I-Tech AB

STO:ITECH

Earnings Call Transcript 2024-Q3

[Operator]

Hello and welcome to today's webcast with I-Tech. We have the CEO, Markus Jönsson; and CFO, Magnus Henell, will present the report for the third quarter of 2024. After the presentation there will be a Q&A. [Operator Instructions]

And with that said, I hand over the word to you, guys.

[Markus Jönsson, executive]

Thank you very much. A warm welcome to this presentation of the quarterly results for I-Tech. The new face and the new voice in the room here is Markus Jönsson, the new CEO, since September 16. And with me is...

[Magnus Henell, executive]

Magnus Henell, CFO, and an old voice, so to speak. So let's get going.

[Markus Jönsson, executive]

Yes. Let's get going to the presentation. So to introduce myself then to the audience here, very briefly, you could say, education-wise, I'm the Chemical Engineer. I've had about 20 years of a career so far, mainly in the Specialty Chemicals and Industrial Biotechnology sectors. And working mainly, you could say, with the Business Development and Marketing, besides General Management. So what I bring with me into, I think, is, of course, the experience I have of business development within these sectors that could be relevant going forward.

But also then skills, I would say, within Marketing and General Commercial Excellence that could benefit the organization. I'm really thrilled to be here with I-Tech, and I want to thank Magnus, especially for the very good leadership during the transition period and for the onboarding from him and rest of the team. So it's really great to be on board and sort of being 3 weeks into the job.

And we start a little bit by a recap of the market that I-Tech is operating in. And I would also here recommend if you want some deeper insights to look at the Q2 report that Magnus and Cecilia was presenting last time. But essentially, we are looking into today, the scope of the market is the shipbuilding and the maintenance industry.

So there are around 1,600 ships built every year and around 20,000 dry dockings, which means then the ship is going in for repairs and repainting, et cetera. And you can see here in the bottom that Asia is really dominating this business today. So in terms of new ships, you have China, Japan, Korea as the three most important regions and then Europe sort of on the fourth place.

When it comes to dry docking, you actually have a very big dominance of China today. And dry dockings in the rest of Asia is to a smaller degree and more in the line with Turkey and Europe, as you see in the markets here.

And the products that the I-Tech solutions are going into then are the antifouling coatings. And that's essentially represented by the orange coating you see on the ship here, which is the below the water surface. And the assessment is that for I-Tech, this is a $300 million to $500 million opportunity, essentially.

And the technology that we are providing then with Selektope today is a key technology then to address the problem of fouling. So essentially, when a ship surface is underwater, you have -- it's attracting a lot of biological organisms, right? So you have soft fouling in terms of algae and seaweed, et cetera, but also hard fouling in terms of crustaceans.

And Selektope then, I-Tech's star product, is very efficient against barnacles. It's not a biocide by itself that it harms or kills the animal, but it actually repels them. So it has a nice functionality, and it's added in very tiny amounts compared to traditional antifouling technologies. Around 0.1%, which means that every shipment of Selektope gets you a long way in terms of creating the very efficacious antifouling coating.

And why is antifouling of ships so important? I would say it is linked now to the energy transition. So as Magnus alluded to in the last quarter reports, the global shipping industry is representing about 3% of our total emissions of CO2 as humanity.

And one thing that very significantly impacts, you could say, the power needed to go through the water is fouling on the hull. So you really need a clean and smooth hull surface to optimize the fuel efficiency. So only as little as 10% of fouling can actually increase the fuel consumption and thereby the CO2 emissions by 30% to 40%.

So it is a matter of for the environment and of course, of the operating costs for the shipping companies. As you know, bunkering fuel represents somewhere between 30% and 40% of the total cost. And also, when we are seeing this energy transition then, of course, the shipping industry will have to transition into new sustainable fuels that you could say are even more high value.

So the potential savings are becoming even larger in the future. And sort of a clean hull is a very, very cost efficient way to optimize your ship. Of course, there are other things like ship design and other efficiencies, propellers, et cetera, propulsion, but a clean hull is really essential.

And the antifouling coating market then has the sort of the interesting outlook that is actually quite a consolidated market. So it's dominated by six to nine major coating suppliers today. And I would say, I-Tech is in commercial relations or very tight dialogue with the majority of the major players today. So the Selektope technology is quite unique, and there is IP around the products, processes and the formulation, et cetera.

And during the last couple of years, then I-Tech has built up a formulation know-how that is now serving us really well when we talk more to customers and sort of further developing the efficacy of their products and the applicability of the Selektope solution.

So the production is outsourced as such, and Magnus will talk a little bit more about that today later. And if we look at the market penetration today, we are estimating now that we have treated a little bit more than 2,500 ships.

And this is out of a total global fleet then of 110,000 ships. So of course, the market potential is still very, very huge for I-Tech. And we should say that, and as you can see to the data on the left here, a lot of the market potential is still in Asia, and that's also where we intend to grow forward.

So if we come in to look at the highlights then for the quarter, we would say it's another solid quarter then delivering according to our internal plans really. So we see a robust sales growth of 27% versus Q3 last year. The operating margin is 23% versus 25% last year.

Magnus will talk a little bit more about that. And I think it's also very glad to see that the diversification of the customer base is continuing. So this quarter, actually 33% of sales was from a broadening and more diverse customer base.

And also noteworthy, we can say that -- or we can just release that I-Tech has been appointed then the Di Gasell company. So being recognized really for the growth and the profitability and for creating new jobs for people in Sweden, which is great, and it's really a testament to the great work done by the predecessor of me and the whole team here at I-Tech. So it's fantastic.

All right, I think we're coming down to a more -- a deeper look on the financials. So I will hand over to you, Magnus.

[Magnus Henell, executive]

Yes. I think you all recognize this slide, and I think it's really nice to standing here, once again, presenting a growth on our rolling 12 months turnover. We had a slight bump in the curve in Q4 '23.

But after that, it's been not a straight line upwards. But of course, we're growing and we're growing significantly with our customers. And it's also nice to see that the profitability also comes along with it. Of course, we have a little slight higher operating costs, which I will come back to a little bit later than we want to have. Because we're -- as we have presented to you guys and girls, along the way, where we are looking at a very scalable business model where we should not be forced to take on major cost increases.

But there are steps that we need to take. For example, now the ED process that where we need to spend a little bit more money, we are coming into the business development work where we will need to spend a little more money to make the company grow in a significant way.

So really nice to continue the growth path on the top line and this also comes with -- if we look into the quarterly and the year-to-date number is really a hard fact. We are in the second best quarter on the turnover side. We are already now year-to-date September, exceeding the turnover from last year, which is really nice.

So this 27% growth on the Q3 comes along with the very nice growth in the early months of this year. And then as we said, we are exceeding last year already. The gross margin, we have talked about quite a lot on the previous calls, we will actually end this call with a little discussion, but it is stable as it is now. We have a stable pricing towards our customers. We have a stable costing towards our suppliers, which I will come back to a little bit later on.

Then of course, we would like to see if turnover goes up 27%, we should have at least operating margin up 27% in the perfect world. But we're not always living in a perfect world. So we need to spend a little money on extra stuff.

And what you see here is that we have an increase at least of 16% of the operating margin, up from SEK 8 million previous year to SEK 9.4 million this year. But there are some effects of the eating consultants that we need to take on, and we also had define a sort of ramp-up of our R&D department, which affects the personnel costs. We have some normal salary adjustment and some small extra costs along with the recruitment of the new CEO.

So that are things that affected the quarter as well. And then, I think, I informed you quite many times now that we are going into taking a little bit more responsibility over the net working capital, taking out some of the responsibility from our suppliers and here, we also see an effect now that the net working capital has increased or almost doubled actually since the year-end '23. And that is an effect of these prepayments mainly and also some increased accounts receivables.

But on the other hand, we have a very good cash conversion still, not a full SEK 35 million we have in profit before depreciations, but it's a very good conversion. And we have a very strong cash balance that we hopefully, can make into use to some great activities coming forward.

[Markus Jönsson, executive]

Next slide. And then, we should comment a little bit on the reregistration process that is ongoing in the EU. And here again, I want to have a shout out to your previous quarterly presentation, where we also were joined by Cecilia, also our Director for Regulatory Affairs, who gave a more in-depth view of this process.

But essentially, we are at this stage then where the approval for Selektope is supposed to be renewed. And where it's actually being challenged then by the biocide regulation or standing committee on biocide and products, et cetera.

So in the phase that we are in now, we actually -- we and you could say the general public, our stakeholders need to prove the use of Selektope and the value of Selektope for them to consider an exemption where then Selektope will continue to be allowed in the EU.

And I mean, I want to say that I-Tech, we're really standing for a progressive chemical legislation. We definitely stand by that. And I mean, the company as such is founded on really a passion and a drive to make more sustainable antifouling solutions for the shipping industry to bring more, you could say, environmental-friendly products, right?

So it is a little bit, you can say, a twist of fate really that we are in this process. So -- but we have actually created a little information with you, that we thought we would share with you today that sort of outlines how we view the data and the fact that comes on the table in this process.

So we will run it now. And we can probably come back to this in the Q&A session afterwards as well.

[Presentation]

[Markus Jönsson, executive]

All right. So essentially, the process that we are in now is called the public consultation phase. And of course, the team is very engaged, you could say, to speak to various stakeholders, whether that would be ship owners or paint producers, et cetera, to, of course, then inspire them to submit sort of their views on Selektope and the use of it.

And coming back to that ironic twist of fate, it is a little bit strange, you could say, how you, at one hand, then can approve medetomidine for pharmaceutical use, and it's being injected into humans and animals on a sort of a daily basis. That's a very popular sedative. But at the same time, you would like to ban it in a different legislation for instance, for concerns of the human health, right, when you're using it as an antifouling solution in the paints. So that's what we mean with an ironic twist of fate really.

So then we shift gear a little bit, and we will talk a little bit about the business development initiatives then. So they were already started, you could say before I joined, but definitely, we will accelerate them now going forward.

So we will essentially be looking for new and additional growth vectors or I-Tech going forward. And that could be then complementing technologies in the applications that we are today or adjacent markets. I mean, besides antifouling things, there are many marine applications that could actually benefit from antifouling whether that would be floating structures, water inlets-outlets, sensors, et cetera, that are sort of more part of the industrial installations, et cetera.

So there is more in adjacent markets as well. And we will also consider, you could say, more, you could say, step out businesses, but something where we can really leverage the synergies that are available in the I-Tech team today. So these are sort of the areas that we are starting for now.

And really the short-term goal is to create a balanced pipeline. So things that we can realize fairly quickly, but also then things that we can work on, you could say, from an innovation business development standpoint for a little bit longer, and of course, with a significant business potential.

All right. So we come to the last part, which is the business outlook then before the Q&A session. So what we are seeing then is continuous market or favorable market conditions. So essentially, as we were saying in the introduction, the shipping industry is in this energy transition period now. Also, I mean, the need for shipping is growing. So the wars and the dry docks around the world are pretty much full. New ships are coming or being built with new sustainable fuels, et cetera.

So there is really a good momentum in the business in general. But of course, more importantly, for I-Tech is to get into additional customers and into their different products they are using for antifouling. And that is also ongoing and we see that, that will continue going forward.

We also see that, of course, the EU process now, as we said, the public consultation will end in November, but then the committee will consider the input, et cetera. So we are really seeing that it will continue to absorb attention and resources at least for the first half of 2025 as well.

And then coming back to operational improvements.

[Magnus Henell, executive]

Yes, we've been discussing this operational improvements for quite some time for the ones of you who have been with us more historically, you know that we have one main supplier of the Selektope product today. We have had suppliers in there for more ad-hoc production, but as you also know, we have continuously since last year, I would say, working to increase both that we have redundancy in the normal production.

We don't want to go with only one producer, but also, of course, to make sure that where we can get the most beneficial pricing and you need to have several producers in line, so to speak, to actually have the best pricing. And what the status is right now is that we have production up and going or all the way into up and going within weeks with actually three suppliers.

So our main ambition is from next year and onwards, we should have at least two of them should be our standard suppliers, continuously supplying material to us. And maybe with the third as a backup or we actually use all three of them. It depends on also the market -- continued market penetration of Selektope, of course.

But -- and that we should start to see effects mainly already late this year, i.e., Q4, but at least during the first half of next year, we should start to see an effect of these that we introduced new supplier with a lower costing, but also hopefully, some negotiations with the existing suppliers.

So all right. Then I'll leave to you to wrap it up.

[Markus Jönsson, executive]

Yes. So this was actually the presentation, and we look forward now to a good dialogue, you could say, in the Q&A session. But as we said then, another solid quarter. And then for me then, personally coming in, it is fantastic to start working with I-Tech and the team here, right?

So I mean, there is momentum in the current business. There's plenty of growth opportunities, et cetera, and also the drive and the will to look for new opportunities, et cetera. So we're really looking forward and to, of course, on one hand then take on the challenges that we see in the registration process, but also continue working with developing the business going foward.

So now we open the Q&A session.

[Operator]

[Operator Instructions] We have received a number of questions. So I think we should go straight ahead. What do you see as the main challenges and opportunities when it comes to broadening your company's portfolio to more application areas?

[Markus Jönsson, executive]

Yes, I mean, these are classical business development challenges, right? So of course, there is investment upfront, and Magnus touched upon that in cost, right? It will put sort of a little bit of a burden on the results.

And of course, there is -- was, as with any business development initiative, there is risk involved, right? So we really need to carefully consider and evaluate before making major moves, right? And with -- as I said, we need to have a balanced pipeline of, you can say, smaller bolt-ons and things that we could commercialize fairly quickly, but also then a little bit bigger initiatives that we are working. And it could be both organic or sort of acquisition-based growth going forward. So it's important.

[Operator]

With your extensive experience in the international markets, especially in Asia, how do you see the opportunities for growth in these regions for Selektope and other potential products?

[Markus Jönsson, executive]

Yes. I think, as we outlined a little bit in the beginning of the presentation, the opportunities are still vast, right? The global fleet of ships today is around 110,000 and -- now 110,000 and then we're talking really about big ships, right?

We're not talking about the private yacht market or smaller fishing boats, et cetera. So that is, you could say, on top opportunities as well here. So -- and as we said also, the majority of this opportunity is in Asia. And also, I-Tech historically have been very strong in the U.S., very strong, but sort found its first in routes into the newbuild market and sort of the outfitting market for new building of ships. And the penetration in the dry docking segment is still fairly low. So that's actually where we're going to focus, and we are focusing and also where we are seeing the results now as the growth continues. So, yes.

[Operator]

In the report, you state that the dry docking segment is becoming increasingly accessible, thanks to the excellent formulation development work in R&D. Could you elaborate on what you mean by that?

[Markus Jönsson, executive]

Yes. I can say that the antifouling products, although you could say it, generally, you could say there are some, some broad technology paths, right, but formulations are unique in a sense, right? So different customers' formulations look differently and sort of the compatibility and the behavior of the different ingredients are always impacted if you make changes.

That's also why the product -- new product development cycles for our customers are so long, right? And also, when it comes into coating of shipping chips, et cetera, you could say the potential consequences of a failed product can be quite severe in terms of fines and additional costing, right?

So there is a risk adverseness and you want to be really sure when you develop products that the system is working. And the capability that I-Tech has built up and the recent past year is really to strengthen, you could say, the innovation and product development skills and assets in the organization, right?

And now you can see you can meet the customers more eye to eye and discuss formulation development. And there has been technical challenges and more specifically in the dry docking segments that we now see quite positive signals that we can be overcoming them going forward.

[Operator]

You see steady progress for approvals in the U.S., Malaysia and New Zealand. Can you elaborate a little on the significance of these markets.

[Markus Jönsson, executive]

Yes. I mean, if we can start with the U.S. market. As maybe you saw it was not as a really big country when it comes to new shipbuilding or sort of maintenance of the commercial shipping fleets, right? It's still, however, a quite big market when it comes to leisure crafts and private boats, et cetera. So there is, of course, that market opportunity that we can see in the U.S. market.

And also Southeast Asia is becoming sort of increasingly relevant also from a dry docking perspective. So these are interesting markets that we would like to access going forward. So although not the biggest but still quite interesting opportunities.

[Operator]

And Markus, as you enter I-Tech with new eyes, what is your take on the EU registration process?

[Markus Jönsson, executive]

Yes. I alluded a little bit to it here in the presentation as well, right? This ironic twist of fate sort of that in one regulation, you can inject it into the human body and in the other, you want to ban it for health reasons, right, because you're using it into paints under ships.

So -- but I think we are, in general, positive and so that we do feel the support from the industry and from the stakeholders here. We know in I-Tech, of course, that the Selektope technology is very relevant and really it could be one enabler to solve, you could say, the energy transformation challenge that shipping industry is facing, right?

And I think what we believe here that the biocide committee has not considered is, again, you could say the application of Selektope, where it is used and sort of the implications of that. But also what is the implication if you actually balance that? How much more CO2 will be emitted if you don't have effective antifouling?

And you have to, of course, compare Selektope to the other solutions that would be available in the EU going forward, right, and see can we live or not live without or live with Selektope going forward.

So we remain hopeful. And I mean, the way that legislation works when it comes to chemical safety is that the burden of proof is on the industry, right? So we are guilty by suspicion. And of course, we can generate additional data that can actually prove that there is no concern when it comes to endocrine destruction. And so there is also a development of the technical size of testing on board.

[Operator]

You're working to establish a project pipeline. Could you give us some indication of what you're looking for in terms of niche, maturity, size, et cetera?

[Markus Jönsson, executive]

Yes. I have to elaborate a little bit more. But it is really, you could say, that either complementing technologies that you could say, would fit very nicely into the value that Selektope and I-Tech is bringing to customers today within antifouling or then firsthand adjacent markets where the knowledge and the capabilities that we have would fit really well with a new customer segment going forward. These are the prime things. But we will consider also, you could say, broader opportunities going forward.

[Operator]

Here's another one. Congratulations to the good results. I noticed that the cash position is very healthy. How do you intend to use this cash?

[Markus Jönsson, executive]

Do you want to start or...

[Magnus Henell, executive]

I think, I can start. Of course, our plans is and have been for quite some time to actually reinvest a certain amount of this cash into the company, into the business development activities, et cetera. But then, you also know that we launched dividend plan last year. And although no firm decision is taken yet, I think, we strongly will consider also another dividend when it comes to the May annual meeting. So...

[Markus Jönsson, executive]

Yes. So definitely, we will find good use.

[Operator]

When can we expect to see a visible result on the gross margin from your new supplier?

[Magnus Henell, executive]

Well, as I said, there is a possibility to start seeing some visible results already in Q4, but the firm ones should come first half next year, I would say, and then move forward, of course.

[Operator]

Do you expect your elevated cost due to the regulatory process to be in line with your previous quarters going forward or can we expect cost to increase or decrease?

[Magnus Henell, executive]

That's a very good question, and you can also ask how long is the line. But we spend what we need to spend. And if that is in line with the previous quarters, as it actually seen, because we have had a quite a stable to -- you have a media spending of SEK 1.6 million per quarter the last three quarters. But of course, if we deem it necessary to spend additional money in order to sort of take the last part of the way balance to gain in our favor, then of course, we will spend it. I don't foresee in the upcoming quarters that it will go down. But there is a possibility that we need to spend more, but nothing that I have on top of my mind right now.

[Operator]

Your customer base is diversifying, which is promising to see. Do you expect CMP to remain your largest customer in the long term or do you see potential or the other customers to overtake CMP in terms of sales?

[Markus Jönsson, executive]

Yes, there is always this potential. You can say that CMP has a good head-start since they were really an early adopter of the Selektope technology. So they have worked with this technology for a number of years now. They know it quite well. They know what the value is, et cetera. Not to say that we still have growth potentials. We have significant growth potentials with CMP. So it's really hard to say then how this will shift. But for sure, we -- the target is to continue the diversification and there is growth potentials but a lot outside CMP.

[Operator]

You mentioned in your report that the team is gearing up for business development activities and new opportunities. Could you please elaborate on this?

[Markus Jönsson, executive]

Yes. I mean, as I said, the work has already started when I joined, and now we will sort of accelerate it as well. I mean, we will look at bringing in select additional capabilities within the business development field. And we would start, you could say, to look also a little bit broad on opportunities, right? But there are already very interesting initiatives ongoing here within I-Tech in the business development area. So we also want to nurture and continue to qualify these ideas.

[Operator]

You also mentioned in the report at the regulatory process are ongoing in the U.S., New Zealand, and Malaysia. Could you give us some more detail on this?

[Markus Jönsson, executive]

Yes. The issue with the regulatory process, as said, is that they are really notoriously intransparent in terms of timelines. So we, of course, know what is expected of us, but it's really hard to say how long the authorities need to know to process and sort of come back on specific submissions.

So I think we are stating now in the report, we are quite confident that we will move ahead in Malaysia then in the first half of 2025 sort of how this is developing. But for the other countries and regions, it's really too soon to say sort of a more firm time.

[Operator]

A question for Magnus. Apart from the EU registration expenses, can you give more information as to which costs go through the specific line item called other external costs? It will be useful to know in order to see potential operational leverage in this line item as the company grows.

[Magnus Henell, executive]

Well, as we have three main line items with the product cost, the other external costs, and the personnel cost, it's quite easy actually to elaborate on what it is. But of course, we have all the general overhead costs with our premises, our laboratories, we have all the travel expenses that we are and we are increasing a little bit on travel expenses as well.

All external consultants that we bring into the table. We are today, I think, we are 10 headcounts employed in the company, but we are 15 headcounts, not full-time 15 headcounts, but even though 15 headcounts that are working with the company and also some of these costs come into the other external costs. So actually, you should see it's everything that is not personnel or production costs. And depreciations, of course, which are outside. Yes.

[Operator]

How do you plan to finance future business development and acquisitions?

[Magnus Henell, executive]

Yes, that's a very good question. And it really depends on if we're having sort of organic business development that we will fund with in the ongoing results, so to speak, then maybe focusing on Selektope or Selektope adjacent things. But then, of course, if we are looking into a more acquisition-related growth, then, of course, depending on the size, we could have some quite nice acquisitions already with the cash balance. But then, of course, we will go out and look to the most favorable terms of financing this either through banks or and/or equity.

[Operator]

Will Selektope be allowed for sale in EU during appeal process post a potential negative outcome from ECHA Spring 2025?

[Magnus Henell, executive]

No.

[Operator]

All right. Are there any examples of ECHA pursuing other regulatory bodies like Korea or Japan to influence them to take similar position on biocides that have been permitted by ECHA?

[Markus Jönsson, executive]

No, we have not seen cases where ECHA then is trying to influence other regulatory bodies. I-Tech will, of course, work with all regulatory bodies in the countries sort of interest, right, going forward, and mitigate whatever sort of we see upcoming that could be similar to the EU process, right? So for sure.

[Operator]

Moving on to the last question here. Regarding the outsourced production, do you have a redundancy in case you would have problems in production?

[Magnus Henell, executive]

I assume that redundancy we're having with multiple producers, of course. But then, if you talk about redundancy, we have some buffer inventories in Sweden that we can use for a limited time period. But the redundancy is really built up by having different suppliers, I would say.

[Markus Jönsson, executive]

And definitely will be strengthened, I think, with the initiatives that are ongoing. So there will be much more robustness in the supply.

[Operator]

That is all the questions we have. So thank you so much for presenting here today, and thank you all for tuning in and sending question, and I wish you all a pleasant week.

[Markus Jönsson, executive]

Thank you very much, [indiscernible]

[Magnus Henell, executive]

Thank you very much. Bye-bye.