EcoSynthetix Inc

TSX:ECO

Earnings Call Transcript 2020-Q4

[Operator]

Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the EcoSynthetix 2020 Fourth Quarter and Year-end Results Conference call. [Operator Instructions] Listeners are reminded that portions of today's discussion may contain forward-looking statements that reflect current views with respect to future events. Any such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. For more information on EcoSynthetix's risks and uncertainties related to these forward-looking statements, please refer to the company's annual information form dated March 3, 2021, posted on SEDAR. This morning's call is being recorded on Thursday, March 4, 2021, at 8:30 a.m. Eastern Time. I would like to now turn the call over to Mr. Jeff MacDonald, Chief Executive Officer of EcoSynthetix. Please go ahead, sir.

[Jeffrey Douglas MacDonald, CEO & Director]

Thank you. Good morning, and thank you for joining us today. Yesterday afternoon, we released our 2020 fourth quarter and year-end results, which you can find on our website at ecosynthetix.com. You can also download a copy of the slides that accompany today's call from our website or alternatively access them on the webcast. Despite the incredible challenges faced in 2020, our financial results held up quite well from a bottom line perspective. We generated positive cash from operations for the second consecutive year. Adjusted EBITDA was just below breakeven during the quarter. We delivered these results despite macro demand pressures in paper and paperboard, which weighed on our sales volume. The deterioration of the macro demand for graphic paper was further exacerbated by work from home and school closures during the pandemic. At the same time, our average selling price was impacted by low oil prices and the resulting historically low styrene-based latex prices. In short, our strong financial standing and our ability to endure 2020 put us in a great position to emerge from the pandemic and deliver on the potential of our biopolymer platform with a return to growth. The value of our bio-based solutions in today's market is stronger than ever before. Our solutions address multiple multibillion-dollar markets. Large organizations are increasingly pursuing strategies that emphasize the importance of healthier alternatives and reducing their carbon footprint. We deliver on both fronts. We can help large organizations with their climate change agendas by making meaningful reductions in their carbon-based footprints through the use of our bio-based ingredients. What consumers, retailers and even investors are increasingly asking of companies is exactly what we do and what we have been doing as a business for 15 years. The market is moving to us, and we are ready to deliver. As an example, IKEA published its 2020 Sustainability Report in January of this year. In it, they highlight their corporate targets to become a climate-positive business and how shifting to a circular business model supports that objective. The report highlights a series of important steps they are taking including steps that require changes within their supply chain. They highlight that fossil-based glues for their wood-based products represents 6% of IKEA's total climate footprint. That is a big number in a category where our solutions could deliver a meaningful impact. The report identifies fossil-based blues as one of the main areas where movement can be made, and we agree. Our bio-based resin DuraBind targets the wood composites market. Our first customer, SWISS KRONO, has qualified DuraBind across multiple production lines. In addition to continuing to promote and produce daily, the greenest NAF OSB products in the market, they have also seen an increase in the level of interest from customers in their beyond-particleboard product in the past several months. The market is starting to move to them. While it is still early days in terms of penetration, as a first mover in the market, SWISS KRONO is well positioned to address consumer demand for NAF wood panels. Their BE.YOND offering has the highest level of natural content and the lowest carbon footprint of any product on the market. SWISS KRONO is highly engaged from the C-suite to the plant floor and adopting these greener and healthier products. In terms of our key strategic prospects in the wood composites market, we continue to have conviction on the market benefits we can deliver for them. They are highly engaged. This work represents a 6-year relationship. During the quarter and into the new year, we have made steady progress pretty much according to plan. There have been no setbacks of a technical nature. In fact, through all the steps we have made together in the last quarter, it is fair to say we met or exceeded all expectations. Some things may have proceeded a touch slower versus the original plan primarily due to COVID-related restrictions and production demands, but everything remains on track. On the personal care front, the situation is very similar. We believe personal care is a great opportunity that, in effect, offers a warrant of upside to our business. We have a fantastic partner, a global chemical company that is motivated to make a meaningful impact on the personal care category with all-natural formulations using our solutions. They are highly engaged, investing resources in marketing and go-to-market strategies that drive awareness and adoption. Today, they are actively targeting the hair fixative market, which represents an approximately $350 million opportunity for our binder, with strong margins to the partner and EcoSynthetix. Progress on the launch and adoption has proceeded slower than we anticipated prior to COVID, but as long as the partner remains highly engaged in the way that they are today, we will as well. Our partner is also optimistic as it relates to the addressable market for all-natural ingredients in the home and personal care space beyond hair fixatives, and we continue to develop and provide new ingredients for other opportunities for their evaluation. As I mentioned earlier, macro demand trends together with COVID, had a significant impact on our paper and paperboard business. Despite these macro challenges, we have suffered no customer attrition. Through the course of the year, we continued to offer customers value as an alternative to conventional styrene-based latex binders, but it certainly became more challenging in 2020. The depressed oil price dynamics impacted the price of competitive materials, specifically SB latex to levels well below normal conditions. This created pressure on pricing for our EcoSphere alternative, which we managed through. With the recent upswing in oil prices and tighter supply of styrene and butadiene, we believe we have rounded the corner on price so that we can continue to offer customers value. Paper manufacturers are pursuing diversification strategies away from graphic paper due to the demand challenges. In many cases, we can support these diversification strategies with projects, and we are showing progress. These new opportunities are, for the most part, niche ones that mitigate the demand challenges on the graphic paper front but they do not compensate for the entirety of the lost demand. We believe our EcoSphere solution will continue to be a standard ingredient for the paper manufacturers that use it and that it will remain a foundational part of our business. However, our strongest growth opportunity remains the wood composites market. It is the largest of our 3 target markets. We are working with customers and prospects that are highly engaged in adopting NAF solutions, and our solution offers material benefits to their carbon footprint and to their end users. Our #1 priority is delivering wins in the wood composites and personal care strategies of our partners. The market is moving to us, and we have an offering that meets its needs. And with that, I'll turn it over to Rob to review the financials. Rob?

[Robert Martin Haire, CFO & Corporate Secretary]

Thanks, Jeff, and good morning. From a top line perspective, net sales were $3.3 million in Q4 2020 compared to $4.4 million in the same period in 2019. This change was due to lower volumes, which impacted sales by $800,000 or 18%, and lower average selling price, which impacted sales by $300,000 or 6%. Net sales were $13.7 million in 2020, a decrease of 26% compared to 2019. The change was due to lower volumes of $3.6 million or 19% and lower average selling price of $1.2 million or 7%. The decrease in each period was primarily due to unfavorable market conditions brought on by the COVID-19 pandemic which reduced global demand for paper products and created a first market pricing dynamics. Gross profit was $700,000 in the quarter, down 33% compared to the same period in 2019. In the annual period, gross profit was $2.7 million, down 32% compared to 2019. The changes were primarily due to the lower volumes, lower average selling price, partially offset by lower manufacturing costs. Net of manufacturing depreciation, gross profit as a percentage of sales was 27.2% in the quarter compared to 27.8% in the same period in 2019. In the annual period, gross profit percentage net of depreciation was 26%, which was unchanged from the same period in 2019. SG&A expenses were $1.2 million in the quarter, a decrease of $200,000 or 14% compared to the same period in 2019. In the annual period, SG&A was $4.3 million, a decrease of $520,000 or 11%. R&D expenses were $300,000 in the quarter compared to $500,000 in the same period in 2019. R&D expenses in the annual period were $1.4 million compared to $1.7 million in 2019, a decrease of 19%. The decreases in SG&A and R&D were primarily due to $500,000 in payments received under the Canadian Emergency Wage Subsidy Program and lower discretionary spend. Adjusted EBITDA loss was $120,000 for the quarter compared to $240,000 loss in the same period in 2019. Adjusted EBITDA loss for the year was $780,000 compared to $400,000 loss in 2019. Despite the challenges from COVID-19 this year, we generated positive cash flow from operations of $200,000 during the fiscal year. This is the second consecutive year of generating positive cash flow from operations. As of December 31, 2020, we had $42 million in cash and short-term investments compared to $43.7 million for the same period last year. During 2020, the company repurchased and canceled approximately 1.4 million common shares on NCIB at an average cost of CAD 1.92 per share for consideration of $2 million. We have demonstrated our ability to responsibly manage our cash reserves through multiple cycles, while continuing to invest in our long-term growth strategy. With that, I'll turn it back to Jeff for closing comments.

[Jeffrey Douglas MacDonald, CEO & Director]

Thanks, Rob. What we have endured as a global society in the past 12 months has introduced a great deal of change in how we work and how we live. It has also accelerated how individuals and organizations approach change. We are more aware of the health and lifestyle choices we make as a society. Fossil fuel-based technologies have been a structural pillar for more than a century. Our solutions offer an alternative in our target markets. Since inception, the use of our biopolymer has permanently eliminated the equivalent greenhouse gas emissions of nearly 68,000 passenger vehicles. Consumers, retailers and manufacturers are increasingly adopting solutions that reduce their carbon footprints. Our biopolymer solutions directly address these needs. We can help large organizations in wood composites, personal care and paper and paperboard reduce their carbon footprint. IKEA's Sustainability Report directly identifies fossil-based glue used in wood-based products as a needle mover for them. Personal care companies are using all-natural ingredients as a differentiator for new product launches and paper companies are diversifying away from markets with negative growth into new opportunities by offering sustainable solutions. The market is moving towards us. Our biopolymer platform is in a great position to address these market changes as society emerges from the pandemic. We have the technology and the financial strength, and we are working with the right customers and partners to make a difference in our target markets. We're looking to deliver strategic wins in the NAF market and the all-natural personal care market that will deliver meaningful growth in the long term. We appreciate the trust and patience that our shareholders have shown. I look forward to updating you further as we progress. With that, I'll turn it back to the operator to open up the call for questions. Thank you.

[Operator]

[Operator Instructions] Your first question comes from the line of [Dan Marks] from Stonehouse.

[Daniel Marks]

Thanks for the update on the markets you're really going after gentlemen. Jeff, it sounds like things are going as well as they can with COVID in the personal care side. You work with a partner in that area, but you don't necessarily have a partner for the wood composites market. Is that something that could help speed the process up to explore that? Maybe it's the existing partner you have in personal care. Is there any view to doing that to try and ramp revenues faster?

[Jeffrey Douglas MacDonald, CEO & Director]

Yes, it's a good question. The 2 markets are pretty different. When we identified that we had something in personal care, we were, of course, very excited, but we realized pretty quickly that we didn't have the applications, expertise, the kind of development labs that our partner does. And I think in particular, the market reach to get into like many, many personal care product manufacturers around the world. So the partner strategy made a lot of sense there. The wood market is a lot more like the paper market for us. In the paper market, I think we serve 7 of the top 20 paper companies globally. And so we can -- like we can see where the volume is and we've developed the team that has the ability to go in and implement our solutions and provide them great support at the level of a big company. And we adopted the same model in wood composites for a similar reason. I think we've shown before the chart of the top players in the wood composites market. We know them all. We can call on them all regularly, and we can implement change with them. Personal care is quite different. So the strategy made a lot of sense there to do it differently. In wood composites, when we think about the ideal partners, it would be the MDI players with our current DuraBind solution. And we know the 5 of them that are the major players in that space. And so far, we've chosen to be able to be a good partner to all of them. Selecting one as a partner would, in some ways, likely alienate the other 4. And at this point, I think there their opportunity is spread around enough that it makes sense for us to be able to be a good partner to all of them and help them drive their growth and opportunity. If there was a compelling solution to do something differently, then we'd definitely consider it. We remain open-minded to that. But so far, serving all the MDI players as a partner and serving all the large customers as a supplier seems to be the right approach for us.

[Daniel Marks]

Okay. Related to that, you've talked about -- and I think it's pretty obvious that we're seeing there's a -- the green movement is really taking hold. And you're seeing, I guess, demand, the customers are moving towards you. What about those MDI suppliers? Are they recognizing that changes coming and your technology is disruptive enough? Is there any -- are they moving towards you? Or are you getting more inquiries that they want to work with you more to preserve their market share before you, what we would assume would be you will eventually eat their lunch? Is anyone trying to get closer to you in that regard?

[Jeffrey Douglas MacDonald, CEO & Director]

I'd say, so far, it's kind of share our lunches strategy. Usually what happens, Dan, is a customer will put us together with their preferred MDI supplier and ask us to work together. Yes, it's fair to say we haven't seen any overtures that would cause us to work any differently with them than that. We're really working on programs that we do initiate with customers. But when we initiate them, they usually say, these are the MDI players we work with and we'd like you to work with them to implement this. That's how it's worked so far. And again, like the earlier point, we're open-minded to thinking about it differently into any approaches that make good business sense. But so far, this has been the sort of the model of choice.

[Daniel Marks]

But do you get any sense from any of those 5 that you might work with, that they are afraid of what you bring to the table, I guess? Like do you see them just -- okay.

[Jeffrey Douglas MacDonald, CEO & Director]

Not at all, actually. I mean, the OSB market is a little bit different because the MDI suppliers do have a pretty good share there. And I think we're disruptive and have the potential to take some of that share from them with our offering. It's what's happened in one case, for sure. But in the bigger markets of particleboard and MDF, we represent a growth opportunity for them. Like for decades now, they've been unable to penetrate those markets, and we represent a path for them to enter there. So they've been willing partners where those opportunities have opened up for both of us.

[Daniel Marks]

Okay. Got it. Just one more question on -- I guess, on -- an overall question on scale. As you see more opportunities come in, and I recall that when you joined the -- took over as CEO, one of the first things you did was reduce the number of projects, I guess, that you were chasing. Again, given the 2030 mandates from people like IKEA, are you looking at expanding that? Are there partners that you can work with in some of those areas that you've dropped off? And what is the potential there? How big can you get -- how many different areas can you go into reasonably while maintaining your existing cost base?

[Jeffrey Douglas MacDonald, CEO & Director]

Yes, good question. So I guess we think about capacity in 2 different ways. If you think about it just in terms of production capacity and numbers, the installed capacity that we have serves us well through $100 million in revenue. And through that journey, we would have to add very little in terms of SG&A. It would be some customer support, people, some applications, development people, but not a meaningful uptick relative to the top line in terms of SG&A. So lots of capacity on that front. Capacity to deliver solutions and new target markets, I guess, is a little bit different. I really first and foremost, don't want us to become unfocused and not take our eye off the ball in the 3 key markets that we continue to push hard on. But the green movement has really opened up a lot of new opportunities. Our salespeople have actually. In my time at ECO have never had more inbound inquiries for what our biopolymer might be able to do for them. And so we entertain those, and some of them actually do read on some of those projects that we turned off in order to focus. And that's where, I think, your questions actually come in line here because those markets where there may be those opportunities would be ideal ones for us, I think, to consider a partner approach if some of the technical and commercial benefits prove interesting. And in some cases, these are not programs that we are anywhere close to wanting to talk about yet. They're still very much in their infancy. But some of them are being worked on with partners that are interesting in that way as well. So we've got a few of those kind of activities on the go. They are sort of the next-generation pillars that we hope will become the next big pillar.

[Daniel Marks]

Got it. One last quick one before I jump off. I know your efforts in the personal care market haven't yielded material revenues yet. But is there any even anecdotal flavor that you can give us? Is there a product on the market that features your products, your polymers? And even if it's small, are people giving you any feedback? Is there any repeat business coming from people? Just any kind of flavor, even, like I said, anecdotal tidbits.

[Jeffrey Douglas MacDonald, CEO & Director]

Yes. Anecdotally, there's one product that we've been able to talk about, and it's actually for those that have been to our facilities here in our conference room. We show a product from Aveta, which is a division of Estée Lauder called Pure Abundance, it's a hair fixative. And it was kind of the pioneering product that showed the way of all-natural ingredients being effective hair fixative. That's the good one. It's really the only one I can put my finger on that we're able to talk about. But I think if people look out there for all-natural ingredients that look anything like ours, you'll see a lot of excitement and enthusiasm from key players in the market. That's about all I can say. But there are products out there like the Aveta product. And we've actually been put through the full evaluation process by Estée Lauder as a secondary -- second-tier supplier to ensure that we're able to comply with their needs. So that's -- it's a pretty big name. It's a nice little product. It is a niche one. So again, it doesn't, on its own, move the needle, but it shows what companies can do.

[Operator]

[Operator Instructions] There are no further questions at this time. I'll turn it back over to Mr. MacDonald.

[Jeffrey Douglas MacDonald, CEO & Director]

Thanks, operator, and thanks, everyone, for joining us today. We look forward to keeping you up-to-date on our progress.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thanks for participating. You may now disconnect.