Impact Coatings AB (publ)

Hello and welcome to today's webcast with Impact Coatings where Seja Jonas Nilsson and CFO Bengt Wernersson will present a report for the second quarter of 2024. After the presentation there will be a Q&A. So if you're calling in and want to ask a question press star 9 to raise your hand and then press star 6 to activate your sound when you're handed the word. If you want to send in a question you can also use the form to the right. And with that said I hand over the word to you.

Thank you and welcome to this presentation of the second quarter report of impact coatings. So today's agenda looks like this. We will start with some highlights from second quarter, then an update, business and market update. Bank will run the financial update. We will have a look at the focus for the rest of the year. And then there's a Q&A session. So let us start with Q2 highlights. Net sales amounts to 31.7 million. And if we look at the first graph upper right, we see one IC2000 delivery and one system upgrade totaling to 25.7 million. In the Coating Services graph, we see increase from previous quarter thanks to Coating Services China, but still waiting for electrolysis orders to return. Total 2.8 million. And last graph, aftermarket remains at the same level, 3.2 million. Some other highlights that you have might seen in our press releases. We got volume approval from a Chinese fuel cell manufacturer. We have delivered a second IC2000 machine to Saxon in China. We got selected as preferred supplier. And after the period, we also got an order for an IC2000 machine from Boyan. Looking at coating services, we have good traction in China with the 2-shift production. We will soon ship an IC2000 to cope with increasing volumes. But on the other hand, we still see delays within electrolysis in North America. Previously, I've talked a lot about standardization and short lead times. And in June, we managed to deliver an IC 2000 six and a half weeks after order. So let's continue with the electrolyzer market, which has previously been focused on North America. but is now also picking up in other parts of the world. And for new listeners, an electrolyzer is used to produce hydrogen from water and green electricity. An electrolyzer consists of a pack of plates like the one on the picture. And electrolyzer plates require noble metal coatings such as platinum and gold coatings for high performance and long lifetime. In 2022 and also first half of 2023, we saw a rapid expansion in the electrolyzer market in North America. And we saw substantial volumes and quite bold forecasts, mainly driven by one customer. This was both good and bad. Those volumes put us as one of the market leaders in noble metal PVD coatings for electrolyzers. But now we have seen a decline in volumes. However, looking at Q2, we do have early traction from multiple new customers in the water electrolysis space. And those opportunities are not only in North America, but all regions. They are serious customers who evaluate our coatings for serious production. So we are ready to ramp up again when our customers are ready. And this takes us to our North American Coating Service Center. If we look at new customers, the initial volumes for tests, evaluations, qualification, pre-series production, etc. can be had. from our coating service center in Sweden. But in the end, real production volumes must be coated in North America. So therefore we are ready to kick off our North American coating service center, but to maintain cost control and not spend money before we see the revenues, we are evaluating the timing of the launch. Two weeks ago, I was traveling in US and Canada visiting customers. Several of the customers I've visited are currently in evaluation of our electrolyzer coatings for serious production. One of them was especially exciting, not because of bold forecasts in Excel, but because of stable, trustworthy strategy for continuous growth. This company is fully vertically integrated from building wind turbines to using hydrogen to produce ammonia. and has a strong financing also. So they are in charge of their own destiny and they control their business case. The near-term volumes can be handled from Linköping, but the long-term potential of this customer needs to be handled from North America. So that's an example why we need to be ready to kick off our North American operation. I also met with some electroplaters. Electroplating is the competing technology, it's our technology. And it was interesting to see that they are now also looking at PVD coatings for electrolysers. So as I said, we are one of the few in the world with experience from noble metal electrolyzer coatings in volume. We have learned a lot from running coating of electrolysis plates at our coating service center here in Linköping. And this puts us in a good position to compete both with other PVD suppliers and with old technology such as electroplating. Sometimes new technology faces challenges to compete with old technology but we are proven we are cleaner and most important we are more cost efficient. In North America the hydrogen market has a big focus on electrolysis that is production of green hydrogen and it's driven by governmental incentives. In Asia the hydrogen market is mainly driven by fuel cells. That is converting hydrogen to electricity. So the sort of consumption of hydrogen rather than the production of green hydrogen. And if we see that it's a bit slow on the electrolyzer market in US, we see a high pace in the fuel cell market in China. So these two pictures are from our factory in Shanghai. There we are running at full speed and we have put in additional shifts. Soon we will also install a new IC2000 machine, which is needed to handle the increasing volumes we see. And I want to stay in China and I want to talk a bit about the background and also the success factors in China. So during the summer, I had an informal meeting with the CEO of the company in the press release you see on the picture here from 18th of April. And among other things, we discussed the Chinese market and compared that to North America and to Europe. And in China, there is a large production of, as he said, hydrogen of all colors. But to be honest, there is not that much green hydrogen yet in China. However, if you start by creating a demand for green hydrogen, there will soon be a market also for production. of green hydrogen so according to this ceo the focus in china and the focus from the chinese government is to create a demand and when we talk we compare this to the battery electrical vehicle market in sweden also here the initial focus was create a demand by subsidizing electrical vehicle. But to make it green, also the electricity must be green. And nowadays, many people have solar panels to charge their car. But you buy the car first before you install solar panels on your carport. People don't do the other way around. So our focus in China right now is primarily on fuel cells, the usage of hydrogen, and a success factor in this market is to address the complete value chain. I'll try to explain. A so-called tier one, as you see in the picture, is a supplier that delivers to the manufacturer vehicles called the OEM. In China, we have a couple of tier ones who have qualified our coatings. And qualified in this case means that they have tested, approved and endorsed our coatings. This doesn't necessarily mean that they buy coatings or machines from us. It means that they tell their suppliers that they want to buy plates that are coated with a coating done by an impact coatings machine. And it doesn't necessarily have to be just one supplier of plates. A tier one can have several plate suppliers, and some of those plate suppliers invest in their own impact coatings machines, and some go for coating services. If we look at examples of plate manufacturers, i.e. look one step down in the value chain from the tier ones, We have Sexton, who has purchased and installed two IC2000 machines. We have Boyan, who has an IC500 and has now ordered a second machine, an IC2000. And we are currently coating plates at full speed to other plate manufacturers at our coating service center in Shanghai. So we will soon ship an IC2000 to increase production capacity there. All in all, the demand from the tier ones has so far rendered a demand of four IC2000 machines in China, two that have been delivered to Saxon, one that will soon be delivered to Boyan, and one to meet the need in our own coating service center. So this has been a strategy from our side to address the complete value chain and create a pull from the customer's customer. Sometimes this is referred to as a push-pull strategy. And to circle back to the CEO I mentioned, he is the customer's customer. So he creates pull by telling his suppliers that he has qualified our premium FC fuel cell coating. I was talking about 4IC2000 and to develop and launch the inline coupler IC2000 in 2022 was a bold decision. But it turns out that it was the right decision. The Chinese fuel cell market needs the capacity of the IC2000. And it was also the entry ticket to the electrolyzer market due to the large chamber size of that machine. What we have also seen is that shorter lead times of the IC2000 machines lead to more sales. The first delivery of an IC2000 to a customer was done in December last year. And due to that delivery, we could start talking to the customer about the next machine, which was delivered in this Q2. So shorter lead times has increased the sales of the IC2000. We have had an internal goal of being able to deliver a machine within the same quarter as the order is received. If this is possible, it's of course dependent on when in the quarter the order is received. But nevertheless, the delivery to Saxon in the end of June was made within the same quarter and it was made only six and a half weeks after receiving the order. Reducing lead time to be able to increase sales. That is an ongoing work and you will be able to follow that through our press releases regarding orders and deliveries. We strive for market leadership in the hydrogen market. Our primary focus for achieving this is through organic growth. But if we look at the hydrogen industry and trends in the market, we also see opportunities in partnerships, strategic alliances, and maybe strategic acquisitions that can strengthen our financial performance and become a stepping stone in our journey towards profitability. Some examples of areas where there are potential opportunities are within new coatings, geographic reach, and complementary offerings. So if we start with new coatings, there are several research intensive startups that develops new coatings that are interesting from a cost benefit perspective. We have expertise in taking new coatings into mass production. So there might be synergies that can be utilized in partnership. And such a partnership could be in the form of a loose collaboration, license agreement, or even an acquisition if it makes sense from a revenue and profit profitability perspective. If we look at geographic reach and complementary offerings, it might be possible to reach new customers and also new geographic markets together with industry colleagues with complementary offerings. I mean, reaching customers that we, by some reason, cannot... reach on our own and by partnerships, we increase our revenues. There might also be some cost advantages working closely together with someone with a complimentary offering. One example, co-location can be a cost efficient way of reaching certain customers or reaching a certain geographic market. So to summarize, we strive for market leadership, and in this drive, we will have an open mindset. We understand that we cannot do everything ourselves, and we will carefully evaluate how different partnership initiatives could contribute to Impact Coating's long-term financial performance and also further strengthen our market position. So with that, I leave the word to Bengt, who will dig down into the figures, starting with the rolling 12-month sales.

Thank you, Jonas. So after a temporary dip in Q1, we are witnessing an increase in rolling 12-month sales during Q2. And sales growth is the cornerstone of our journey towards profitability. And when looking at the sales over the past seven quarters, it's clear now that we have established ourselves on a new level. While Q1 was slow, the quarter before and after have been the best we've seen in the past six years. As we concluded on the previous page, We saw an increase in sales in the quarter. We also maintained the gross margin level at close to 60%, achieved in full year 2023. This combination led to a profit improvement in the quarter compared to previous year. In the quarter we delivered one system and an upgrade of previously delivered system to a Chinese customer. In total close to 26 million in revenue. The slower pace in coating services continued in Q2 with sales amounting to 2.8 million down from 8.6 last year. Aftermarket was slightly up compared to previous year, 3.2 million compared to 2.6. Operating expenses in the quarter were 21 million, consistent with last year after adjusting for the severance pay to the former CEO. In the quarter, increased costs in China, that was still in a startup phase last year, were offset by reduced activity in the Swedish coating center. Depreciation rose to 1.4 million from 1 million last year, mainly from the investment in the Chinese facility. Currency exposure in US dollars and euro resulted in a foreign exchange loss of 0.7 million, linked to bank balances and the net of receivables and liabilities. Interest income amounted to 0.8 million. So in total, this led to a negative result of 3.8 million in the quarter. We now move to the balance sheet and conclude that during the quarter we have continued to invest in coating systems. We have also continued our work to produce systems based on forecasts. There are a lot of figures on this slide, so I will explain the most important changes compared to the end of last year. So we start with asset under construction. So that is the third line from top of the balance sheet with 80 million at the end of the quarter. And to support future growth, we have been working with one IC system to the coating center in China. We have also been working with one IC500 system and other equipment to the new facility in Linköping. Finally, we have capitalized costs related to product development. So in total, this means an addition of 7 million compared to the end of 2023. The next major change compared to last year is related to our continued work to manufacture system based on forecast. So for this system, we have brought in components, which can see in an increase of raw materials per 8 million, as we are moving from 18 million at the end of 2023 to 88 billion at the end of the quarter. We also see an increase in work in progress by 8 million. So by manufacturing against forecast, we will be able to shorten lead times generate increase in sales and reduce costs. So moving to the cash flow, we can conclude that we end the quarter with a good cash balance at 86 million. We also note that continuous sales growth is vital to scale up the business. So the cash flow was negatively affected by the period result, minus 20 million. The increase in working capital of close to 10 million is mainly driven by the new strategy to produce systems based on forecasts. And as mentioned before, investment in the quarter 8 million is mainly related to one system to China and a system to the new facility in Linköping. In total, This resulted in a negative cash flow of 34 million in the first half of the year and a closing balance of 86 million. So this was all from the finance and then we move now to the focus for the second half of 2024.