Nexam Chemical Holding AB (publ) (NEXAM) Earnings Call Transcript

Good morning, and a warm welcome to today's Q3 presentation with [ Cleantech ] company Nexam Chemical. Joining us today are CEO, Ronnie Tornqvist; and CFO, Marcus Nyberg, who will take us through key developments and financial performance. Following the presentation, we'll also move into a Q&A session, where we will be joined by ABG analyst [ Laura Mai ]. And a quick reminder to everyone watching this morning, you can submit your questions if you're joining us live in the chat box, and we'll try to get to those at the end of the Q&A session. All right. With that, I'll hand it over to you Ronnie and Marcus. Please go ahead.

Thank you, Joakim. Good morning, everybody. We're here to present our third quarter we make some chemical together, in markets. Brief overview of this quarter is that after the record quarter that we had in the second quarter, Q3 was quite weak on the top line in comparison and in comparison to what we wanted. This was mainly due to low sales in 2 of our segments, high temperature and lightweight, where there were some let's say, stock adjustments happening for some of the biggest accounts. However, this quarter was also really strong -- another really strong quarter in the sales development in recycling. And it was a quarter full of enormously much more activity in terms of business development, as you will see more during this presentation. So everything is running at high rate that makes some, although this quarter had a little bit lower sales. But we're under -- the underlying engine is running at very, very high RPMs right now. I would like to hand over directly to Marcus for some more financial details. Please, Marcus, go ahead.

Thank you, Ronnie. As Ronnie mentioned, it was kind of weak on the top line, but we also have some really positive results, and that's also a bit what we will focus on, on this presentation. We had a record in gross margin, 49%. We are getting closer and close to the 50%. One thing that is really driving our margin is the recycling business. We have invested many millions in this business during the last year. And this is our growing part of the business and also where we have the highest margins. With a record in terms of recycling, we had SEK 9.3 million during this quarter. That is compared to the third quarter last year, is 66% higher. And actually, on a rolling 12, we actually doubled the recycling business. And as always, during the third quarter, we have lost a vacation period in -- at our customers. So that's a little bit -- the seasonality is not in our favor during the third quarter. For the coming -- for the fourth quarter, of course, it looks different and much better. We can also mention that our base -- let's call it our base business, the [ Calasterbatch ], is really stable and continue to be so, and that's really good for us. And here, you can see a few comments on our 4 different let's call it, business segments. We have the aesthetics. That's very much related to color to the plastic industry. We have many hundreds of the customers. It's a very stable business. We saw that Eastern Europe is picking up actually. During the spring, the Nordics were growing, but the Eastern European was a little bit weak. Now you can see that Eastern Europe is picking up. For lightweight and high temperature, as Ronnie just mentioned before, we had kind of weak quarters after our record in -- during spring. And then we had recycling where we are putting a lot of resources. We're out on exhibitions. We are in meetings, meetings, in meetings. And this is a truly interesting part of our business that we really are focused on with -- but continue to also run the other parts. Here, you can also see what he just mentioned. This is the sales for recycling and the development. And now we are 9.3. Of course, we are looking to come up to a new record for the fourth quarter. There is no doubt what we're aiming for. And also saying that we actually doubled the business on the rolling 12 months in this part. Here are also some small numbers related to this. What is happening before we get orders and before we get the revenue? We actually had 86 samples that we sent out. But this is also samples in the other areas. But the majority of those are related to recycling. And that's where we have [ Doseo ] interest from our current customers and potential customers. And also that we have been focusing quite a lot on also doing internal trials making this. So we are getting more and more knowledge in what applications our additives should be used in. And then I hand over and hand back to you, Ronnie, again.

All right. Thank you, Marcus. I would just stay a little bit on this slide. So the number of samples is really a mirror, a KPI, you can say, that tells us how big the interest is from relatively new customers and new application fields. And this has increased by 50% as compared to a year ago and to last quarter, and that is truly a signal that we're really out there on the market, and there is a lot of interest both digitally and physically from new customers to look into our solutions. And the number of internal trials that is much higher than usual is also a signal that we are adapting products, let's say, later on closer to commercialization into our production. So much more material with customers. more optimizations of recipe, more industrial tests with customers and more results about from verification. So this is actually the -- all the steps that are required in order to grow business in the future, and that is running at high speed. Okay. Take a step back maybe in particular for people that don't know us so well, what is our role in the circular plastic value chain? We talk a lot about recycling, and we're part of that, but we are not recycling ourselves. We add value to recycled material by making additives that are added in a small percentage when you do a plastic compound from recycled materials, so manufacturing of raw materials from recycled plastics or when you make components out of such compounds, Around 1% of additives from us can increase the value of that material a large extent. So you can say disproportionate customer value in terms of -- in relation to how much you put inside. So our customers are not the recyclers themselves, and it's not the end product manufacturers or brand owners. It is the component manufacturing in between, which is our customer base. But of course, we work with the whole value chain. So our category in recycling is reactive recycling. When you do mechanical recycling of polymer, that means you get old products, you grind them down and then you remelt them to make new plastic components, the polymer degrades. You can avoid the degradation by doing chemical recycling. But that is, let's say, a new technology, which is not used to a high extent yet and is related to a lot of both very, very high investment levels and also very high energy consumption. It's difficult to scale. So the industry has accepted that there is a compromise, either you pay a very high add-on to get super clean chemically reactive -- chemical-recycled material or you accept poor mechanical properties or poor processing properties from a mechanical recycled materials. What we are trying to do here is to reverse that, to make it possible to use mechanically recycled plastics using additives, raise the value of those, so they become much closer to a new material. So we want to avoid that compromise. Okay, improving both, let's say. Technical properties and costs. Customer economics in an application. This example is PET. PET is used, for example, for those kind of products that are in the picture down there. So packaging, as shown by this cartoon, various wrapping materials, fiber applications such as fleece materials or strap bands and these kind of products. If you produce those type of products, you often need to use virgin material, combined with high quality, let's call it, recycled bottle grade PET and to a certain extent, a lower cost recycled PET materials, and that gives you a certain material cost. By collaborating with Nexam, you can add a little bit of additive, in this case, approximately 1% or 2% of an additive that we make. And then you can change a large portion of quite expensive, very good bottle grade plastic and replace that with much lower cost recycled materials and thereby, saving the material cost quite a bit. So it is a cost save that is often driving our customers' recycling applications with additives. When we look at how big can this become, Marcus told you that we had approximately 10 million sales in this area, the current run rate, and we're aiming to grow that quite a bit, but we are in that area, SEK 30 million to SEK 40 million, so we call it EUR 3 million, EUR 4 million. When we look at the total addressable market, look at all over the world, all polymers that we have solutions for -- and all of it would be recycled, and it's EUR 16 billion that we could address, which is then not realistic because not everything will be recycled and we will not achieve all the whole market. But if you look at what will be mechanically recycled, it is several billion still that we could aim for. But it's also not realistic. So we have assumed, let's say, quite modest market penetration rates. And we think that it's absolutely feasible for us to reach somewhere between EUR 50 million and EUR 100 million market in this area. So let's say, in contrast to all our other market areas, the reactive recycling area can grow many, many times over, without reaching any kind of, let's say, limitation by the size of the potential market. And that is why we put so much effort into developing this technology. And we do this by project by project with customer by customer, by meeting new prospects, going to trade fairs by digital presence, being visible on the Internet when people are searching for how to solve their problems. And we follow these projects and from prospects, and then we work together with the customers to discuss about their challenges and so on and send them information and then typically the sample materials that were mentioned before. And then if that is successful, they go into a proof of concept, start to scale up and industrialize, technical approval at the customer and their customer and then it goes into commercial serial production. So obviously, quite a complex and long process. The good thing for us is that it's fairly similar every time, and we are working with standard material solutions. So we have this, let's say, under control. But it's true that because we're putting so much more marketing and sales efforts out there, the number of projects are increasing all the time. So we -- it's an everyday battle internally how to handle all of those projects and all of those customers in a very professional way. So we're working a lot on this process. If you look at the number of let's say, projects that have passed the, let's say, get to know each other and started by technical discussions, testing samples and so on, we're up to about 164 such projects that are ongoing. We have 25 that are in this scale up or industrialization phases and the 14 that are technically approved, but not yet into production, and then commercial production 31. So we have a fairly substantial pipeline and that is what is assuring tomorrow's growth. We've been working like this for a long time just that this year after we did a capital raise at the end of last year, we're giving up this year, we have put so much more effort into this. So it's growing a lot. But it's obvious when you look at what needs to happen from that you start to know people digitally or in the real world until they actually buy in serial production, there's a lot of things that need to happen. So it has not yet hit the ground so the same with commercial applications. If you look at the development of our activity, we increased quite a lot of number of, let's say, development projects in the early phases. There is a relatively stable number of scale-up industrialization projects. Of course, since some of them have not that were accelerated this year, have not yet reached that stage. But it's also -- some of them have moved on into production, and some of them have dropped out because we were not successful that the customer does not need this solution right now, for example. And then we have grown by 3 new customers this last quarter and -- which is down 10%. But the growth in the segment itself was much higher than that, and that has to do with that the growth is not only coming from new customers but also existing customers that are buying more and more materials. So commercial milestones, 3 new customers that have moved them from, call it, industrial evaluation to commercial production and serial production. We had -- we were at a few expositions and shows this quarter. One was AMI Compounding and Recycling Show in Frankfurt in Germany, where we got extremely many qualified leads that are now moving into the top of the funnel. We were actually at the second fair [ Fakuma ] in Germany also, which ends today, so after the quarter then. And then also after the quarter, we were at a similar show in Turkey. So we're moving out there and meeting a lot of customers and we're getting a lot of new contacts. We have broadened our patent base, the polypropylene upgrading recycling patent has been approved in the United States, which is very good because our distributor, [ Palmer Holland ] in U.S.A. are pushing more and more the polyolefin usage in the U.S. And in France and Turkey, where we have our 2 new distributors. We have spoken about, I believe, already last quarterly presentations, they are getting the first orders and there is a high activity with them. We have also launched a new homepage reactiverecycling.com, which is dedicated towards the recycling customers. But you can, of course, go in and check it out if you are interested in our digital presence. So it's all -- for us, it's all about the process and the activities around activities to drive future growth. So we're looking at this more qualified and more targeted customer projects coming in, let's say, well-controlled process to handle them, making much more industrial validations. We have many such [ data ] projects ongoing, and then to reach technical approvals and also find tricks and similarities from project to project and learn from them in order to shorten the lead time between all those steps in that process. And in the end of the day to get more customers into serial production and then get the customers to really love the use of our products, and we are a good supplier in order to help them in their business and thereby also extend the collaboration with existing customers ending up in growth. We can do this, and we can do that in a very ambitious manner because we did the capital raise that we did at the first days of this year. And our ambitions right now is to continue to grow the recycling business at a very high rate, but typically doubling year-on-year. As Marcus said, rolling 12, we were double compared to the rolling we before that. And we want to keep that pace for a long time in the future. Also our -- since long time outspoken target to reach SEK 300 million and then beyond that remains a target because then we will be properly profitable, and we will have a really strong platform for future, let's say, expansion of the company. So why invest in us, like myself and Marcus have done? We have a very interesting specialty chemicals platform, which is based on the stable base business. And on top of that, we have a scale-up activity, which is then the recycling business. So we have this stability but also an enormous future opportunity. The platform that we have in terms of manufacturing organization and so on, can handle much higher volumes without having to grow at a very high rate. So we can became -- as we grow beyond SEK 60 million per quarter, we become profitable at a quite high rate. So we don't need enormously much more to become profitable. Large enormous untapped opportunities in the area of recycling, I would say, no end to the opportunities that we can search for in that market. Of course, each project takes a lot of effort to be successful, but still. And it's a differentiated customer value. What we add to our customer costs much less than they are gained from it, so to say. And we have a really well-funded execution here. We do not need to push on the brake or anything like that because we have capital to continue to work on our scale-up plan. And also, we're right in time. There is a new legislation coming up in Europe, which is quite interesting. The [ PP WR ] is packaging directive from the European Union with given clear targets of recycling rates. And if you're in that business, you know about it, and that will change the landscape of recycling. And A lot of companies will have difficulties to put in enough recycling material just to fulfill the law in 2029, 2030. And there, we have solutions. So if you're in that business, and we're struggling with this, come to us, we will help you. Okay. With that, thank you, and we go for the questions.

All right. Great. Thank you for that presentation, Roni and Marcus, and we're going to head into the Q&A portion of this presentation. So let's move into it. We joined first by ABG analyst Lara Mohtadi, who's with us remotely. Can you hear us Laura?

Yes. Just a couple of questions from my end. You now described at the recycling ambition, which was typically doubles year-on-year. And you measure it now on a rolling 12-month basis in Q1. You said that the ambition was to sort of double the recycling sales for calendar 2026 versus 2025. Would you say that, that calendar year target still is in place? And if so, what sort of Q4 recycling sales would that require? And also, does this doubling ambition also apply for 2027 and 2028?

Yes. Our ambition stays. Of course, we know that it will be big challenge for us to reach it during the fourth quarter. We're looking forward to -- we see at least a record quarter for us in the fourth quarter. But our ambition and goal stays the same for this year, in the coming years. But we know it will be a challenge, but that's what we work on every single day to reach these objectives.

Indeed, I just agree with the markets. analytically to it, it will be -- it needs to be super high sales in recycling [ Q4 ] to hit exactly that quarter. But generally, we're continuing to target 100% year-on-year, at least. This quarter, it was only 66%, but it's also quite a good number, I think. And we continue to fight for that over the time, and that remains the ambition, absolutely. And as Marcus said, we're definitely aiming for a record quarter in active recycling in this current quarter.

And you sort of point to some seasonality here and your U.S. customer moved to a higher run rate from Q2. I'm talking about recycling, stone. And 2 additional customers also entered commercial production over the summer. Is this U.S. customer still running at around what was you said 11 million run rate annualized? And also, are you seeing any volumes from the Canadian and European customers?

What we can say is that we see that there's a big interest for them to increase the volumes, meaning that we can use it in more applications, and that's related to the U.S. customer. So we are very optimistic in terms of growing with existing customers because once we're in, it's much easier to expand in that area. But for the other ones, you have a much more in-depth detail.

Yes, it's difficult to comment on single customers like this. We're trying to handle it more and more as a process becomes, let's say, a little bit like we have it in the aesthetics market, where we have very many hundreds of customers, and we try to handle it as a process being good supply to all of them. And we are intending to and so far, managing also to do the same thing in recycling. There is growth in both Canada, U.S. and European customers that are existing. We don't see many customers that are receding in terms of usage, but we do have a couple of them that are, let's say, that's struggling with -- on the sales side, but many of them are increasing the usage, including the big U.S. customer and -- I think I know which ones you mean in Europe and Canada, and they are also growing quite well.

They are part of the growth that we're seeing in this quarter and also what we are looking for in the coming quarters that we think there's -- there is more potential in existing customers as well.

Okay. And well, both lightweight and all high temperature primarily was affected by stock adjustments among some of your bigger customers. Is it the same customer that you've been talking about? And what gives you the confidence that the adjustments will be completed by year-end as you stated in your report?

Yes. Okay. high temperature first, yes, it's the same customer. And yes, we know more or less their needs for next year, and we know that the exact level they will end on next year, we do not exactly know yet, and we'll come back to that when we know more. But we know that it will not be at this low level that we currently have. So that's on the high temperature. On the lightweight segment. It is the same as we have had for years or a decade that the order sizes in that segment are quite large. Every single order is quite a large order. And then, therefore, whether an order lands right before or after the change of the quarter changes quite a lot on the full quarter for us. And this has been the case. And I would say looking back now, probably 1 or 2 of those large orders that were placed in Q2 where it could have been in Q3, let's say, and then it would have looked more even between the quarters.

And so to beyond this stock adjustments in lightweight, was there also some underlying weakness, would you say this attributable to maybe some specific applications or end markets?

No. I think -- let's say, the sum of deliveries into lightweighted this year, it is certainly a weakness in that market compared to how it looked some years ago, definitely. But it is not that it changes abruptly between the quarters within this year. And it's not even stock adjustment has happened to be deliveries in Q2 or Q3 or Q4 in some of these big orders. So it's more like that. And I would say that they're in this new mode of lower volumes in the sum for us that has been our reality for more than a year now. And we are at that level, we don't see further deterioration, but we do also not see a big reclimb back up into the high numbers that we had a few years ago, not within short anyway.

And on your gross margin, you reached 49%. That was very strong. How much of that improvement would you say is maybe for recycling? Or is it maybe pricing or costs and other segments?

This is related to product mix. Our margins in recycling is 50% plus. And the higher portion that margin takes of the overall business, the higher margins we will get. So this is product mix related. So we are aiming for the 50% and 50% plus. Of course, we are aiming for this every single quarter to improve this. But this is product mix related.

Okay. And also on approved projects, you said you had -- I think you have 14 projects that are technically approved but not in production. What is sort of holding that back? When do you expect it to start? And what is the sort of revenue potential?

Yes. Yes. Interesting question. And like the -- all 14 are individual projects with various customers and various -- in various market areas or application fields in different countries. So it's very difficult to give like a generic answer on that without talking about each and every one of them, which is too detailed, of course, for this forum. But I would say, some of them, there is a solution developed that is currently not yet approved or, let's say, needed or introduced on the market. So their, let's say, application's in waiting to be started into production. Some of them are waiting because there is not yet a need for it or let's say that the customer has approved to use this in order to be able to use lower cost raw material, but currently have other sources of low-cost [ dormant ] head that does not require our additive, for example. Or -- there could be many, many different reasons for why they are not yet into the launch phase. And some of them are still there because they are, so to say, just recently got approval. I mean, a few of them have moved from that segment. So we have some moving in and some moving out of that phase in the product life, let's say. So it's a little bit different a little bit everywhere.

And the ones that are in scale up, I think you said 25. What's typically the lead time from that to serial production?

So different. Some projects passed that phase in no time is a couple of months. Some are there for a couple of years. It depends a lot on how and to which extent the project is dependent on, for example, customers' approval of, let's say, that you make a component and it's part of a system and the whole system might need to have approval by the customer customers or even further down the process chain. So it is really, really a wide range there. The only thing what we do now is try to learn from past projects and try to see what could do -- what would have been possible to do knowing what we know afterwards, in order to accelerate that project to be out in the market quicker and how can we therefore, change our way of handling other projects in order to accelerate, so to say? That is a little bit how we are working with it right now to try to make it faster.

And also I was thinking a bit about the price spreads or sensitivities sort of because the customer case in PET is driven by replacing [ auto-grade ] recycled PET with lower cost recycled material. How sensitive is that, so the price spread between maybe virgin grade and [ low ] grade recycled PET? Is that spread sort of narrow, does the bar for active slowdown?

I don't know that would require to -- and we'll, of course, read a lot of these analysis that are made of these markets, how that is developing. But it's always kind of speculation, looking into the future. It depends on the development of, let's say, oil price that would affect the virgin price. It would be, let's say, recycling behavior of the bottle community changes the availability of bottle grade for other application areas. And also the growth of recycling capacity and capability in, let's say, lower-cost PET recycling will also change that. So it's very complex. But I don't know right now, it seems like there is a big cost spread, and it will remain so for quite some time. between the, let's say, bottle approved RPET from bottles and the, call it, more generic PET scrap that is food approved and even more so to the regenerated PET that is not food approved.

But I guess the key message here is that with our customers to use our additives to save money and to become green. So that is a little bit -- and we are saving money on using our additives. That is a driver and becoming green. So that is both. So we say that it changes both. This is what we mean. You save money and you become green. Yes. And that's important to keep that in mind.