I-Tech AB (ITECH) Earnings Call Transcript

Hello, and welcome to today's broadcast with I-Tech, where our CEO, Markus Jönsson; and CFO, Magnus Henell, will present the report for the Second Quarter of 2025. After the presentation, there will be a Q&A. So if you have any questions for the company, please submit them using the form to the right. And with that said, I hand over to you, Markus.

Thank you very much, Ludwig, and good morning, everybody, to this Q2 presentation from Moindal. It's me, Markus Jönsson and Magnus Henell by my side. And we'll just dive straight into the material. So for any newcomers to I-Tech, we will just have a brief introduction. So I-Tech is a biotech company with a unique technology targeting antifouling coatings for ships. We're a knowledge-based company, and our production is outsourced. We estimate that we are on today around 3,000 out of a global fleet of 110,000 commercial vessels. So plenty of opportunity to grow going forward. We are addressing some of the key challenges for international shipping, which is the emission reduction of CO2, prevention of the transfer of invasive species. We'll talk a little bit more about that. And also then emission to water of chemical substances. So our solution is well positioned to help shipping companies and ship owners to address this challenge. The solution stems out of Swedish wire technology, and it is, I would say, a drastic improvement in terms of performance, both to prevent barnacles from settling on to ship and also the amount of chemicals that is needed to achieve the desired effect. We are in at 6 of the 9 largest paint companies today and working actively with all of our retired customers. So during the Q1 presentation, we talked about the market a little bit. So at the start of the year with the turbulence around the global trade, et cetera, it's sort of called for a discussion of what can the implication be for I-Tech going forward. So we would say, in Q2, of course, the preconditions has continued to evolve. But looking more specifically at shipping then, I think it's positive to see that the charter rates have maintained at a sort of a very good level, around $25,000 per day, which is sort of an indication that at least that is stable, the demand is stable. If we look at the deliveries of new ships, new vessels, that is predicted to increase this year by about 9%, and that is well underway as far as we see. The worrying signal is the contracting of new vessels and the turbulence we saw in the beginning of the year, we have seen so far a significantly lower contracting rate, coming, of course, from a situation with very strong growth in 2024, but it has markedly slow than in 2025. It's not an issue here now. But of course, if this prevails that could be a challenge for us in around 3 years from now. But let's see how that evolves. So that was a quick introduction. Now I will hand over to Magnus then to take you through today's results.

Thank you for the introduction. That brings us into the quarter and the first half year of this year. And as you all have seen, I guess, in the report where we are coming with a quite slow quarter, but we would like to share this picture first to really emphasize that we are coming into a slow quarter from two exceptionally strong quarters, where we saw a huge growth and very nice purchases from our customers. And we can see that both as we wrote in the report, there are some short-term inventory buildup in our customers, which we foresee that it is really short term. But also the turbulence that have been in the market during the start of this year, that has had some negative effect on us. I think it's really we need to emphasize that the macro conditions for the shipping, they are still very positive. So when we look into the results of this quarter, I think we also need to see the whole picture, but let me take you through the quarter first. As you have already seen, we had a -- net sales were 26% lower than Q2. I know the expectations have been very much higher, of course, from our side as well. But given the different events during the quarter, this is unfortunately the result. We are, of course, also talked about this during the last 5 quarters since our previous sort of reduction over a quarter in Q4 2023 that it is a little bit stochastic still the business. So it can go up and down in the quarters. And as you see, it was two exceptionally good quarters in the beginning and there will be variations. I need to emphasize that again. And of course, the exchange rate hasn't played in our favor. Of course, we have lost roughly 13% only on the exchange rate. So what is positive in the quarter though is that we are still increasing our gross margin. It continues. And this increase in the gross margin is a combination of new supplier, some process improvements and of course, also price pressure on the existing suppliers, so to speak. And coming out of the quarter, we're ending at 21% EBITDA which is good, but bad for us. But I think also a positive is the strong cash balance that we are still growing even that we have a dividend during the quarter with 34% compared to last year. But as I said, I think we need to look at the full picture and the first half year gives a little bit more flavor of where we are, where we combine the first 2 quarters. And here, we show double-digit volume growth. The exchange rate makes that just or almost double-digit net sales growth. But we're coming out with a very good EBITDA margin of 30%, which is where we should be in our view, so to speak, and the operating cash flow is also good. So taking into account, of course, Q2 is a bad quarter, but we also need to look on the full picture of the first half year and the trends moving forward. And just to round up the financial part, so to speak. We're having a situation with still it's very much Asia, we have 99% RSAs in Asia. But what has happened over the quarter into this first half year is that Korea has taken over a little bit more again with a little bit drop of the portion of the sales in China. So that maybe doesn't say anything for the long term, but I think what we also need to emphasize again is that all the customers we have the smaller customers below the #2 are growing significantly, although well back from a low level, but they are continuing to grow.

Okay. So just wrapping up, then I think it's important as Magnus is saying, to look also at the development of the full year. And I just want to emphasize what Magnus was saying there, the number one reason for the results in Q2 is the natural variation. There was really strong sales in Q4 and Q1, one customer then reporting high inventory, you could say, in the [indiscernible] right? The market turbulence in the beginning -- or end of Q1, beginning of Q2, could have had an effect, you could say, on purchasing behavior and risk mitigation, et cetera. But as Magnus is saying, I mean growth first half is still good, especially if you look in the volume or nominal currency there. So if we look at the split from CNP and the other customer base, you could see that CNP has grown again their share a little bit in the first half. So 28% of the sales comes from the broadening customer base. But this space has grown their volume by 41% in the first half of the year, which is sort of also underlying then the additional growth potential going forward because many of these customers are coming from pipe volumes, and we have seen positive developments. We've talked in a number of quarters about PPG. I think their growth in the first half was 172%. But there are also now more customers that start to display higher growth rates among the smaller ones, which is speaking well for sort of the underlying strength of the business as such and the future growth prospects, I would say. And also, cash balance, yes, it grew 20% versus H1 2024. So the underscoring sort of the positive momentum in the business, and Magnus was mentioning the gross margin as well, right, which is another good thing as developed even a little bit better than anticipated so far this year. So very good developments there. So let's look at the outlook a little bit then as well going forward. And here, we actually start with the regulatory situation and the reregistration process in EU, which is this theme that we keep coming back to. What was a significant event during Q2 was the extension of Selektope's existing approval year then to accommodate that this process that we're going through now can be finalized. So essentially, the old approval was set to expire in the end of June, but they have now given it an additional year. During the summer and in July, I actually participated in the first implementation dialogue regarding the bio side product regulation. So this big regulatory package in the EU, which was a very good event. It was hosted by the Commissioner Várhelyi and his cabinet and also included members from other commissioners and also -- so it was a good opportunity for industry and other stakeholders to sort of highlight the challenges and the opportunities to develop this legislation going forward. And another very important meeting happened just after that when I and the I-Tech team got a chance to meet the commissioner's cabinets. And in this meeting, we had the opportunity to point out some of the factual errors that has been apparent, you could say, in the ongoing reregistration process of Selektope. So we, of course, anticipate and look forward to see how this meeting can influence the process positively going forward. The first occasion where we can see an indication of the results will be at the next standing committee meeting, which would be in September. The meeting after that is in December. We still hope that we will be able to say where this process of reregistration will end towards the end of the year. But as we have flagged numerous times, it's very difficult to see. Now at least we know there is a deadline for the mid of next year. with the relegation of the current approvals. So that's the status here. I would say, quite good development over the summer. Also, we released a new white paper about filling in niche areas of ships. I think now we come towards the end of the summer. I think many of you have maybe seen use of exotic species turning up in our coastal waters around Europe, at least here in Sweden, there has been some very noteworthy spottings of new marine species. This is, of course, threatening by diversity of our European coastal waters. And the #1 source for spread of invasive species is actually the fouling of ships holes. And we talk a lot about sort of the big areas of the how because that has implications for the fuel consumption. But actually, you have very much problem in the so-called niche areas, which are very difficult on one hand to service and maintain, but also very, very difficult to clean during the dry docking cycle. And here, actually, then you have the possibility for invasive species to thrive. And that could be in CCS and CCS ratings in crossover tunnels or broad thrusters. So it is really to highlight and put an emphasis for the industry to develop better solutions here to help preventing the spread of invasive species. And here, of course, our solution, Selektope, has the opportunity to give much better protection versus barnacles. And barnacles is really, you could say, a host organism for other invasive species. So tackling that would have a big implication. So coming to the business outlook then. Well, the uncertainty in market turbulence is, to some extent, continuing, you could say. I mean, there is new updates regarding trade tariffs, et cetera, going forward. However, we've seen positively then that the shipping business is stable and the new ship deliveries is set to increase for this year. So underlying, it's still a quite good market. The currency headwind, we have suffered that in Q2. Now it has been stable during this quarter, but we will see then how the rest of the year develops. But as also we said then, I mean we look forward to more positive developments with customer product launches. During the quarter, we have got confirmation then of one customer intending to launch a new product in Korea later this year. And we also see or anticipate several new product launches in the end of October, and let's see more about that going forward. Also, the business development activities are developing really nicely. We had some good technical milestones achieved during the quarter. And also then last but not least, I mean, we will continuously work on the operational improvements and the outlook as -- of course, specifically to the EU, but also for the rest of the world when it comes to achieving additional registrations, U.S. market, for instance. So I think that concludes the presentation part, and we eagerly await and look forward to your questions.

Let's start with some questions here. You previously experienced a similar pattern in which sales growth was halted in Q4 2023, which rebounded in Q1 2024. Can we assume a similar pattern here?

Well, we stress every time that there is a substantial variation between quarters, right? And we can say that the result is predominantly because of quarterly variation. So the underlying business is positive and is developing positively. We see a good volume growth of the larger and growing shares of smaller customers. So there is definitely more to be seen in the future.

Do you think your gross margin of 59% in the quarter is a sustainable level going forward?

Yes. If we work proactively with our suppliers and of course, with making sure that we have good prices towards our customers also in the future. I think we should look at a sustainable level, of course, it can also vary a little bit depending on the customer mix because, of course, we have different prices. et cetera, different mix over which the supplier we are delivering from moving forward. But I think we're starting to look on a more sustainable level, yes.

When do you expect inventory levels to be more normalized?

Well, I think the inventory levels at our customers, I think we have talked about that extensively also is, in general, quite low. Paint manufacturer, they are really taking pride in keeping low inventory levels. And we have -- as I take, we have a very good response time and are able to deliver quite quickly to our customers. So in general, customers have very low inventory levels. We made this comment specifically around one customer than in Q1 that was buying large amounts in Q4 last year. That resulted in them having a high inventory in Q1. But in general, I would say inventories levels are not high with our customers.

What development in sales have you seen during the first half of Q3?

Well, we do not give forward-looking statements, right? But I think we are saying with emphasis that the main result for the low results in Q2 is because of natural variation in orders.

Gross margin was very strong in the quarter. Should we expect a level around here going forward?

As I said in the previous question, I think we are looking at sustainable level of gross margin for the coming periods. Then of course, it can go up and down a little bit, but it shouldn't be any major deviations.

Given you see the current sales environment, as well as temporary, the cost for adding workforce are behind now, given the drop in share price, would it make sense to buy back some shares.

Unfortunately, we don't have -- we have a situation where we can't buy back shares. So that is not an option we can elaborate on.

What percent of 2024 sales came from the customer with financial difficulties?