Impact Coatings AB (publ)

Good morning and welcome to today's webcast presentation where we have Impact Coatings presenting the Q1 report for 2024. With us presenting we have Jonas Nilsson, the CEO, and Bengt Wernersson, the CFO. We'll do a Q&A after the presentation. You can either type in your question using the form that is located to the right, or if you're calling in and would like to ask a question, please press star nine to raise your hand and star six to unmute. We will then announce if it's your turn by saying the last four digits of your phone number. And with that said, please go ahead with your presentation.

Thank you. So welcome to this presentation of the interim report for quarter one 2024. And looking at the agenda for today, we will start with business highlights, then financial update, focus on 2024. And we will end with a q&a session. So at previous presentations, I have talked about our change from building to order and to instead build to forecast. And by that, shorten lead time, increase margins, and sell more. Today, instead, we start with technology. And the key question is, why do customers in our focused markets, hydrogen and metalization, choose impact coatings. And to put that question into context, in Q4 last year, we got six new paying customers. And in this quarter, Q1 2024, we got seven new paying customers. And now in the beginning of Q2, we just sent out a press release that we received approval for volume production with coating services using our new premium FC coating. And that is for heavy duty fuel cell vehicles to one of our new customers in China. So we have technology combined with a business model that put the customer in the center that makes it easy to go from buying the first sample coatings to invest in own machines. And that is because we use the same type of machines for making samples in our coating service centers as we later deliver to customers. So therefore the qualification process is quick and smooth with a seamless transition from initial sampling to volume production. And maybe everyone talks about putting the customer in the center. So I will explain a bit more what we mean. We have advanced technology that sometimes is hard to explain, but regardless, It should be easy to buy from us and the threshold should be low for the customer. Even a customer that has zero experience of coatings should be able to go to mass production with our help. And the first step in the customer journey is to test. It's important that it's easy to test. So here our coating service offer is crucial to sell samples to the customer for trial and error. For example, a customer that has not got an exact specification, for example, of the desired thickness of the coating, can buy samples with different thicknesses, get advice from us and test in their application. Next step is to order coating services for initial volumes and when the volumes increase, the customer can buy their own machine. But if they are lacking experience with operating PVD machines, the customer can use managed services during a transition period and then buy the machine. For fuel cells, we have started building our smorgasbord of coatings, Premium FC and Ceramic Max Face that have both been qualified at major tier ones in the automotive industry as examples of that. And having qualified coatings makes Impact Coatings a safe choice for plate manufacturers who wish to offer coated plates to their customers. Yesterday night, I came home from Germany, where I have visited a hydrogen and fuel cell fair in Hanover. And I talked to a lot of customers and potential customers. And I would say that the market trend is that the plate manufacturers have to offer coated and welded plates, which means that they either have to go for coating services or invest in coating machines, which is, of course, good for us. So going back to qualified, that is a term used in automotive industry, which means that a carmaker or a tier one supplier to a carmaker has approved a certain technology. That's why it's important for us. As you see on the slide, our machine is fairly small and flat. This makes the machine suitable for noble metal coatings used for electrolysers. Because when you coat with golden platinum, you don't only get the noble metals on the plate, you get it also in the chamber of the machine. So the smaller the machine is, the easier to recover and recycle the metals. We have good efficiency in noble metal use and we offer a production ready solution for electrolysis coatings as a service. This is why many of the new customers that I mentioned come to us. When it comes to metalization of plastic, it is a benefit to place the coater close to the plastic molding machine. And a plastic molding machine runs at a certain tact or certain pace. In contrast to batch coaters, which coats a large batch during a long time, our machine with a load lock and three coating chambers arranged in a circle can be... adjusted to run at the same tact as the plastic molding machine so you get everything in one production line. That is why we call our machine inline coulter. Now I have only talked about why customers choose impact coatings. So maybe you wonder, isn't there any technical smartness to disclose? Well, the major technical smartness is the arrangement of four small chambers in a circle around one single vacuum pump. That is the enabler for the things that make customers use our machines and coatings. For example, our new premium fuel cell coating. It is a multi-layer coating using the full potential of the multiple chambers in the machine. So let's leave the technology where we put the vacuum pump in the center and talk about the business model where we put the customer in the center. Many of our new customers tell us they appreciate that they can start with coating services and then switch to their own machines. It's not a completely unique business model, but many of our competitors do not offer this, at least not close to the customers as we do. And talking about putting the customer in the center, delivery time is important for many customers. So customers want shorter delivery times, but there are also other reasons to reduce delivery time. You cannot deliver a second machine before you have delivered the first one. So right before Christmas, we made a team effort to deliver all machines we had in the backlog. It is, of course, a challenge to start a year with an empty backlog, but that actually put us in a better position to sell more machines to the same customers. Because instead of talking about the delivery of the machine that is being built, we can start talk about ordering the next machine. This is a strategy that has been proven to work. We get faster into discussion about second machines with existing customers. So we are working on shortening lead times, and I'm pretty sure that will not only lead to happier customers, it will also lead to more business. So with that, let's switch to Q4 highlights. And if you have any questions regarding the technology and business model, please stay until the Q&A and there will be plenty of time for questions. So Q1 business highlights. Let's start with net sales. So in terms of total net sales, which amounted to 4 million SEK, I'm not pleased with a quarter. We made a strategic decision to deliver all systems in our order backlog in Q4. So as expected, there was no sales from systems in Q1. And the fact that all systems in the backlog were delivered made the transition to build to forecast easier. So in that respect, it has been good. For coating services, net sales amounted to 1.6 million during the quarter and we still see delays in volume orders within electrolysis which affected the net sales negatively. We believe there is light at the horizon and I will come back to that later. Aftermarket sales was 2.4 million which is basically in line with previous year. When it comes to customer activity, we continue to build a strong sales pipeline and we welcome seven new paying customers during the quarter, quarter one. All seven are in the hydrogen market vertical and like previous quarter, our new paying customers are spread over the regions where we are active. Now in April, we... Got approved for volume coating services for fuel cells up to volume corresponding to 9 million Chinese yuan. That is a bit more than 13 million sec. So we now prepare production capacity in our coating service center in Shanghai to allow those orders. Our route to profitability has a strong focus on sales. Our sales pipe is substantially stronger now compared to half a year ago. And in the pipe, we see both existing machine customers who need more capacity as well as new customers who have just placed the first order for samples. The reorganization in Q4, we bring in the regional presidents for our main markets into the management team, has strengthened organization and has put increased focus on sales activities within our main markets. Not looking just at the quarter, China is our biggest market, followed by US. In China, we have our coating service center up and running. Looking at the numbers, also coating services, China has been weak in quarter one. This is partially due to the Chinese New Year, partially due to normal fluctuations and partially due to focus on qualifying in premium FC or coating for heavy vehicles. The production line to Waveland, which was reported in the end of 2023, is now installed and commissioning is ongoing. And we also see that Premium FC has been qualified for volume delivers, which contribute to the coating services sales or will contribute to the coating services sales during the coming year. So all in all, we are looking forward to a prosperous future. If we look at U.S., which in 2023 was our second largest market, we are ready to start our coating service center, but we await the right timing with increased volumes. In U.S., as we reported, there has been delays from existing customers, but the planned volumes, they are still expected. In parallel to existing customers, we have during the last half year, three new paying customers in the field of electrolysis in the US. And this paves the way for future orders for coating services and or future orders of systems. And as I said, to maintain cost control, we are ready to start our US coating service center, but we will not push the button too early. So with that, we switch to Bengt and I will see if I can manage to switch slide also.

Yes, as we have concluded before, we had an expected decline in sales in the first quarter from the strategic decision to deliver the systems in the order backlog at the end of 2023. So together with continuous lower pace in the coating services and aftermarket in line with last year, net sales landed at 4 million compared to last year's 20 million. And last year, included delivery of one system for 10 million. So the gross margin at 71% was positively affected by a favorable product mix with more coating services and aftermarket. So looking at the cost side, we can see that now the fully operating coating center in China is increasing cost in 2024. 19.2 million compared to 17.5 million last year. So in 2023, the center in China was in a startup phase and with only four people compared to today's 14 people. We also see an increase in depreciation, 1.7 million compared to 1 million last year. This is mainly from the new Chinese facility, but also two new coating systems for R&D and coating services in Sweden. Exposures in US dollars and euro resulted in FX gain from a weaker SEC in Q1. So this refers to bank balances and net of receivables and payables. And in total, this means a loss of close to 60 million in the quarter. So we now move then to the balance sheet and conclude that during the quarter we have continued to invest in our coating service centers and started up our work to produce systems to forecast. So there are a lot of figures here on this slide. I will explain the most important changes compared to last year. So we start with assets under construction. So that is the third line from the top of the balance sheet with 20 million SEC at the end of the quarter. To support future growth in sales, we have been working with one IC2 system to the coating center in China. We have also continued to work with an IC2 system to the plan coating center in the US. So in total, this means an addition of 10 millions in assets under construction compared to the end of 2023. So the next major change is related to that we now have started to up the work to manufacturer system to forecast. So for these systems, we have bought in components which can be seen in the increase of the raw materials by 6 million as we are moving from 80 million at year end to 86 million at quarter end in raw materials. We also see an increase of work in progress by 1.3 million. And as been mentioned before, by manufacturing against forecast, we will be able to shorten lead time, generate an increase in sale during the current and produce cost. So before we leave the balance sheet, it's worth noting that as before, the inventory of metals for electrolyzers is largely financed by prepayments from the customers. So it's 55 million at the quarter end. Moving to the cash flow. We can conclude that the end of the quarter we have a good cash balance at 97 million. But we also note that continuous sales growth is vital to be able to scale up the business. So slower sales in the quarter means that we are generating lower cash flow compared to quarter one last year. In working capital, the decrease in accounts receivables from lower sales is offsetting the increase in inventory. So this is resulting in a positive 2 million cash flow from change in working capital. And as mentioned before, investment in the quarter 10 million is related to the IC2000 system to the coating center in China. In total, this has resulted in a negative cashflow of 22 million in the quarter and a closing balance of close to 100 million. Before we leave the cashflow page, we can note that in 2023, we invested 27 million in scaling up the coating business in China, Sweden, and we've prepared for the plant center in US. Last year, we also completed the right issue in March and injected 129 million in capital after transactions cost. So this was then all for finance and we moved to focus 2024.

So to emphasize our focus for 2024, We aim to maintain leadership in electrolysis coatings for green hydrogen, while striving for market leadership also in fuel cell coatings. We want to expand in metallization, that is radomes and antenna, so the vertical for radomes and antenna for the automotive industry. And we do admit that PVD is a horizontal technology. So, of course, we don't say no to other business. We have profitability as the leading star for the coming year. And the main action to reach profitability is to sell more. We have a high pace in getting new paying customers and we have a very strong sales pipeline. Reduce lead times, that will increase sales and system manufacturing to forecast is our way of shortening lead times, which has the positive side effect, also reducing manufacturing costs. So with that, we move to the Q&A.

Thank you very much for that presentation, and like you said, now we'll jump into the Q&A section. If you have a question, you can either use the form that is located to the right, or if you're calling in and would like to ask a question, you can press star 9 to raise your hand, and star 6 to unmute. We will then announce if it's your turn by saying the last four digits of your phone number. And we've got a person calling in from 0757, please go ahead, you have the word.

Okay. Hello. This is Henry from Redeye. Do you hear me?

Yes.

Great. Hi. And well, thanks for taking my question. First off, if you could maybe talk a little bit more about the, and maybe clarify also, you said you have seven new customers within coding services and they are all within hydrogen. First off, was that correct? And maybe if you could put this into a little bit of perspective, like how many customers do you have in coding services altogether if we start there?

Yeah, if we look at those seven new customers, they order things from coating services, but they are not classified as sort of coating services customers. So the journey from initial contact with a customer until the big order has several steps. And one important step which sort of shows that, okay, this is a serious customer, this is a customer committed to buy from someone, is that the customer starts by samples to evaluate the coatings and sort of evaluate into their own systems. So even for machine customers, the first step, the first thing they will pay for is the samples to test if the coating is okay. And of course, that is a service we're doing for them, but it's not a coating service customer. Some customers, they say that, well, the end goal, or most customers say that the end goal is to invest in machines. But the road to do that is to use coating services for a while until they see they have the volumes and then they will invest in machines. So I wouldn't say that it's seven coating services customers. It's seven starts on this journey to big orders.

Okay, yeah, that clarifies it. um but how many customers do you have within coding services is that a number you would like to share i i will not disclose that no um okay but um uh well this kind of leads into um your plans for the the us plant and when you're you think you're ready to to uh well, startup in the US. Do you think that you need at least a handful of paying customers before you make that decision? What's your view on this?

Yeah, we do have more than a handful. handful of paying customers in the US in the hydrogen space. And during the last two quarters, we got three new paying customers when it comes to electrolysis in the US. So it's not about the number of paying customers, it is about volumes, because the There are two reasons why the customer wants to have production in the US. And one is they don't want to ship the plates to Europe and then ship the plates back. There's a cost for transportation and there's no customs, but there's at least a risk of customs. The other reason why you want to have production in the US is tax reductions. And it's not fully clear all the rules and regulations regarding the tax reductions, but sort of the... Common understanding is that you have to have a substantial part of the production on U.S. soil to get the tax reductions. And that is pushing sort of for customers want to have volume production in U.S. So I would say that all our electrolysis customers in U.S., they have a requirement in the end. uh to produce in us uh but it's not necessary it's not necessary to to for the initial volumes for us uh we will push the button and we are ready to push the button uh so it's it's not that we are late with starting our operations in u.s it's that we we want to keep cost control so we will push the button when we see that the volumes are enough to to have good business from the u.s coating service center yeah

Thanks. And then just finally then, regarding the numbers that you released here for coding services in China, only 0.3 million in sales in this quarter, which is clearly lower than the last half of last year. Would you like to comment here maybe Were they all focused on celebrating the Chinese New Year or what was going on really?

It's a combination. The sort of main... Main benefit with the coating service center in China is to reduce the threshold for the customers. And most customers in China, when it comes to fuel cells, they want to invest in their own machines. And there's a trend in China. It doesn't work in China as in Europe. So there's a trend that you build a factory prior to having the orders. It's not that you take the orders first and then you build a factory. To some extent, There's a race in China, who will build the biggest factory. And before investing in a machine, you want to see that the coating is working, you want to build the prototypes, you need sort of some kind of, I wouldn't say volumes, but almost... initial volumes of plates to test. And when you're happy with the result, then you either go to more volume coating services or you invest in a machine. So the volumes in the coating service center goes up and down and the closer we get to machine order, the sort of less volume we get in coating services.

Okay, so this is the an indication of some customers considering buying a machine then you could interpret it like that yes great thank you that was all for me thanks okay we'll move on with the questions here

You post things on LinkedIn and describe it as exciting news, but there is no info in the report nor on the website. Automation, high volumes and low costs are the cornerstones of this industry when it comes to volumes. So what can you tell us about this?

Yeah, we have just launched a collaboration with a company in the Netherlands. It's called AWL and they are experts in automation and especially for the automotive industry. They are big in automation. And the reason why we think we need this type of collaboration is that for fuel cells, it will become a high volume market. And that means that customers will not have persons who feed our machines with plates. It will be robots. And it will not only be one machine. It will be several machines in a production line. Therefore, someone has to build the production line. We are not the builders of the production line. We are the makers of the coating machines. So if we partner up, with the builder of production line, then together we can offer a complete solution to the customers. It's not that we are sort of totally bound to each other. The customer can select to buy the automation solution from someone else if they like. But if they want a complete proposal, yeah, then we have a partner in the Netherlands where we together can offer this.

Thank you. And you said that you have gained 13 new paying customers in the last six months. Does this mean that we should look forward to 13 new machine orders?

Well, that's one way of expressing it. When it comes to sales, you're always working with percentages. So you sort of start... your customer journey and you see a new customer or a new lead, you say that, okay, there might be a machine sale to this customer or it might even be several machines to this customer. And then there are many different steps and sort of toll gates on this journey to the big order. But one important toll gate is when the customer is actually paying the first invoice, because at least for a little bit larger companies who are customers, then you have to go through the process of being a registered supplier to them. So that means that you have all the checkboxes checked for being a supplier for the later volumes. So it is a very important step. But still, it's about probabilities. So I'm very, very happy that we have those 13 new paying customers. And we're looking forward for the future.

Is it possible to say something about how late the orders in electrolysis are, especially to the big customers in the US are?

Unfortunately, I have nothing more to comment about that. We see delays, but we expect the same volumes as previously, but we see delays.

Okay, thank you. You did not invoice any metals for electrolysis in Q1. Didn't you do any coding services for electrolysis?

We have different agreements with different customers. So for some customers, we charge the metals separately and we charge the metals sort of at cost. So the customer takes the risk for the metals. For some customers, the metals are included in the offering and then they are not accounted for separately.

Will Coding Service Center in China deliver to both Waveland and the customer and additionally to the major customer that was disclosed in the press release on April 18 in Q2 then?

Yeah, if we start with the press release, so going back to how the sales is working. So, well, The first deliveries have already been done. So that's the way we work. We charge for samples to get customers as paying customers. And this is one of those customers who have tested our stuff. And now we are qualified for volume deliveries. The second part of the question was that Waveland, the production line is installed. So we expect to deliver also sort of initial sampling volumes there. So it's the same with Waveland that the volumes will continuously increase. So I think the short answer is yes on both those questions.

Okay, thank you. And you have long-standing plans to start producing systems against the market forecast. Can you say something about what the market forecast looks like at the moment?

We do not disclose our forecasts. What we do disclose is, for example, that we have 13 new paying customers. So that can be disclosed, but we do not disclose the forecast.

If the market continues to be sluggish for a while longer, is there then a risk of a new issue in the next coming 12 months?

We do not plan for any issue of shares, no.

did the approval from the chinese fuel cell manufacturer include order for coding services you write nine million chinese one in the press release yeah the nine million is for for coating services so what i i maybe i didn't understand the question Sorry, the question was, did the approval from a Chinese fuel cell manufacturer include an order for coding services?

Okay, if it includes an order. Well, it doesn't work like that in the automotive industry. So you get approved. So you get a letter of approval. The actual orders will be sort of, A number of separate orders. So when the customer or the customer's customer sometimes produce, then they continuously will place orders for their production. But they don't order in advance. So it's not that you get an order of a big batch. You get a... approved as a supplier and then you supply according to their demand okay thank you for that clarification we'll move on to the next question here what does ptls mean on the technological slide for electrolyzers yeah ptl is the porous transport layer so in in an electrolyzer stack there are plates separated by membranes and and in in a stack typically there's more than 100 of those plates and more than 100 of those membranes and each each sort of layer in this stack has to be coated. And that is to increase the efficiency of the stack and also to increase the durability of the stack. So the coating has two purposes. And one is to reduce the electrical resistance. And the other purpose of the coating is to enhance durability so you don't get oxidation, like you don't get rust on your plates. So we coat both separator plates and we coat PTLs. So there are different layers in the stack we coat. So for each stack, it's a lot of plates.

Okay, thank you. And we'll take one final question here. Just as we see new customers incoming, how many customers are leaving or lost after the initial approach?

That was a very good question. But we will not disclose those numbers.

Okay, that's a wrap for the Q&A section here. Thank you very much Jonas and Bengt for presenting and answering all of our questions. And also thank you very much to everyone who followed along this presentation with impact coatings. And I hope you have a great rest of the day and until next time, thank you very much and goodbye.