product.

Of course, there are other alternatives to protect your ship. So we're trying to reach and grab as far as we can in this journey, but that's the maximum potential.

When we started off this, we were all thinking that leisure boat market will be the easy grab, because simply, it's not 5 years between each repaint. It's maybe 1 year, maybe 2 years. There's a lot of boats lying still most of the time and then hence, having hard fouling as a main problem, which also is quite difficult to get away from a maintenance perspective. But it turned out to be super difficult from a regulatory perspective as the whole industry is in a complete revamp of regulatory criterias, and therefore, that market, at least in Europe, is not accessible for new active agents at the moment. So that took a shift back in 2010 somewhere around there, where we start to understand that other markets are more compelling, and that's where you save fuel. So the fuel driving aspect became so much more interesting and also, obviously, the volumes.

So we looked at the left most pictures, mostly then from 2010 on to where we are today. So, all our sales almost are into this commercial shipping industry of the huge ships transporting goods over the oceans -- the large Atlantic oceans, so to say. The further you go the more important the fuel bill is and the more -- the more attention you pay to the efficiency measures, the hull coating is being one of those.

The good thing with all this is that, there are many of those vessels and they have to dry dock every 3 to 5 years, depending on age and so on. That means there is a recurring amount of ships coming into the dry dock and there's a recurring amount of opportunities to apply new paint, hopefully, most of those with Selektope in the future.

But that's -- then we also see the working boats. It could be supplier ships, tugboats, a lot of other more local coastal ferries and ships that also uses antifouling and pays a lot of attention to, not only the fuel bill, but the environmental concerns in the more nearby water environment.

Normally, that translates into avoiding transport of alien species that may come from the larger ships, and the smaller ships are then spreading this problem around the coastline. So they also pay a lot of attention to coatings.

Also in that area, a lot of ships, very fixed dry-docking intervals altogether, very interesting annual opportunities for a paint maker.

We are happy to say that despite we're not looking actively -- or we are looking actively, but understanding there is a long delay in this process, we do have some products on the leisure boat market, but not explicitly in the large European market. It's mainly related to Japan at the moment.

We are trying to put ourselves in a nice position in the United States in this area as well as some other countries where leisure boating is prominent.

So this is what we do. This is the market. And now let's move into the quarter. Needless to say, and I guess you have read the very strong numbers of the quarter of SEK 21.3 million in net sales compared to SEK 13.8 million. That's a 54% difference.

I'm very proud. So after so many years -- well, so many years, so many quarters during the COVID time to have not seen the growth, curve coming back up. Now it is. That is clearly exciting.

Gross margin maintains at good levels. Growing -- we'd maintained gross margin, its good and even better to also present strong EBITDA on the growth curve. And essentially, this is the essence of our business model actually.

We have had some struggle with cash flow previously, at least from a quarterly report perspective, although we're quite solid on this over a year time, so to say. Now it turns out really good with -- on this quarter. Cash balance is also very strong.

As you all know, there's large variations in currency exchange rates at the moment. We're happy enough to have sourcing in dollars, selling in dollars and relatively low cost in Swedish krona, which means we do have an effect on the magnitude of the numbers, although the percentages on gross margin, as an example, remain the same, obviously, if the currency moves up or down. But the magnitude clearly is affected.

The organic growth is 26%, and that's an important number to -- for you to keep in mind. Obviously, the EBITDA margin of 32% is very, very attractive. It shows some indication of the potential in this business model.

So what's driving this? Well, this quarter was a strong, dominant position from our large customer who is, we believe now is starting to experience a stronger demand of their many Selektope containing products. There's 15 or more, not on the global scale, but in their different regions, combined with the global availability of products.

So that is hopefully -- well, that is likely the driving force in this quarter, and we hope to see more of that, of course. It's the first quarter, we really see an effect of those launches of new products that they did certainly in Japan in 2021. So that gives us some confidence that those are actually being pushed into the market in a good way.

We do have some lower operating expenses that support the profitability, meaning keeping control of cash, but also planning differently. And sometimes, the third quarter comes in a bit lower on the expenses side. Quarter 4 normally a bit higher on the expenses side, so that will probably shift a bit.

There is also delays in the regulatory system. I wrote a bit about that in the CEO statement that we have a delay in the U.S. administrative burden on these, what do you call them, institutions, the chemical agencies or environmental agencies is extremely high.

And it's not only related to us at I-Tech. We hear the same from our customers who need to register their products from our fellow colleagues with other active agents. It is super difficult to get attention and to keep any sort of timeline when it comes to authorities at the moment.

So many of the investments that were expected to come in impacting cash flow then, of course, in the year will not come in because we don't get the responses needed from authorities, mainly then in U.S.

I should also say, which I also highlighted in the annual report, and that's just for information, that for that same reason there's been a delay in expectations of conclusions of reapplications and new applications within the European Union. So that's just for noting remark, so to say. But we have 2.5 years ahead now before any reevaluation will be performed.

Okay. We look at the first 9 months now comparing the first 9 months of several years -- last 4 years in this case. You see also our traditional 12-month rolling curve, displaying the EBITDA figures, revenues and gross margins.

Starting then on the left-hand side still, we, for the first 9 months, are exceeding the full year sales of 2021. We're exceeding any other quarter in the past. As you see, the 2020, 2021 were flat year, even decreasing a bit. Obviously, not the most exciting times. Now it's looking better. More in the direction we were hoping and expecting and the direction we saw until COVID hit in the middle of 2020.

Gross margins remain strong, even increasing at the same time as net sales are increasing. There is a certain volume correlation here, but it's also a customer mix discussion, and it's also incremental improvements here and there. So positives on all those figures for the first 9 months, which I think is the first time ever comparing these years. Very, very sound quarterly performance here.

Retaking the growth curve is important, and we made our small calculation on the CAGR from IPO year 2018, comparing again the first 9 months with each other, finding out almost 30% growth over that period on CAGR. So, a quality-based metric showing that we're on the move, although we had some disruption in the growth for a few years.

I think that's about it on this slide. I mean, we have said that the business model is proving itself. That is maybe the main message of this and that we really are on the right track again. And there is still a growth potential, of course, as we do have less contributions from other customers this quarter. If all of these start to work and coming with a growth figure on the same quarter, we will obviously have even better figures.

And needless to say, there is a lot of potential out there. We're still only at the very start of the growth curve in all our customer accounts. And we haven't really got the traction on the leisure boat market either that will, at some point, contribute, although much later.

To display a bit on what's going on in the past years, I'll give you some more ideas on explaining the result and maybe doing your own estimations for the future. We have seen an increase of products to the market. We are now about 20 commercial available products, again, stating these are not globally available, all of them. They are heavily skewed towards certain Asian countries, but those are countries with high activity, that is Korea and Japan specifically.

And another important metric is a number of customers that are picking up the technology from a commercial standpoint. We have 6 out of 9 largest customers in the world using the Selektope product in their paints on a regular basis. So that's an important quality measure that not only one customer is using it, although they're dominating. We're seeing a good pickup among others.

And I also have to say that all of the 9 largest brands, including a tail of a few are working intensively in the R&D departments, finding ways to use Selektope in their best way on their markets. So the underlying activity is more expanded than what you see on this slide.

Unfortunately, many of these customers don't want to have a communication out there, meaning we are not able to talk about who all these are. We only have 3 in the official domain, but now you know there are some 3 more continuously contributing.

This is a slide on some general aspects on the shipping industry. It's not directly related to Selektope, but sometimes good to give you a glance of what's in the analytical reports out there. So first of all, this is the ClarkSea Index, which is a weighted index of the earnings of the rates -- freight rates across all ship types.

And that -- it obviously has a big variances between container ships and bulk ships and so on, but disregarding all that, you see that shipowners in general are making much more money now than in the past. And even the index is at levels not too far away from the very extreme peak it was just before 2009.

It's coming down lately now. We're still at high level. So the earnings is positive, because that means we already are putting ourselves in position where we at least get more interested to invest in long-term efficiency technologies such as the best possible antifouling coatings with the best possible hull preparation methods.

So that is very good. That's maybe the biggest takeaway from this slide. So high earnings increases the investment appetite, and we look forward to seeing more of that, although there's a lot of uncertainty on inflation and so on at the moment. But this remains, it looks good.

Another slide now relating to the new building market. As you know, many of our products out there are related to the new building segment of large ships. We see that the order book versus the total fleet is about 10%. So 10% of the fleet is under renewal that is, compared then to around 50% in the order books in 2008.

So we think that although the contracts are lower 2022 than before, they will bounce back up too, because the fleet needs to be renewed in a faster speed to comply to future CO2 requirements, meaning being equipped with engines that can manage dual fuels, other technologies that are normally fitted on to a new build vessels and so on. So I think we're waiting to see a bigger pickup on this general industry.

Limiting factor at the moment is the capacity at yards. I think there's about -- it's 40% below, many shut down. There's about, I think, 110 or so active yards at the moment on larger scale compared to 300 plus in 2009. So it's been a huge shrinkage -- shortage of new building yard capacity in the world following the economical crisis since the super trend that brought us up to 2008.

And that, of course, makes it difficult to place an order and have any sort of expectation of when to get it, but it also pushes up prices on new building, combined them with increased steel prices and so on. That also is one of the explanations why the orders are not booming in 2022 despite the need to renew the fleet. The positive is the outlook moving forward. The challenge is the current situation on the capacity and raw material pricing.

This is our last slide. We tried to share some own views on our opportunities and challenges for you to guide yourself in estimations moving forward.

We definitely see a continued effect of the introduction in January 2023 now of the CII, the Carbon Intensity Index, which is a driver to improve day-to-day performance on a ship. That includes having to do a lot of investments to put yourself in a position where you get a strong rating and then you get a better charter contract and then you probably get better financing and better insurance terms, maybe even in the future.

That is driving this industry in the premium direction, even to the ultra-premium direction of coatings and that's where Selektope belongs. That's important and will be important for quite some years ahead.

We do have a growing customer base. That's important. Everybody doesn't want to work with any customer. It's important for us that we are available as an option in any paint makers' portfolio list. And we hope to be able to expand from the new building area to the dry docking area.

We do have -- we do experience enhanced activity in our customers' R&D development portfolio. We cannot go into details at all or highlight any specific example. We're just confirming that we're getting closer, getting into more activity. And we also are through our own investments, putting ourselves in a position where we can provide more relevant information on how to handle, how to formulate with Selektope in the new circumstances that regulatory bodies are putting forward in different regions.

On the challenges side, it's obviously the delay of regulatory processes. EPA is delayed, I think, 1.5 years since we started, and that's going to be a long process. We're used to that in this industry, unfortunately, but it's always tough. The EU/BPR is also in delay. It doesn't affect us that much. The EPA does affect us because we needed a starting point there.

And then there's a global economy challenges with lower expectations on GDPs. In many areas, short term, hopefully, and that will pick up as soon as we, hopefully, get back to more normal geopolitical situation at some point. But -- yes, that's estimations and expectations on all different directions.

Raw material prices are still a challenge for many, although I think it's moving in the right direction. For us, this is not really a problem at the moment. It seems like from a customer perspective, and certainly not on our own backyard.

So with those words, I say thank you for tuning in, and I'm ready to take questions.

[Martin Westerlund; Finwire Media;IR]

Thank you very much for that presentation, Philip and now we'll move over to the Q&A section. Start off with the first question. With a growing cash position of about SEK 50 million, are you planning on dividends or are you looking for investments? If so, what are you looking for?

[Philip Chaabane, executive]

That's a relevant question and a question that is being discussed at the moment. Because that's -- seeing the good trends in the company one has -- we can make a different perspective on what kind of cash we need for bad times and so on. So now it looks strong. That's why we can start the discussion on how to expand and use this money in the best possible way.

I would say that it goes more in the direction of finding a way to build I-Tech stronger rather than provide dividends. But that's not finalizing a discussion with the Board yet, but that's the direction I would believe it goes.

[Martin Westerlund; Finwire Media;IR]

We'll take the next question. You mentioned in the report the administrative backlog of European authorities regarding biocides. Could you elaborate a little more firmly what this means to you?

[Philip Chaabane, executive]

Definitely. And I need to explain further, it's a backlog also on the paints. So both paints and biocides need to get through. I-Tech and Selektope alongside our fellow active agents in the industry are approved in the EU system.

The problem is that that's not enough. The paint makers need to get approval of their paints as well in the system to be able to sell them. And there's a 12-year backlog here.

So although, we together with our fellow colleagues were approved around 2014 to 2016, '17 on the biocide level, only one single antifouling product has been approved since the regulation was implemented in 2012. So like 10 years down the line, only one product has come through.

So that doesn't affect those who have products on the market with known technologies before that date. That means traditional copper-based paints with agents has been known longer than what Selektope has been known. They continue to sell and can have read across on product updates and so on.

But for the new biocides, which means Selektope and another one called ECONEA, it's super difficult to get into the European revenue stream, because it's just a total mess of backlog in European system. So that does affect us in the sense that our customers cannot get their products through and we cannot get the sales in Europe to the levels they should be.

There are certain exceptions where some European countries have said that they will use old legislation until agreements are reached on the new one, but that's limited to a few countries. So sales in Europe are to very limited amount of countries.

So that's a direct effect in Europe. And I think that was the only question. There was nothing on the EPA in that question, right?

[Martin Westerlund; Finwire Media;IR]

Correct. And the next question here.

Do you see any risks for inventory buildup from your largest customers? Or should one consider the accelerated growth trend to continue driven by underlying demand?

[Philip Chaabane, executive]

The inventory balances are said to be in -- sorry, the inventory levels are said to be in good balance. We believe this is the effect of actual growth.

[Martin Westerlund; Finwire Media;IR]

Okay. Thank you. Take the next question.

Why isn't Selektope included in all paintings your partners sell?

[Philip Chaabane, executive]

Why it's not included in all paints? Was that a question? Okay. Yes. So most importantly we can say other more established alternatives that have been working for many, many years, and that creates comfort.

It's also so that all ships doesn't need all type of active agents or all type have the same profile on antifouling coatings, so to say. So some simply are in less need of a Selektope version maybe, while others are more in need of that power. So that explains it.

And also the fact that some authorities are very late in approving products, puts on a position where they need to have a different products portfolio in one part of the world then a different one in Europe that may have its issues as well.

And then I think the third thing is, generally, it takes a long time to optimize the coating that is compatible or competing -- possible to compete with in terms of cost performance benefit to those who has been proven for a long, long time, where they have the guarantees in place and all that. It takes time to build up a new product portfolio with a guarantee scheme on the same level they have on the ones that they have been running for the last 20-25 years.

[Martin Westerlund; Finwire Media;IR]

And regarding your European customers, would you say that they're impacted by the negative -- that they are impacted by the negative macro trends at all?

[Philip Chaabane, executive]

Our customers are definitely impacted by -- in a certain way. I would assume, I'm not sure in what magnitude. I think shipping is doing quite well, as just I showed on the slide. So they are -- our paint maker customers are probably having quite decent discussions with their customers, because they are money there, and they need to do a transformation to more sustainable operators. So in that sense, I think that's overweighting other problems at the moment.

But of course, if the negatives of this inflation cuts consumption, cuts the need for shipping goods, then we're in a completely different situation, of course. The only thing we need is the ships will anyway need the coating, the question is if they're well financed enough to continue the efficiency journey or if they will have to pause it. And I do believe, and that's only my own reflection that the pressure on creating a greater efficiency gain on the shipping level will be stronger than negative effects.

[Martin Westerlund; Finwire Media;IR]

Thank you. Take the next question.

You had an increase in other operating income, what is the underlying driver for that?

[Philip Chaabane, executive]

That's a good question. I have to check that with the CFO, of course. But we do have currency contributions [ constantly ] over there. There is no other sales going on in the company. We're not getting paid for other things in our products. So I will have to come back to that more in detail. So please e-mail me that question again.

[Martin Westerlund; Finwire Media;IR]

And do you expect currency adjusted growth to accelerate the coming quarters or to remain constant or even decline?

[Philip Chaabane, executive]

It's difficult to say where the currency is going. A lot of people know tremendously more about that than I do. We focus on organic growth, the actual growth on the volumes we ship out, and we believe there is a good grounds to expect a positive outlook on this as long as the global trends doesn't change completely. But where the currency will go, I don't know. Very difficult to say.

But I could also maybe clarify that, we're buying in dollars and selling in dollars, which means the magnitude of the numbers you see is obviously dependent on the exchange rates quite a lot. But the relative numbers within each quarter, such as a percentage of gross margin remains the same even if currencies go up and down.

[Martin Westerlund; Finwire Media;IR]

Could you elaborate on the reasons of the slowdown from some of your leading customers?

[Philip Chaabane, executive]

There is no logical explanation to that. That's just a variety of variation over the years that comes in. They maybe didn't get the contracts they were expected to get. These products are normally for the new building market. So they maybe lost projects to competitor. They may have found other deals to make with a shipowner, applying different coating of a lower grade, because there were some other issue on another end of the ship, I don't know. This is movements that come and go all the time. So there's no conclusions to be drawn from this.

[Martin Westerlund; Finwire Media;IR]

Would you classify the macroenvironment as favorable or unfavorable given the inflation and oil prices?

[Philip Chaabane, executive]

Oil prices are generally good because that sets the light to the good payback on the efficiency investments. So, on that end, that's good. Inflation, as long as it doesn't impact global trade, I guess, and I'm hoping that everybody can absorb the inflation all the way through, then that doesn't matter. But if that starts to put an impact on how people consume and how much goods is then needed to be transported, the whole industry will be impacted by lower profitability and at some point that will harm also the more high-end products in this industry.

[Martin Westerlund; Finwire Media;IR]

And finally, what's your outlook for 2023?

[Philip Chaabane, executive]

Again, we don't provide outlooks to the public. Although, we at some point quite soon, within probably quarter 1 next year will have new public targets out there. But we continue to do our work, continue to try to grow organically as much as we can, and we see a lot of positives in this end. And then there's things that we can't control that we'll have to talk about quarter-by-quarter.

[Martin Westerlund; Finwire Media;IR]

Okay. Thank you very much, Philip, for presenting today and answering our questions. And a big thanks to all of you who listened to this presentation with I-Tech.

Hope you have a great rest of the day, and I'll see you next time. Thank you, and goodbye.