I-Tech AB (ITECH) Earnings Call Transcript

And we are live here at Investor Studios when I take as published airport for the third quarter. Joining us here in the studio is the company's CEO, Markus Jönsson. Welcome.

Thank you very much, Mike. Great to be back.

I will soon hand over the word for you to give a presentation. But before I do that, I would like to give a final reminder to our viewers that if you have any questions, then please post them in the chat. So Markus, go ahead. Thank you very much.

All right. So at first, we start with a little short introduction of I-Tech, right? And the space that we are operating is in the maritime space, right, the maritime industry and industrial shipping. So we typically this question what is 1/3 of the global fleet of 110,000 commercial vessels. We're using 36% more fuel than needed, even for a day. What would that mean for operating cost and emission. And this is actually the data from our studies of in docking performance of ships coming in after 5 years at sea. So the picture is this bad. So there is much to be done exactly to target biofilling going forward, and it has huge costs. So I-Tech solution is called Selektope, and it is originally a pharmaceutical ingredient that has been developed as an anti-fouling substance. And it has a unique property to help stop hard-fouling, more particularly barnacles. And this helps the ship operators to reduce their emissions to air to help to protect the sensitive marine ecosystems from the transfer of marine invasive species. And also reduce the emissions to the ocean because Secop is highly effective and efficient. So you need very small concentration. So I take today then, we have a unique technology. We are focusing on building intellectual property and formulation know-how around using Selektope and also new solutions now going forward. We are asset-light in the sense that our production is outsourced, and we estimated our penetration is quite low still, 3,500 vessels out of the commercial fleet of 110,000 vessels. So our customers are the major anti-fouling coding producers, the coding companies, and there are actually 9 major companies then representing more than 95% of the addressable market. So we work, of course, closely with all of them. So if we look at I-Tech's journey, since its IPO in 2018, it has been a growth journey essentially, right? We have grown nearly 30% year-on-year, and we see also the until quarter 3 this year, we are continuing the growth journey. So it's really nice to see that the use of Selektope is continuously increasing. So then we dive into the Q3 results. And this I can say then that organic growth continues essentially, right? If we look at sales or currency adjusted growth, it is 80% versus Q3 last year. And we see then the year-to-date sales grow with all our major customers, which is great to see. So it's a little bit lower sales than the previous record quarter, which was last quarter, Q2, but still a very good quarter overall by our standard. So looking a little bit into the numbers then. So net sales in SEK grew by 19% and reached SEK 48.8 million. The gross margin continued to improve or be more stable at the high level. So 60% versus 57% last year, right? EBITDA rose by 16% to SEK 15.1 million and EBIT then by 20% to SEK 13.3 million. So operating cash flow was lower this quarter than the corresponding quarter last year. However, this is an effect mainly due to skewed accounts receivables because we had a very low sales quarter in Q2 2025. So the operating cash flow we are seeing now in this period is more resembling you could say, how it should be, right? The cash balance continues to grow, and we have now 177 million year-to-date. Okay. So looking at the geographical spread of sales and year-to-date, we can see that Korea continues to cement its #1 position. So 46% of our sales year-to-date has gone to Korea, 27% to Japan, 21% to China, 3% to Singapore, and also 3% to Europe, right? So that is the we are looking at now. So we see continuously strong development from all the Asian markets here. And growth, you could say, in Q3 have been driven a lot by both South Korea and China. So to summarize the quarter then, yes, 18% organic sales growth, still a very good momentum here. I think the diversification continues. We see higher growth rates with our smaller customers, which is positive. So we are becoming sort of less dependent on #1 or the biggest customer. The margins, we are very happy to see that we've been able to maintain really high gross margins despite the turbulence that has been, you could say, with raw material prices this year and that we continue to have a strong resulting EBITDA and EBIT percentage. So all in all, we are very satisfied with the results. So now we come to the outlook. And you have heard me talk also in the previous quarters this year about the market and sort of we are in because they have a mini boom at the moment, right? But just so zooming in from the bigger picture, there are around 2,000 new vessels being built every year. And there are around 20,000 service events or dry docking, where ship come into service and where they apply a fresh layer of paint. China represents more than 60% of the drydocking market and nearly 60% of the new vessels. So China continues to expand their #1 position in the market, meaning that it's also one of the key markets for I-Tech for securing additional and future growth. So if we look at the market this year I think the closure of the Strait of Hormuz, right? Has meant you could say that the loss of volume here has been able to be mitigated by alternative routes and sources, right? And in fact, what has been the consequences is that you could say the availability of ships or vessels have decreased. So prices have gone up, right? We do see, however, that overall, seaborne trade has actually gone up year-on-year, right, by 1.1%. So the charter rate, which is then sort of the price you have to pay to ship goods has increased 61%, sort of the overall indexes year-to-year. And we see also then a very active ordering of new ships, right? So that is up 33% on the full year 2025. So it means that we have seen a tremendous pump. And that is actually shown also in the top graph here to the right, right? You see that expected deliveries have increased for the years to come, which is, of course, good, you could say, from an I-Tech perspective. There will be more ships built that need a new fresh layer of antifouling coating, right? We also see that the shipyard output has increased by 14% year-to-date. So -- and we often talk about the shipyard being full or at their capacity, but we also see that they continuously expand the capacity. And of course, the elevated fuel costs continue really to underscore the value of a premium antifouling solution. So all in all, you could say the macros are quite positive for anti-fouling coatings. We also note, you could say, an increase in the number of repair events. And this is, of course, quite linked to the available fleet and their service schedules. But it's all in all, a very positive view. All right. And now we come to the regulatory part, and I'm really glad to have brought with me another fantastic I-Tech employee for this session. So I will hand over now to Cecilia Ohlauson, Head of Regulatory Affairs and Sustainability.

Thank you, Markus. So as most of you know, Selektope has been going through a reregistration process in Europe for the approval as an antifouling biocide. And this has been a long process. Selektope has been discussed several times by the standing committee of biocidal products. And what's been happening this quarter is that there was a meeting in June with the standing committee where a draft proposal for nonrenewal of Selektope was discussed. Following that meeting, it was decided that a vote would take place. So in the meeting in September, Selektope was not discussed. But following that meeting, a written procedure for voting was launched to the member states, and that is currently ongoing. So the voting running from the seventh to the 21st of October. And as we also indicated before, the approval for Selektope currently expires by the end of this year. So Selektope is not the only antifouling biocide under pressure in Europe. And we, as I-Tech tried to draw attention to this problem for several years now. And finally, I would say that European maritime industry is also waking up. So with the support of biocides for Europe and SEPA, a petition has been launched, to activate industry in Europe and highlight the risk that we're facing of losing efficient antifouling. So to date, there are 30 organizations, companies, similar that have signed some very influential trade associations have signed, but also ship yards, paint manufacturers ship owners. And the intention is to send this letter to the member states, but also to European Commission, to European Parliament, et cetera, to really highlight the risk that we're facing here. So what would be the consequence if Selektope is not approved in EU? What could the impact be? Well, if we look at how Selektope can be used, there is very few limitations actually. What is the limitation is that paint containing Selektope to cannot be placed on the European market. Hence, you can't sell paint containing Selektope within EU. Another limitation is that treated articles cannot be traded within EU. And what does that mean? Well, a ship is considered a treated article under the BPR. So a ship treated with Selektope containing paint cannot be sold to a European owner for European -- or I shouldn't say European owner, an EU-based owner for EU use. So it is a quite small limitation. Roughly 5% of the addressable market would be impacted while 95% can continue as usual. So port calls in EU are -- continues to be acceptable. So traveling in EU water has continued to be approved. So there's a very small limitation here, actually. Yes.

Thank you very much, Cecilia. All right. So then we move ahead to the business development pipeline. So we had a press release yesterday that we will come back to in just a few seconds. But we can say that we are very much actively working on our opportunity pipeline at the moment. And as we have talked about here numerous times, we are looking at what complementing technologies and products we can bring to our existing customers. And that could be other active ingredients that could be complementing technologies such as binder technologies, et cetera, that we have talked about earlier as well. In addition to complementary products and technologies, we are looking at adjacent markets. So other marine markets that have really big challenges with Biopole and here, aquaculture and the yacht market are in our focus, as you know, and then shifting gears and talking about the recent acquisition, it's actually a license agreement that we have signed with a company called Titanium Technology. It's a Spanish start-up company, sort of similar in profile to what I-Tech looked like 25 years ago. They have actually tested and proved the value of the technology in a number of pilot tests already. But of course, they would highly benefit from an experienced partner like I-Tech in terms of commercializing their technology. So we have then signed a worldwide exclusive license to commercialize their technology within aquaculture. And what is their technology then in essence, right? So they are working with titanium services. And the innovation that they have found is that if you use an electronic control system and you apply a certain type of current or yes, electricity to the titanium material in a sort of a varying pattern. That really limits the ability for microorganisms to settle on to the surface. And this is mainly, you could say, electrochemical effect. So you have like the charge surface charge and the PH at the surface that is varying and this is preventing species to settle. So it's not a biocide containing technology per se. So what this enables then is to create really fouling resistant structures. And for aquaculture, this would mean much smoother operations, right? If you have no filing, that means that you can have better water flow. You have more oxygen and less pathogens coming into your species that you're growing. This means that you can reduce significantly the maintenance that is today applied to clean and remove bio-fouling from underwater surfaces. And the really big benefit here, and I think also to the value of both this technology and the ones that we talked about at last quarterly report is that improved animal welfare and the yield really that bio-fouling actually calls sickness and death among the species that you're growing. So here you have a chance to really improve the yield, which is, of course, a massive economic impact as well for the farm. And with this type of technology, you can also mission a much lower environmental impact since this is an electrical signal and it's not a release of chemicals to the environment. So all in all, we are quite excited. And we also brought to you some pictures today to show you how the technology has been validated today. So these are actually 4 different pilot validation studies. So what you see here further to the left is actually a big water tank that is used to evaporate liquefied natural gas. And here, you can see the technology that really applied as big sheets of titanium aluminum to keep fouling from growing on the inside of the tank. The second picture is actually a pipe, and you can see on the outside of the pipe, you have a lot of fouling on the inside where you have the active titanium surface, it's actually completely clean. Same goes for the third picture, maybe a little bit difficult to see here, but this is a great. So that sort of filters and gives a basic filtration for the water and also the picture #4 in the bottom there is a separate grade. And you can see in the frames how much biofouling you have and also on the top part here of the grade, how much biofouling you have and how clean the underwater surface titanium area is, right? So we have seen and it has been proven to work really technically. And of course, what remains now is to prove the commercial validity of this technology for various aquaculture applications. And here, there is really the benefit of I-Tech and Titanium Technologies working together going forward. So that was a brief overview of the Q3 results and coming now to the business outlook. We are continuing to work very actively with the business development pipeline and the opportunity pipeline so we can foresee additional strategic preships going forward. As you heard from Ceci, we Remain very active on the advocacy side, both linked to the European Union market but also the U.S. and other markets going forward. So that's another focus area. And of course, the business development now to really make these new interesting technologies fly and to get them out to customers to test them. So all in all, a quite busy time ahead for I-Tech. Right.

Thank you very much, Markus. I think Cecilia will also be joining us here for the Q&A. And for the Q&A, I will soon hear from ABG Sundal Collier. Analyst Lara Mohtadi. But before we do that, I thought I could -- I extracted a question from the viewer base here in this shatters a lot of activity going on as there as usual as well. is Selektope used in the defense industry and if not, could it?

Well, then I think the spontaneous application that you would think for is, of course, for an antifouling solution for a naval ship, right? To my knowledge, there are no products today that are really specifically targeting the naval segment. But of course, there is nothing you could say, blocking any of our customers to promote products for naval applications.

We'll now turn to analysts Lara Mohtadi from ABG Sundal Collier.

Yes. A couple of questions from me. Well, sales, as you said, it was still a very strong quarter. I had 18% organic growth, but it was still down a bit sequentially. Or would you sort of say what drove that sequential decline? Is it just simply put order timing anything on customer inventory levels? Anything else? Or how should we sort of think of Q4?

Yes. Well, Lara, as we point out, I think in many quarterly reports, right? Our sales do vary quite a bit between various months, right? And you could say, if 1 order ends up on 1 or the other side of a quarter, right? It can actually have a big impact. We have a few customers that place rather big orders, right? So -- and we tend to it's a natural variation. I think overall, we see with Q3 that the growth momentum we see this year is continuing, right? Of course, Q2, we had very easy comparables, right, to last year, et cetera. So there is the element of natural variation, I would say that, that sort of is the predominant effect here.

Very clear. And you mentioned the tablets in raw material prices and what the cost flagged earlier this year they haven't really materialized, so we can all see that in the gross margin. What would you say is the current situation for your key raw materials? Do you still sort of see a risk of higher price going ahead? And to what extent can you sort of pass this on to your customers?

Yes. I think there are 2 things here. I think the worry is, you could say, for I-Tech's margins, but I think the worry is also for our customers, right, to be able to obtain the appropriate amount of raw materials to produce their product. And I think in the start of Q2, there was really a worry among some of our bigger customers, right? Because of the disruption of Hormuz, et cetera, will we be able to source enough raw material to meet the demand, right? So that was really a question you could say, in the start of Q2. We see that, that has sort of settled a little bit now. So availability is not a problem, but you could say raw material prices have sort of stabilized at an elevated level, right? And you could say that I-Tech had to take action as well during Q2, right, to adjust prices and, of course, work with our suppliers, right, to mitigate the effect. And I think we are quite happy and proud of being able to keep our good gross margin, right? Also in Q3.

Yes, obviously, you touched on a bit. You had a very strong gross margin of 60% this quarter. Should we also see this as a sustainable level going forward?

Well, this is definitely our -- you could say target, right? To keep it at a higher level. However, it will vary, right? As we know, between the mix between different quarters, et cetera. But plus/minus 2 percentage points, I think, is reasonable, right? But it is our clear intention to keep the good margin.

Okay. And also on the operating cost side, you had some license fees at the costs related to the acquisition of aquaculture technology. On the license fee side, is that something that will be recurring? Is it -- yes, basically.

Yes. It will be a recurring license fee going forward. And the level you could say, is performance-based as well. So depending on the success.

Okay. Also, on your aquaculture technology, it's still very early. Can you give some sort of indication time line to which when you think this will start generating some revenue?

Yes. So let's start with the technology than the bio-based additive that we released, you say, before last quarter. So I think that has progressed nicely now. We have set up an internal validation project to look at performance. We are actively speaking to prospect customers here. It's really difficult to say how far away sales is. But as I think we indicated within a few years, it should be reasonable. If the technology really matches the requirement and delivers on the promises, right, that it shouldn't be unreasonable to say within a few years, Lara, for this technology. In terms of the new license agreement with Titanium Technology, very much early days, right? We need to focus now on building pilots to prove the value for agriculture, right? Sort of you see the pilot test that the technology seems to be working really well, right? Sort of to prevent fouling, but this has to be proven then in a commercial aquaculture application as well. So that's where we are now. And of course, now we are preparing a plan for different applications to validate the performance, right? But it's really too soon to say when will we have sales and what is the absolute potential that we are going for here.

Okay. And obviously, you mentioned that your building pilots to prove the value. Would you say on the commercial ship side, part of the reason for the penetration taking a long time, you would call it is that you have to test on the dry-docking period. It's 5 years. How does that cycle on the aquaculture side?

Well, we talked about that a little bit last quarter as well. I think the good thing with aquaculture is that qualification periods are generally much shorter, right? So I think this is one of the advantages of the aquaculture market, right? That you could say that time to market is significantly reduced compared to our traditional antifouling segments, right? Hence, it's also part of the attractive properties of this adjacent market.

And just on the cost side, what type of costs should we expect for this technology? Obviously, it's very early. Should we expect elevated R&D costs? And will this be expensed or maybe capitalized?

No, I mean, you should expect us to continue to invest in our organization, right? To be able to take care of these new technologies and to really develop and commercialize them, right? We need, of course, resources do that. However, knowing I-Tech, we will do this in a cautious manner, right? Also to balance, you could say, yes, costs and what we are able to deliver in the projects. So you should expect a continuously prudent increase of our cost expenditure.

Yes. And if we move on little bit to the regulatory process, as Cecilia mentioned, the approval expired at the end of this year. In an event, if the both is negative? Are there any sort of transition periods for selling an existing stock that actually contains Selektope? And when will actually the actual restrictions take full effect?

Yes, I can take that question. So you will have a 180-day transition period when you can sell whatever is available what you have in stock, et cetera. Of course, the 180 days starts from when the decision comes into force, so not immediately when it's announced in that case. So there will be some transition time.

Yes. And I understand it's hard for you to know when a decision will come, but the voting is [indiscernible]. I think you said 17th of October, do you expect a decision from do you expect an announcement from that outcome shortly thereafter? Or more of sort of time line?

Yes. So the voting runs until the 21st of October. And then Normally, a decision will be announced within 1 or 2 weeks. But there is no really fixed deadline for the announcement. So there whatever the outcome is, we're in the hands of the European Commission.

But also there is a need for the signature, right? So it doesn't become low until from the lion has signed.

Yes.

Okay. So now is it could take longer?

Yes.

Okay. And just a final 1 for me. You mentioned at previous port to conduct a EL-GRT study. Is there an update on this?

Well, we are currently looking into several different CROs or clinical research organizations that could run the study since this is a difficult study to run, there isn't that many laboratories that are capable, especially then using Selektope since it is a sensitive and it is a long study, you need to be extra mindful to make sure that whatever effect you might see are due to the relevant endpoints or due to the relevant effect and not sedation per se. So it is a little bit complicated, but hopefully, we should have sort of a starting time and a CRO in place within this year.

Okay. So you're still fairly confident that you will conduct this study? Or is it still a question of you're going to conduct it or not?

Well, I think it will -- of course, we have said that we plan to run the study. But of course, it will also be dependent on the time line when the study could actually be started. I think that would will be something that we need to take into consideration.

Viewer questions remain and there's a lot of them. I hope we have time for all of them. First of all, new products, how many new Selektope products did customers launch in Q2 and Q3? And how many projects were passed because of the EU process.

To my knowledge, we haven't really seen any new launch or any product being passed during Q3.

Another question from viewers. What's the reason for the large fluctuation in revenue? Are there any seasonal fluctuation when it comes I-Tech?

No, I think it's back to Lara's question again. I mean we have a few customers that place rather big orders, right? And the pattern varies between months. So it really matters, you could say, we in what quarter a certain order ends, right? So that's the main reason for the filtration.

And speaking of your customer base, there's a lot of questions there. Another question from the chat. How much of Q3 growth came from the covered second -- recovering second-lowest customer? And is that what is underlying growth excluding it?

A substantial part in Q3 because that has been the picture, you could say, throughout Q1, Q2 and Q3. I think we talked about this already in Q1 that they recovered much quicker than we anticipated, right? And I think it's reassuring to say that, that momentum has kept you could say, through Q1, through Q2 and Q3. And of course, last year, they were buying very little in Q2, Q3, right? So of course, a big part of the contribution comes from the second biggest customer.

Another question regarding the second largest customer, it's 123% growth restocking or a sustainable run rate, how much of the receivable does it own?

Yes. So in general, the stocking effect is quite minimal for our type of business. Selektope is a very expensive raw material. It's not something that you want to sit on. Paint manufacturing is a just-in-time business, right? However, our customers do need to build stock of their own product to be able to service the service or the dry-docking market, right? But I would say that this -- since the growth has sort of accelerated early on in the year and has maintained, you could say, level throughout quarter 1, 2 and 3, right? It's a more sustainable level, right? That's what you can say.

Other questions from Bisha. The 9-month growth with CMP was 15% versus 35% in the first half. which implies Q3 fell about a quarter. Was that order timing Selektope CMP's formulation. What's the explanation there?

Yes. I would say mainly order timing, but they could also be related to their production planning.

And what's E&P's Q3 change year-on-year?

That number, I unfortunately don't have with me today.

Very well. Moving on then, this quarter resulting a lot more nonrecurring expense that the usual SEK 1.5 million for the EU BPR regulatory process. Approximately how much expense this quarter was nonrecurring?

Well, you have expenses then related to our acquisitions, right, in the license agreement. But I will not go into detail, you could say how much they are individual precisely and there came a question from Oscar in the chat as well.

What can you say about your expected investment in cost structure connected to the acquisition in and the license agreement recently communicated?

So the acquisition that we announced in August, that was -- it's a one-off, right? It's an acquisition of a technology. And so that's essentially how you could view that with the license agreement, as I was mentioning, this is a recurring license fee, so a yearly license fee. And overall, it is success-based. So it will only increase if we are very successful with sales.

And this is regarding the aquaculture acquisition, correct?

Both of them are for aquaculture.