Nexam Chemical Holding AB

STO:NEXAM

Earnings Call Transcript 2024-Q3

[Mattias Vahlne]

Clean tech company, Nexam Chemical Holding released a report for the third quarter of 2024 earlier this morning, and I'm honored to be joined by CEO, Ronnie Tornqvist; and CFO, Marcus Nyberg. Please, welcome. And how do you do guys?

[Ronnie Tornqvist, executive]

Thank you, Mattias. Yes, we're doing good here. Thank you.

[Mattias Vahlne]

Great to hear. You will soon be giving us your presentation, but could you first start off by describing the market temperature you're meeting out there?

[Ronnie Tornqvist, executive]

The general market temperature in the industry is a little bit like this season, not really warm, and tendency of cold in the morning.

[Mattias Vahlne]

Okay. Thank you. I guess that describes it very well. I want to remind the viewers that you can ask your questions in the live chat next to the video. And you will now be given the opportunity to present the quarter and I will be back for the Q&A also joined by equity analyst. So please go ahead, Ronnie.

[Ronnie Tornqvist, executive]

Thank you, Mattias. So welcome to Nexam Chemical's presentation of the third quarter this year. It's myself, Ronnie Tornqvist, and my colleague, Marcus Nyberg, CFO. Next slide, please. There, we will talk about the current situation, things that stand out is that we have an increase in contribution margin that continues since quite a while now, and we have a huge focus on market development to grow our business. And also we said that we're, of course, not happy with the sales level that we had in this quarter, but it's a temporary setback, I would say, related to one occurrence.

So next slide, please. What Nexam is about, a short introduction for the ones who are a little bit new to this. We work with plastic materials, providing additives to this industry. We're a clean tech company based in Sweden. We have a lot of patented solutions to make plastics better and improve them as a technical building block in our society, and we have a lot of solutions and patents on how to recycle plastic materials to get rid of the huge environmental programs that are related to plastics.

So if we take the next slide, please. We have a set of basic chemicals and other additive materials that we engineer to materials that are very concentrated and are used in a wide range of applications. It ranges from small components, such as micro chips, ordinary plastic components up to hot components that are included in jet engines, for example. And we have strong focus on everything that is driven by the global megatrends towards sustainability. And for us, this is mainly activities that relate to wind energy and low carbon energy generation and also waste handling, in particular, recycling of plastics to improve that.

Next slide, please. We have done a strategic retake approximately a year ago and set the company into a new direction. This baseline that has been built up is still driving our activities towards being very, very market-oriented while making full use of our core competencies, patents and know-how. We're much of an R&D-based company, although we have significant production and commercial deliveries. Where we are right now is that we have fulfilled, you can say the 3 most important cornerstones for the first year, which is, on one hand, to pull through a quite extensive savings program in order to put us on a more convenient breakeven level.

We have a much sharpened commercial strategy and actions and we are now able to fund our ongoing operations with our own cash flow. So with those cornerstones laid, we can now continue to work on executing the marketing and sales strategies that we have in place.

Next slide, please. So also in the aim of introducing, we have segments that we have identified based on the value that we bring to our customers. One area is lightweighting and it is really about providing additive solutions to make better foam material from plastics. The big area of application right now is in the material PET, same as in drinking bottles but to make -- use that material to make a structural foam that is used in for example, the wind blades of windmills. That is it's a very narrow product segment. It's very sharp and it -- it requires continuous R&D to move forward with new advanced applications in that area. We also have the area of high temperature. You can say where Nexam started.

We make additives that make the most temperature enduring plastics, even more temperature enduring. And that is used then in jet engines microelectronics that can reach very high peak temperatures and also now starting to look into other electronic areas that is relating to fans charging, for example, where high temperatures can be attained sometimes. We also have the product area that we named aesthetics, which is really to put the right look on plastic materials for their applications.

It's color, but it's also the durability of the plastics when they are in use so that they look good for a long time, we can say and function well for a long time. Then we work obviously with recycled materials, which is kind of our specialty here, but we also work with customers that use virgin plastics and an increasing interest also from bio-based plastic materials in this segment. We have taken all the specialties and know-how from these 3 segments and put it into the area of recycling.

It is growing and hope for growth, and there is a lot of initiatives around the world to grow the recycling of plastics for obvious reasons. And we have developed and are continuing to develop an additive portfolio that makes recycling more efficient and better. So I want to spend a couple of slides on that segment. So we can take the next one. The recycling today is approximately 10% of 400 million tons plastic produced in the world. It is predicted that in a 10-year period, plastics consumption in the world will increase by 50%, which is worrying, but it's also predicted that the recycling should increase much more than that. so that we get a better world situation.

However, when you do recycling, you must -- you can do simple applications such as plastic bags or other simple elements. But we have -- we are in the area where we try to increase the value of that recycled plastics and make it something else. So either by making higher value applications using recycled materials or using recycled materials to make the same applications, but to improve the cost profile of the whole project.

Maybe we can move on a little bit on the global picture with the next slide. So you see here a distribution of the produced plastic in the world is 400 million tons. Approximately 8% of those are recycled mechanically, meaning that you mill them down and make a new plastic material of them and use it. And a small fraction is recycled by chemical route so that you break them down again with new plastic from, you could say, broken down in molecules, which has high hopes for the future, but very little practical implication and there is some biomaterials that is also developing.

But the big chunk of material is virgin plastics and the biggest material segments are the polyolefins, which includes polypropylene and polyethylene and PET. So you know them from plastic bags, ice cream boxes and drinking bottles and they consist about 50% of the plastic consumption in the world.

If you take the next slide, you see that the patented unique solutions that we have at Nexam target exactly these high-volume materials, the polypropylene, polyethylenes and PETs. So when we do this, we attack the largest material streams, the one that are the most relevant and the one that are most likely to be recyclable in the system as it's built up.

Next slide, please. Okay. A short update on our business. We have, as I said, a little bit short top line this third quarter. A big reason for that, if you compare to earlier quarters, is the seasonal effects due to summer vacations. But there is also some call-offs from some of our biggest customers that have been very short in this quarter due to their market conditions temporarily which hit [indiscernible]. On the other hand, we have a lot of new sales and new customers and new applications that compensate for that to a large extent, but not fully.

We also have a gross margin that has increased from 43% the same quarter last year to 47% this year. Marcus will come back to that point. Our EBITDA continued in spite of the low sales to be quite positive with SEK 1.2 million compared to SEK 0.7 million same quarter last year, with higher sales. Our cash flows from operations increased a bit also in relation to last year, although we had some problems with a couple of invoices that were pulled over the quarter limit, but that was no big deal. In sum, you can say that we have a very safe and sound economic situation to base our business on and we have an unused credit facility with our bank of about SEK 20 million that we very seldom use anything from.

Other news that has happened during the quarter that we got an order from a long-standing customer in U.S.A. worth SEK 17 million over 4 quarters. And we got a first production order to a customer that we worked with in the area of structural composites developing for more or less 2 years, additive product for them that is now finally going into production. And we can expect this to become one of our biggest customers in the consecutive years, '25, '26. So we're really happy for that news.

Also, we are increasing the pressure on the market, more sales activities, we had unexpectedly low sales in Central Europe. By that, I mean, the Germany, Austria, Switzerland, Benelux countries. And we are compensating to that with having really accomplished polymer specialists now in the team who works as a business manager for us. He is handling the ReColour Plus segment and this market in all segments. We had also press released very early in this quarter, a few new PET sheet recycling customers around the world, and they are ramping up production, and this is also very promising for the future.

And we have new production start going into production relating to the latest press release during the fourth quarter, ramping up going forward. So that's more or less the situation right now. A lot of good things happening on the business development side, a little bit weakness on the top line, but we have our new stable financial situation that can also handle a little bit of sales low light.

Next slide, please, where Marcus will come in and take over for a few slides, and then I'll be back.

[Marcus Nyberg, executive]

Thank you, Ronnie. The first thing we would like to look into will be the margin and margin improvement. We're nearly up to 47%. It's more like 10% more than we were actually 2 years ago. And this is something that we've been putting a focus on and thus on the daily work up with sourcing, optimizing the recipes and also in-sourcing production. And now we are on a stable level that can be expected going forward.

Okay. Next slide. And on this slide, we would like to show you that we are much more stable level now compared to 2 years ago when it comes to our customer base. We have much more customers now than we had 2 years ago. Meaning that, we really are on this new platform. And this platform will allow us to grow further actually and also have reduced our risk for more drop in sales.

Okay. Next slide. And here is also another area. I think that Ronnie has mentioned about, we are in a much more stable financial situation now. And this is our cash flow and how it has improved during the last 2 years. And this is also what we expect going forward that we will continue to be stable, and this is something that we've been working quite a lot on and we'll continue to work on. So that is also what to be expected going forward.

Okay. Next slide. And on the next slide here is more or less going into the details that we already have mentioned. One thing that I just want you to highlight here is that we have another SEK 20 million in the credit facility from our bank that's not used. And that could be good to keep in mind because you don't really see it in the figures otherwise.

Okay. Next slide. And this is also something that we've been working on for quite some time, meaning the scalability. We have invested a lot both in terms of machine but also in terms of organization and so on. This actually means that we can double our volumes without adding more investments and maybe just adding a few people in operations. And we actually also have tested the system because we have single months where we already are up to double volumes.

Okay. Next slide, and I will actually hand back to Ronnie again.

[Ronnie Tornqvist, executive]

Okay. Thank you, Marcus. So stability and so on. There has been a lot of interested investors and other people that are interested in Nexam that would like to know a little bit more about what is behind in the projects.

We sometimes do press releases when we have new businesses going into production, but it's important to understand that there is a lot of work going on behind the scenes. We have -- if you look at it as the sales funnel going from, let's say, customer interest, first contacts, starting to know each other and having an interest as a opportunity, there is a fairly long process that follows this until you have a running commercial business.

And we've been refining this process over the last 10 years, how we handle it at Nexam. We've been doing it in the high-temperature field for a long time, and we've done it in the lightweighting segment and so on. And now we are applying that into recycling. So you could say that you have this drop off, you could say at each stage, going from initial interest. This looks interesting to a, let's say, early evaluation stage, usually, together with the customers and our R&D, looking at the technical and commercial feasibility in early stage.

Oftentimes, you need to either develop the customers' product to something else or our additives to something else in order to reach the goals and they will go through this development collaboration. And then you get into proof-of-concept stage, you also go into pre-production trials and so on before you launch the product. And then you have the ramp-up phase. Depending on business, this can take a different a long time, but I think a good example is the latest press release. It's a product that is now in the launch phase.

And we started 2 years ago and have done significant work in all of these steps. But we follow our plan, and this is also an aspect of scalability. We know how to handle this process, and we are used to working in this. So we have our toll gates, we have our follow-up on the projects, and we know how to handle this. Also part of the organization's ability to take on bigger tasks. And that's also why we are adding a little bit of sales force in order to have more of these customer interfaces and continue to grow the feed on the top in order to grow at the bottom.

Okay. Next slide, please. Okay, the business outlook. We see that there is a little bit cold market out there. I've seen on other companies reporting now also with a little bit weaker sales into many industrial segments. We also feel and we notice hands on, right, that some customers have a little bit of a hard time right now, and it can have many various effects that leads to this, and we have wars going on in the world and so on. But we are confident that what we just did, which is replacing a temporary market weakness with a lot of new projects and new sales, we will continue to do so.

And when the let's say, we'll start to turn better again, that will, of course, multiply the effect for us. So we feel very confident for the future. And we also feel that our stable financial situation now gives us a really, really strong base to when we reach growth also to profit on it. The commercial strategy that we're running is very well focused, and we see it multiplying in the company. It's kind of getting into the walls. Everybody in operations care about the customers much more nowadays.

We do the R&D projects that we work on are very, very customer focused and so on. So we see that this is going in the right direction. And we do set ourselves apart from our competitors in all markets, also in, let's say, the more mature market of aesthetics, we set ourselves apart with the unique selling point by being so specialized in recycled materials, which also helps other type of projects in that segment. And this is a really strong point that we have in our, let's say, customer collaboration.

We have good -- and we were quite happy to get the American order in now that secures us for another year and the deliveries of those high-temperature additives. We just had our new business manager, our new German colleague, Johannes Lorenz in place, who will also be in the management team, and he has started really well. And we are also happy to see after so long time that the number of recycling customers are multiplying. They're not quite up to volume yet, but it is moving really well in that segment, and that's something we're happy for.

So we're looking quite optimistic towards the future. And regardless of how the general economy is moving, how the temperature is, even if it becomes more winter, we are quite happy with what we do is generating results for us. It's a long time, the right thing to do, and we can do it while financing our own activities on the road.

The next slide, please. Also, to round up a little bit, we are in business areas, which have a huge growth potential. Wind energy might be a little bit weak for the moment right now, but it should be an up-and-coming market. It's predicted to grow quite a lot, 6% per year. We are in the recycling field that is Juvenile business, you could say that is still not quite mature, but it's growing and growing and the initiatives around the world are fantastic in this field. So it is growing. So we feel that we're in the right business segments to also join the movement forward.

Next slide, please. So why should one invest in Nexam? A bit of a sales pitch, I take the opportunity here. Like I have done and everybody else in the management team have done and all the Board of Directors, well, we have very ambitious goals to perform on financial KPIs. Marcus showed some development of some of these KPIs, and we will continue to be very focused to do so. We are happy that we can live on our own cash and that we are in a stable position for that, so we can continue to do also, let's say, the right decisions here as we go along. We have good improvement of margins and expect to be able to at least maintain the level that we are at right now. It's a question of balancing, of course, if you are flexible to also accept a little bit lower margin business, you can also grow quicker. And -- but we also have our niche products where we can grow our margins even more. So we think that this is a good level where we are at right now.

We have clean tech solutions that are driven by global sustainability trends that we believe will be persistent over years to come. The thing that is driving our business, though it might be interesting from a sustainability perspective, it's really good business cases for the customers, and we're very focused on doing improving our customers' business. So that's another thing. We have done the investment, so we can double without doing more.

We have a good organization that works well now, although we have went through this fairly extensive saving programs. We have not lost the competencies and the ability to grow, follow-up projects, do the right thing in R&D and sales in order to support customers. And then on a -- like from a bigger perspective, we are in a situation that could multiply in technologies or geography through acquisitions when we come into such a position.

And you can also say that being a base company with some growth potential, we also have some kind of opportunity in the recycling business to really make a difference and have something enormously speculatively large going on there in the future, but that's, of course, not known now. So all of this put together, we feel safe and sure about the future. So everybody who worked here invest in our own company, and we like others to do so, too.

Next slide, please. That was it. We are here. We think we are part of the future of the planet and the future of the plastic, fixing the problems and improving the potential to make more of it. And we have a strong pipeline portfolio to protect our position in this. So with that, I would like to thank you for your attention and move on to the questions-and-answer session. Thank you.

[Mattias Vahlne]

Thank you so much, Ronnie and Marcus. And so let's start off. A positive EBITDA of SEK 1.2 million compared to SEK 0.7 million in the same quarter last year. How important was it to you guys to beat that number?

[Ronnie Tornqvist, executive]

Yes, I can say that. We want to beat all the numbers every time actually. So we are very competitive guys and girls here also -- but it's also -- it actually showed that we've been doing the right things a year ago. We did a savings. We were focusing on the cash but still not taking away the future of the business. So we are -- even if we are a bit disappointed with the sales, we are quite happy with -- that we still compete last year. in terms of profit.

[Mattias Vahlne]

And by that, I would like to hand over to equity analysts. Henric Hintze, could you please go ahead with your questions, Henric?

[Henric Hintze, analyst]

This is Henric with ABG. So you mentioned that some larger customers within Performance Chemicals ordered significantly lower volumes this quarter than usual. And you also said that you think this is a temporary effect. Could you explain what gives you the confidence to say that it's temporary?

[Ronnie Tornqvist, executive]

Because they are running their production and there is a need out there for the materials. So there is movement there. and there is long-term growth in this segment. So we do not see that it stopped. It's just like reduced and it seems like it's temporary, and they are still putting in efforts and so on to come back on their sales. So that's why we say it's temporary.

[Henric Hintze, analyst]

All right. Very good. So the contribution margin in the quarter was, I think, the best since you started selling significant volumes ever. Could you tell us a bit more about what enabled you getting here? Were there any quarter specific effects? Or can we expect this level going forward?

[Ronnie Tornqvist, executive]

I'll start, and Marcus, you can fill in maybe. I think that the improvement over the past few quarters was some small steps going upwards, and that's reflecting let's say, the continuous improvement work that goes on. We're looking at recipe cost optimizations as a one big driver for this. We do not think that it's product mix compared to the quarters before. It is much more related to actually changing a little bit small things in operations in purchasing recipe development and operations.

And I think, yes, you can expect this level. We I don't know. But in the coming few quarters, I would expect us to be in the range between 46% to 49%. And Marcus, you can fill in that?

[Marcus Nyberg, executive]

That's what to expect. And there's nothing specific in this quarter up or down. So this is a quite stable level I'd have to say, going forward.

[Henric Hintze, analyst]

Okay. Very good. Could you give any more detail on how much new customers are contributing to sales in the quarter and maybe year-to-date as well compared to how much existing customers were down on sales?

[Ronnie Tornqvist, executive]

Can you start and I can...

[Marcus Nyberg, executive]

Yes. But I would like to say that to give you kind of a rough number this quarter to new customers, let's say, SEK 5 million, something like that is for new customers, something like that in that range. And it's also to tell it what you mean by new customers. It can also be a customer where we are selling new products to at least SEK 5 million, I would say.

[Henric Hintze, analyst]

Yes. Okay. Very good. So you also mentioned new business manager here, Johannes. Could you just tell us a bit more about this mandate and the motivation behind hiring him?

[Ronnie Tornqvist, executive]

Okay. The motivation was twofold. It started out really that we needed more technical experience and know-how in the field that is between the aesthetics or Performance Masterbatch segment and the Chemical segment, someone with -- we wanted someone in the management team with their feet in both camps, you could say, from his background. That's how it started. And on the same time, we felt that our presence in Germany and countries around it was a little bit weak, and we were lucky to find the right technical person, so to say, with commercial acumen that happened to come from that region.

So it was spot on what we were looking to. We were kind of solving two possible recruitment in one. And -- but he's really is very experienced in the field of, let's say, ordinary plastic production, but he's also has a long experience in the field of the up and growing recycling market from the machine side. The polymer engineer from IKV in Aachen which is one of the best institutes in Europe in this field in general plastics field. So I think we were lucky with the right person, and he's in the management team. He reports to me together with the other two business managers that we have complementing a little bit a technical hole in our portfolio, you could say, and also a hole on the market presence.

He will not be alone. When he works in Germany, he will be supported by our Hungarian, Polish and Swedish organizations, and he will be integrated, of course.

[Henric Hintze, analyst]

Yes. Okay. Then finally, maybe if you could give us any more detail on the large, high temperature order and the structural composites orders that you announced in the quarter?

[Ronnie Tornqvist, executive]

Yes. Okay. The high temperature order that came in. It is -- you can say it's a continuation of what we are already doing in North America for high-temperature composites, they placed a 1-year order to secure volume going forward and that volume remains similar to what it has been. It's based on, in the end, state contracts, right, in America. So it's something that never -- it doesn't fluctuate very strongly, you could say. And therefore, they are able to put these long orders in.

And -- but it's good because it gives us a safe baseload, these type of orders going forward, especially for the Scottish factory where the material is produced. And the second structural composites order that came in is quite confidential due to the market situation of our customer and to be honest, a little bit for us too. So we have not been allowed by them to talk about many details about it, but it's right in the middle of the activities where we are good, it's additive, it's for composite materials and it's international business, you could say. So it's good. It complements what we do otherwise. And we -- some of the raw materials are already rolling in our production going to other additives and so on. So it's a good fit.

[Mattias Vahlne]

Okay. Thank you so much, Henric Hintze, ABG Sundal Collier. So if we could move back to the project pipeline, you showed us the kind of sales funnel there. Could you say anything of how many of the projects goes all the way down and how many get sorted out on the way?

[Ronnie Tornqvist, executive]

Like this, in high-temperature and lightweighting, it's possible to answer that question. And the drop-off rate is fairly low because based on experience, you know this is likely to be a success or not. The customers are often quite stable. And we know whether we have a chance or not. So the drop-off rate is quite low in those, but some of them do in -- so I don't know, 50% to make a house number.

This proper industrial scale recycling, but it's definitely lower. We have to attack much more customers to feel and -- we also get a lot of spontaneous context coming from the market to us that hear about our additive, various fairs and exhibitions and so on and or through internet and they might not at all be suitable for our type of products.

So it's a higher drop off, definitely. But the -- it has been almost frustrating that not enough of them have resulted in launches and so on over the last year, but now we do see that there is quite a few that will land there.

[Mattias Vahlne]

Okay. Right. Thank you. And if I raise the question again regarding the lower volumes from your -- some of your larger customers, for how long do you foresee that they will stay in these lower volumes?

[Ronnie Tornqvist, executive]

That's very, very difficult to say. And we -- we cannot really know because it depends on their -- It's really not orders. It's just call-offs of a running business. And so how low will their customer -- the customer's customer be and so on. It's really difficult to tell how long it will be. I do think that we will continue to see effect in quarter 4 from this. Hopefully, not as bad as in quarter 3, and then I guess it depends on the, let's say, business temperature out there in these various segments.

The only thing we can do is to work on what we can have an effect on, which is new businesses growing our customer portfolio and growing our product portfolio. So that's what we focus on. And then yes, we follow what happens, so to say, on the general market.

[Mattias Vahlne]

I see, yes. And if the gross margin really improved in an interesting way. How much higher can you go here?

[Marcus Nyberg, executive]

It was much easier to answer this a year ago. Then we had all activities in place to increase it. But I think we know much on a pretty stable level then depending on the product mix and current custom mix, I would say, maybe not 1% or 2% maybe, but also can maybe drop one. But I think we're on a pretty stable level. And so I would say that we are pretty much where we are quite satisfied actually with this margin.

[Ronnie Tornqvist, executive]

I would say like this I don't expect it to drop because we still haven't implemented all the activities. So it is basically going up, but then you can have product mix issues and so on that will make it push it downwards a quarter or so. But I think we can be around here and that we -- around that can build a healthy business with the -- what Marcus said, 35% bottom line when we achieve growth, it will be going to a much healthier business.

[Mattias Vahlne]

I have a question from one of the viewers. He asked, what does the revenue forecast look like for the current quarter?

[Ronnie Tornqvist, executive]

We don't do forecast.

[Marcus Nyberg, executive]

We don't do forecasting net perspective...

[Ronnie Tornqvist, executive]

Let's say like this, we follow the forecast every week deeply. And even for us, it varies quite a bit from week to week where it will end. So it would be very duty to stand here and say where it will land.

[Marcus Nyberg, executive]

Because we don't have the vacation period. that we had in the third quarter. And that's -- even though they are a little bit close around Christmas, it's not -- it's less weeks.

[Ronnie Tornqvist, executive]

Yes. It's more the same to compare to as this fourth quarter than to this third quarter. Yes. From that respective, yes.

[Mattias Vahlne]

Okay. And one last question regarding your project in India. What can you tell us about this development?

[Ronnie Tornqvist, executive]

India is, let's say, higher up in the funnel still. We do have technical approval from several customers. and see some challenges to move it fast forward to actual launches and production. We do have one customer so but it's not significant enough to talk about the numbers. It's going faster in some of the neighboring countries to India, India right now. But the potential in India, on the top of the funnel is fantastic. So when it finally comes down, it will be good, but I have no prediction on when that will happen.

[Mattias Vahlne]

Okay. And you just a week ago, you sent out the message about your SEK 17 million order from the U.S. When can we expect new large orders in your news flow?

[Ronnie Tornqvist, executive]

I don't know.

[Marcus Nyberg, executive]

It's seldom that we -- because that's a running business and they place a 1-year order going forward. Most customers do not do it in that way because they have more fluctuation than this customer has. So they place it on short term, maybe quarterly or maybe a maximum half year level. So that is unlikely that we have one with an exact number. It's more likely that you will hear more, let's say, really interesting recycling projects or other that dropped down from the -- in the funnel to the launch phase, you could say.

[Mattias Vahlne]

Okay, and I will wrap it up. I want to thank everyone that has been viewing. And of course, thank you so much, Ronnie, and Marcus.

[Ronnie Tornqvist, executive]

Thank you for great organization. Thank you, Mattias.

[Mattias Vahlne]

And we're looking forward in getting the full year report within 3 months. Thank you.