EcoSynthetix Inc. (ECO) Earnings Call Transcript

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the EcoSynthetix 2025 Second Quarter 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' risks and uncertainties related to these forward-looking statements, please refer to the company's annual information form dated February 18, 2025, which is posted on SEDAR. This morning's call is being recorded on Wednesday, July 30, 2025, at 8:30 a.m. Eastern Time. I would now like to turn the conference call over to Mr. Jeff MacDonald, Chief Executive Officer of EcoSynthetix. Please go ahead, sir.

Thank you. Good morning, and thank you all for joining us. Yesterday afternoon, we reported our second quarter results. It was a much better quarter with revenue up 57% off a soft second quarter in 2024. That growth was primarily driven by higher volumes, which increased 50% compared to last year. At the same time, we reported adjusted EBITDA of $240,000, an improvement of $1 million compared to the same period last year. Q2 also represents the third quarter of the last 4 where we've reported positive adjusted EBITDA. As a result, we have now generated positive adjusted EBITDA of $200,000 for the last 12-month period, the first time ever that the company has achieved that milestone over a 12-month time frame. Our book of business is growing primarily from our 2 key strategic accounts in the pulp and wood composites markets. That's important from the perspective of how the business is changing and strengthening and where we're going, and it's starting to show up in our financials. On the pulp side of the business, we continue to make strong progress with a leading global pulp manufacturer. Earlier this month, we announced a new purchase order from them for $800,000 worth of material for immediate delivery, which is great progress. Earlier this year in February, we announced the first purchase order from them for just over $1 million. At the time, the customer believed that inventory would be sufficient to support production for their existing customers during calendar 2025. Based on the new purchase order and further feedback, it appears that they've roughly tripled their run rate production at this stage. We're optimistic of additional growth beyond this level as well. This new purchase order demonstrates the consistent and growing success our customer is having in the market with their new differentiated product that uses our SurfLock strength base. This success comes at a time when the need for a product that targets the significant supply and value gap between softwood fiber and hardwood fiber has never been more evident. Given the global macro environment, that gap is only going to become more significant given the lack of softwood supply relative to the growth of packaging and tissue. It's a structural issue that is not going away from a supply perspective as a result of the imbalance between more expensive softwood fiber and the cost differential with hardwood. Pulp manufacturers beyond our first customer recognize hardwood strength aids will be a key growth driver for volumes, not just in capturing additional share in the market, but also in filling capacity with higher-value product. While the market is still in its relatively early stages, we've continued to expand our reach into additional pulp producers through the first half of the year. SurfLock also continues to show great benefits and progress in the tissue and packaging end applications. We won 2 new commercial accounts in the tissue market in the quarter. These wins are a result of our relationship and work with one of our more recent distribution partners. As we've broadened our distribution relationships, we're starting to see the fruits of our success. These new wins demonstrate that the results with distribution partners are repeatable. The new distribution partners we've added are building a nice book of activities and opportunities. In tissue applications, we've consistently shown meaningful improvements with our SurfLock strength aids up to the point that some customers are eliminating their dependence on expensive long fiber completely at a time when the gap between long fiber and short fiber continues to grow. We're demonstrating that we can continue to win new tissue accounts, which contribute to top line growth. However, tissue producers represent a smaller opportunity on a volume basis than pulp packaging or wood composites accounts, hundreds of thousands to $0.5 million at a tissue line versus $0.5 million to $3 million at a packaging or wood composites line and tens of millions of opportunity at pulp mills. In terms of our pipeline of prospects, it's skewed toward pulp, packaging and tissue today with a solid contribution from wood composites. The pace of progress on the wood composites side is driven by our key strategic account in wood composites, a leading retailer of furniture and manufacturer of particleboard. Our key strategic account continues to show steady demand at the first mill, and we continue to do advanced trials at a second mill, which they own. We are working together at both mills on process optimization projects with the goal of improving the economics of our DuraBind resin, which will enable us to penetrate more of their opportunity as well as more of the opportunity at their supply chain partners. They continue to be supportive of the trial activity underway internally and at supply chain partners that they have chosen as the next steps in their program. Overall, their goal is to reduce their climate footprint by 30% by fiscal year 2030 by using bio-based glue to make particleboard versus fossil-based glue. We have the right partner in this strategic account, and we have the production capacity and team ready today to execute on this $50 million-plus opportunity. Stepping back for a moment, I've spent a considerable amount of time with the key players in the wood composites end market last month, including with the key strategic account. Two key themes are consistent across the wood panel manufacturing space. The investigation and adoption of AI in search of operational efficiencies and the adoption of bio-based glues to replace formaldehyde glues. It's clear there is an increasing level of activity in pursuing solutions for bio-based glues. Based on the continued investment in our solution by our key strategic account and their supply chain, we have a significant lead in providing a solution which offers a significant carbon footprint reduction as well as the elimination of formaldehyde from wood panel products. What this level of activity demonstrates is that bio-based glues are here to stay. They're becoming more critical in the supply chain of our key accounts and the level of activity validates their importance. And we have a significant lead that we're continuing to invest in and drive further innovation so that we can earn a significant share of this multibillion-dollar wood resin opportunity. On the personal care side of the business, we continue to view this end market as a warrant on our growth, but an important one that's backed by a major player in the personal care space, Dow Chemical, our marketing and development partner. Dow remains highly engaged. They continue to invest resources, and they're broadening both the range of applications that use our all-natural binder and broadening their customer trial program. They continue to make good progress on some larger brand opportunities, which, in some cases, they've been working on for several years with key customers, which shows the level of commitment on their end and the opportunity they see ahead given the continued demand for all-natural ingredients. This is an exciting time for EcoSynthetix. We're well positioned for significant growth in all 3 core markets and are ready to execute. The technology is proven. We have the right customers and partners. We have the capacity, and we have the right team. And with that, I'll turn it over to Rob to review the financials.

Thanks, Jeff, and good morning. Net sales were $5 million in Q2 2025, up 57% or $1.8 million compared to the same period in 2024. The improvement was primarily due to higher volumes of $1.6 million or 50% and a higher average selling price, which resulted in an increase of $200,000 or 7%. As Jeff mentioned, we're seeing higher volumes at our strategic accounts in tissue, pulp and wood composites. Net of manufacturing depreciation, gross profit as a percentage of sales was 33% in the quarter compared to 31.1% in the same period in 2024. Gross profit was up 66% to $1.4 million in the quarter compared to the same period last year. The improvement in gross profit was primarily due to higher volumes. SG&A expenses were $1.2 million in the quarter compared to $1.4 million in the same period in 2024. The 14% improvement is primarily due to approximately $300,000 in asset relocation costs incurred in the prior year period from our manufacturing footprint realignment project, which was completed last year. R&D expenses were $430,000 in the quarter compared to $640,000 in the same period in 2024. The change is primarily due to higher product scale-up costs incurred in the prior year as well as lower asset depreciation. R&D expense as a percentage of sales was 9% in the quarter. Our R&D efforts continue to focus on further enhancing the value of our existing products and expanding our addressable opportunities. Adjusted EBITDA was $240,000 in the quarter, up $1 million compared to the same period in '24. This improvement was primarily due to the higher gross profit and lower operating costs. As Jeff mentioned, we have now reported positive adjusted EBITDA in 3 of the last 4 quarters and are adjusted -- and continue to be adjusted EBITDA positive over the last 12 months. As of June 30, 2025, we had $30.7 million of cash and term deposits compared to $32.2 million as of December 31, 2024, representing a change of $1.5 million. During Q2, we invested $400,000 in the NCIB to purchase and retire 121,000 shares and have invested $700,000 to purchase and retire 228,000 shares during the first half of the year. We have also increased our working capital investment by $1 million during the first half of the year, primarily due to $500,000 higher inventory compared to year-end. 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.

[Audio Gap] And wood composites with increased volumes driving higher sales in the quarter. The new purchase order from a leading global pulp manufacturer demonstrates the success they are seeing in the market with their new differentiated product that uses our strength aids. Our key strategic account in wood composites continues to grow and is committed to using bio-based glues across their full supply chain by 2030. We continue to believe pulp and wood composites will be the major growth markets for the business with personal care a warrant on that growth. Our 2 most important accounts addressing these end markets are making an increasingly significant contribution to our financial results, and that's exactly what we want to see. With that, I'll turn it back to the operator for questions.

[Operator Instructions] And our first question is from Brian Morrison.

So nice to hear a positive tone, Jeff, especially with respect to the financials improving and the outlook. I want to start with the second purchase order news release for SurfLock as it appears very material, certainly from a qualitative standpoint today. So I just want to understand how an order for media delivery came to be? Is it simply they are actively marketing with customers and demand is exceeding initial expectations as the initial order was to stand the whole year, as you said in your prepared remarks?

Yes. So I think you framed it up really well. So the initial order was to support what they saw as their existing book of business. They wanted to make sure that was secure with us, and that generated the first order as we got the year started. This is an indication that things are going well and the customer base and the use of our products at the existing customers seems to be expanding. And that's resulted in what we believe if we extrapolate the best way we can see it, it's roughly a tripling of their run rate since we started the year with indications that, that growth is expected to continue and that we should be ready for it. So the optimistic tone is coming from the tone we're getting, which is backed by some material activity on the commercial side.

You're typically a conservative communicator, Jeff. I'm just wondering, you seem to have confidence there's going to be follow-on orders. Any color on potential magnitude or timing? And is it just safe to assume that this $800,000 of quarterly run rate is good for now based on your tripling comment?

Yes. So I'll continue to be a little conservative, and I'll take this as the run rate for now, but with a level of optimism that has us ensuring that we're going to be ready to meet an increase in demand as well. I think -- I don't think they even have full visibility on where this is going, and we certainly don't have full visibility into their pipeline, but we do see a great level of activity in the market on their side by an increasing base of experts that are helping their customers to implement this new product for them. And that effort seems to be going well. So -- but we don't have -- we don't and nor do I think they have super visibility into how this will exactly grow from here. But I think everybody is believing now that -- everybody is seeing that this is working very well, and they're believing that that's going to drive further growth.

So with the potential total addressable market, especially for this customer, I see your raw materials are elevated to where they were at least at the beginning of the year. So how do you prepare with inputs and inventory planning to meet demand if we do get a hockey stick for demand at some point?

It's a matter of taking the indicators that they're giving us and just making sure that we're ready. And if we're off by a little bit on timing in order to be prepared for them, we'll take that. We don't want to miss out on this growth, and we don't want to let them down. So we've been a little bit ahead on the supply chain, and I think that's allowed us now to fill this order for immediate demand. We actually have both operations working hard in tandem to make sure that they get what they need in time for their customer demand. We'd love to have greater guidance as it goes forward so that we can prepare our supply chain, and we're working hard to be able to do that both with the customer and not only digging in deeper with our existing supply chain partners, but even during the quarter, broadening our discussions with other potential supply chain partners to make sure we have backup supply as well. So all those things are necessary to be able to, first of all, understand and then to support the growth, however it comes.

Okay. So it seems that the product is performing as advertised, enhancing the quality a fraction of the softwood price and lowering costs. So -- outside the structural softwood availability gap, what's the roadblock to displacing current hardwood pulp lines? I presume you're on one line now, but last quarter or even today, you said that the potential to ECO is tens of millions on the line annually. Is there the potential for multiple line application over some time frame? I'm just curious on your take on that dynamic.

Yes. For sure, there's the potential for that, I would say, both at this initial customer and add additional customers. And in the first half of the year, we've had some successful introductions to other customers. These are big mills, so it's a big effort, and it's slow progress at each of them, but we now have multiple other pulp producers engaged. I think the first customer is benefiting from having an early lead due to their early adoption of our product. It seems like they're focusing their efforts initially at one mill, which I think is probably the simplest and most effective way for them to meet their customer demand. But they are also looking at expanding this into other product ranges for themselves and other customers, which I think is driving additional trial activity at other mills as well. So yes, within customer and beyond into other customers, not only is the potential there, but the activity is already there to support growth.

So sorry, just as a follow-up, last question on this. Have you tried on multiple lines with your key customer with similar success to date?

Yes.

Okay. I want to switch gears. So a little quieter on the tissue and paperboard front. I see you have one more tissue orders, as you say in the release. Are you seeing a degree of resurgence on these verticals now that we've seen destocking somewhat complete?

Yes. I mean the dynamics are changing all the time in the paper end markets. Tissue seems to be quite resilient, especially where a lot of our activity right now is in Europe. It seems to be a resilient space. Packaging is a little bit down right now. But again, we're starting from a position of having almost 0 market share in a market that is very cost conscious and wants to divorce itself as much as possible from expensive softwood fiber. So I think we have a good value proposition there even in a little bit more challenged market today. And we're making some progress on the packaging side, too, which is good.

But I frame it a little bit little differently. The service providers, are you seeing greater progress in terms of penetrating accounts? Are you adding additional service providers? Can you give us any data on trialing assuming -- I assume numbers are improving?

Yes, the pipeline has improved nicely through the first half of the year, and our number of service providers has increased through the first half of the year as well. We've got now the majority of the European space covered with service providers. Still a couple of locations where we'd like to do a little bit more and are working on that. But I think we have really good coverage. In the quarter, a really important validation point to me because I hate a data point of one was the fact that a later service provider achieved 2 wins in the quarter. And that shows that our work with multiple people can be successful, which I feel confident we can replicate that now many times over.

Okay. Let's look at Wood Products for a second. It sounds like Line 2 is now commercial. And this is the first time I've seen in print that you're making progress with some of their external customers. Has their carbon footprint -- your major wood products customer, has their carbon footprint target of 2030 changed? Or should we see ongoing acceleration as we move into the second half and 2026, both from internal and external lines?

Yes. I think as I noted, their 2030 goal remains from what we see and here, a very important goal to them that they're not coming off of, and that definitely requires an acceleration. The level of activity at the second line has been good. We have not called it commercial yet. We do have a steady level of activity, and they're taking product from us regularly, but they're gearing up actually to start their new fiscal year, which is coming up here shortly, not a calendar year with some new equipment to support growth. They've installed some already. There's a little bit more to go. And I think that will be the trigger for us to see everything working the way it needs to for continuous production to say, yes, this is an ongoing good going concern. But otherwise, things are going well. Yes, with the supply chain partners, great support. In fact, in the last month, I was with them and the supply chain partners at the same time. And I think everybody is convinced that this is the future. I think there's still some question about how that pace and how that will operationally unfold, but we're ready to support it however our end customer dictates it.

Are there learnings you can take from the first -- let's call it, 2 lines. Are there learnings you can take with your work to date with the external customers?

100%. There are learnings we can take from further optimization work we did literally last week that we -- I mean, we continue to take steps forward. You have to remember, formaldehyde has been around for decades, and they've had a ton of time to optimize that. We're still -- in the grand scheme, we're still in our infancy, and we're learning and improving all the time. And yes, even just last week, we took -- I would say we took a meaningful operational and cost reduction step by doing some optimization work altogether. So yes, the learning continues and then that learning -- and this is a good thing about being involved in a program that they're defining and driving is that they help them to translate that learning across others as well.