Impact Coatings AB (publ)

Good morning and welcome to today's presentation where we have Impact Coatings presenting the Q3 report for 2024. With us presenting, we have Jonas Nilsson, CEO, and Bengt Wernerson, CFO. We'll do a Q&A after the presentation, and 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 then star six to unmute yourself. And with that said, please go ahead with your presentation.

Thank you. So welcome to this presentation of the Q3 report. I am Jonas Nilsson and with me I have Bengt Wernersson. He has caught a cold and he has a weak voice so I will also present his slides but he is online and available for questions. So this is the agenda. We start with Q3 highlights. We have a market and business update, financial update, talk about continued focus, and then a short Q&A. So let us start with Q3 highlights. I would say that Q3 is a strong quarter across the business. Net sales amounts to 31.7 million, which also gives a rolling 12 net sales above 100 million. If we look at the first graph, we see that we, like the previous quarter, had a delivery of one inline quarter IC2000. This was the second system delivered to Boyan in China. In the Coating Services graph you see an increase from previous quarter thanks to Coating Services China. There we are limited by capacity right now but a brand new IC2000 has been shipped and will be installed and up and running during this fourth quarter. For those of you who have read the report, you have seen that the order backlog for coating services amounts to 3.9 million. On top of that, we have 10.7 million that comes from a rental arrangement of a coating line to an antenna customer. During the third quarter, we again demonstrated the results of our new delivery strategy with a successful delivery of another IC2000 within the same quarter as the order was received. This delivery to Boyan in China confirms that our focus on standardization and forecast-based system production increases efficiency. Moving forward, we will work on refining software, coding processes and other system functionalities. And we are in a good position to do that. We have several customers that are running real volume production with multiple machines, and so do we at our coding service center in Shanghai. This gives us the opportunity to fine tune and improve our systems for real serious production performance. Our coating service center in China has been operating at full production capacity in two shifts since the second quarter 2024 with machine setup time and preparations for the next shift. This is in practice around the clock production at the factory. So basically we're running 24-7. So we very much look forward to have the new IC2000 up and running to increase the capacity. We're also increasing our delivery capacity of machines. During the quarter, we began the relocation of our headquarters, including R&D, coating service center and system manufacturing and assembly to our new premises here in Mjärdevi in Linköping. The move is being carried out in stages and we expect to be fully settled in the new facilities by the end of the year. Our path to profitability is based on increased sales. This quarter, we show increased sales on a rolling 12-month basis. And to continue on that path, we need increased delivery capacity. The new factory has an initial capacity of one machine per month and can be upgraded to two machines per month. So talking about rolling 12, After a temporary dip in Q1, we are witnessing an increase in rolling 12-month sales during Q3. Sales growth is the cornerstone of our journey towards profitability. And when looking at sales over the past seven quarters, it's clear that we now have established ourselves on a new level. While Q1 was a bit slow, the quarters before and after have been the best we've seen in the past six years. As we have concluded, we have a strong quarter in all revenue streams. In the quarter, we delivered one system to a Chinese customer amounting to 21.5 million. We saw a positive trend in coating services in China, which reduces the gap compared to last year. We have sales in a quarter of 6.6 million compared to 8.4 million last year. And last year was mainly driven by electrolysis coatings. Aftermarket were slightly up compared to previous year, 3.6 million compared to 2.6. Gross margin is at 50% for the quarter and comes from the product mix during the quarter and the fact that we have repetitive order which affect our price level. There are, however, significant opportunities to lower the production costs. Operating expenses in the quarter were 20.7 million compared to 19 million last year. In the quarter, increased costs in China were partly offset by reduced activity and therefore reduced costs at the Swedish coating service center. Depreciation rose to 1.6 million from 1.1 last year, mainly from investments in the Chinese facility. Currency exposure in US dollars and euro resulted in a foreign exchange loss of 200,000. Interest income amounted to 200,000. In total, this led to a negative result of 6.5 million in the quarter. So we now move to the balance sheet and conclude that during the quarter we have continued to invest in coating systems to our coating service centers. We have also continued our work to produce systems based on forecasts. There are a lot of figures on this slide. I will explain the most important changes compared to end of last year. We start with assets under construction, the third line from the top of the balance sheet with 25 million at the end of the quarter. To support future growth in sales, we have been working with one IC2000 system to the coating service center in China, as I previously mentioned, that the system is now delivered. We have also been working on one IC500 system and other equipment to the new facility here in Linköping. Finally, we have capitalized costs related to product development. In total, this means an addition of 14 million compared to end of 2023. Next major change compared to last year is related to our continued work to manufacture systems based on forecasts. For these systems, we have purchased components, which can be seen in the increase in raw materials by 6 million. We are moving from 80 million at year end to 86 million at quarter end. We also see an increase in work in progress by 4 million. By manufacturing to forecast, we will be able to shorten lead times, generate increased sales and also reduce costs. Moving to the cash flow, we can conclude that we end the quarter with a cash balance at 65 million. Continued sales growth is vital to scale up the business and we are working according to our plan to get in new paying customers and also reduce the lead times to increase sales. The cash flow was negatively affected by the year-to-date results. The increase in working capital at just over 18 million is mainly driven by the new strategy to produce systems on forecasts, which is part of our plan to increase sales. It also includes increasing receivables from a shipment of a coating system at perioden. And as we have mentioned before, investments in the quarter of 50 million is mainly related to one system to our coating service center in Shanghai and a system to the new facility in Linköping. In total, this resulted in a negative cash flow of 54 million in the nine months and a closing balance of 65 million. So this was all the finance slides, which means that we now move to our continued focus. Continued focus is unchanged. We aim to maintain market leadership in electrolysis coatings for green hydrogen, while also striving for market leadership in fuel cell coatings. We want to expand in metalization, i.e. radomes and antenna verticals for the automotive industry. And we do admit that PVD is a horizontal technology, so we do not say no to other businesses. We have profitability as the leading star, both for the rest of the year and also for the coming years. And the main action to reach profitability is to sell more. We still have a high pace in getting new paying customers and we have a strong sales pipeline. And this is especially important when the sales cycles are long. Reduced delivery times has led to and will continue to lead to increased sales. The system manufacturing to forecast is our way of shortening lead times, which has the positive side effect of also long-term reducing manufacturing costs. So with that, I want to thank all of our shareholders and also our customers for your continued trust. And I would also like to send a special thanks to Bengt, who has been our interim CFO since January 23. Bengt will stay until end of this year to make a smooth transition to the new CFO, Lena Åberg, who starts next month. Thank you.

Thank you very much for that presentation. And now we'll jump into the Q&A section here. If you're calling in and would like to ask a question, you can please press star nine to raise your hand and then star six to unmute. And we'll begin with Henrik from Redeye. Please go ahead. You have the word.

OK, hello, gentlemen.

Hi, Henrik. How are you?

Hi, I'm fine. But yes, I have a few questions here. So let me start with coating system sales. Just if you could give us some flavor on your tender pipeline. I mean, you've been You've recently shipped these systems to some Chinese customers, and I'm just wondering how, is it mainly Chinese customers that are on the top of your pipeline and negotiations, so to speak, or is this pipeline a lot broader than that? Could you elaborate a little bit, please?

Yeah, that's a very good question. And if you look at our sales funnel, if you look at the top of the sales funnel, i.e. new paying customers that come in and pay for samples to evaluate our technology, we see them all over the world. We have new paying customers in US, we have new paying customers in Europe, and we have new paying customers in China. If we look at sort of the bottom of the sales funnel, we see that in China, it's sort of a higher speed. China typically are faster through the sales funnel. And we also see that in China, in the deliveries we have seen this year. It's focused on China and fuel cells. I was also traveling A month ago in China, I was traveling in Korea, and we see also some new opportunities in rest of Asia, not only China.

All right. Well, thank you. And then, well, you mentioned here in the report and previously the letter of intent with FTXT and you mentioned that initial orders were estimated at a value of 13 million Swedish crowns. Could you give us some timeframe to these orders?

Yeah, we're referring to, I think we sent out a press release of that. So FTXT is part of Great Wall Motors. So it's a subsidiary to Great Wall Motors. And we have strengthened the collaboration now with Great Wall Motors. So I was there a month ago and we signed a letter of intent saying, with intention that we continue to develop coatings and they will use their test center and their test vehicles to do sort of real life test of those coatings. So we work together to improve the coatings. Great Wall Motors, they buy coated plates from different suppliers and we supply the coatings to those suppliers.

Okay. But what about this timeframe that I was asking for?

Sorry, could you repeat the question?

Well, you said that at At the time, I'm reading from your report here, at the time initial orders to us from the plate supplier of FTXT were estimated at a value of 13 million Swedish crowns. So how far out in time does that extend?

Yeah, it's about a year. We are running full production now at our Chinese coating service center and some of the plates we are producing is of course due to this collaboration. So you can see Great Wall Motors and FTXT. It's our customer's customer. So it's not an order. We have been approved as the supplier of the coatings. And the orders comes from the sub-suppliers of FTXT and Great Wall Motors. All right.

Yeah, thanks. And then... Talking a little bit about electrolysis, that segment. You mentioned, I think in the previous report, Q2, that you have a few new clients testing these. What's the progress here?

Sorry, the sound was breaking up here. So could you please repeat the question?

Yes. Within the electrolysis coatings, you mentioned in the Q2 conference call, I think, that you had at least a handful of new clients who are getting samples from you. So how is the progress with these new clients?

For most of them, we have good progress. And for one of them, we have very good progress, but we have nothing that we can report to the public right now. But I can say that in general, with that handful of new customers, we have good progress. Okay.

And then I guess regarding the The large US client that you usually don't talk about by name, are there any signals from them? I mean, I see in the report that there are no metal surcharges in this quarter, so I guess the activity has been about zero with this client. Do you get any indications from them?

To some extent you are right, but I wouldn't call it zero activity. We have a lot of activity, but when it comes to sort of large orders of plates, as you can see in the report, there has not been any large orders of coated plates with noble metals that we report separately. So there is a lot of activities going on, but when it comes to orders, it's still slow.

All right. Well, thank you. That was all for me.

Thank you very much. We'll move on with the Q&A section here. If you're calling in, a gentle reminder to press star 9 to raise your hand and then star 6 to unmute. We've gotten a few written questions here and we'll start with the first one. You mentioned that production costs are expected to decrease. Do you have a plan for achieving this?

Yes, we do have a plan for achieving this. And I will not go into sort of the complete plan. But just to give an example on that, we do have a coating service center in China. We have personnel in place in China. And what we have started doing some tests is to do production of some parts in China. That that can increase a lot. Right now, we are fully, fully, fully busy with production of fuel cell plates in China. But as soon as we have our new machine up and running, we will have more room for also looking at producing parts of our machines in China and especially for the Chinese market we see that we can have some benefits on that when it comes to production costs and by doing that we can get better margins.

And we'll move on with the next question here. First of all, congratulations to another great quarter. We're seeing that sales are picking up, and as you self-stated, the first time passing 100 million SEC in rolling 12 months. So the question is, you say in the report that you want to continue and also strengthen the positive trend with sales of the IC2000 each quarter. Do you have any feelings of yet another sale of an IC2000 this year? Or even a feeling that some quarter it might be two or more sales of this product? Thank you.

Yeah, we do not present forecasts, but I can say that the decision to develop the IC2000, when the decision was made, it was a bold decision from the management and also from the board who approved this decision to make this investment. But it turned out that it was a very, very good decision. We have a good market fit with our IC2000. The size is good. The competitors, they are either smaller or larger. The fuel cell market is expanding in a way that customers appreciate the throughput and the size of our machines. So it's a very good fit for the market.

And what are the key challenges or risks for impact coating that you foresee in maintaining your market position in China, especially with the increasing competition in fuel cell coating segment?

You have to be fast. So if you're going to enter the Chinese market, you have to act sort of in the Chinese way. And the Chinese way is to be very, very fast. And we can see that also on the sales figures for China, that the time from order to delivery has to be fast. We have to be fast and we are fast. And also the time from sort of initial contact with a new customer to order tends to be a little bit faster in China than the rest of the world.

And with the planned relocation of the headquarters to Mjärdevi and its larger facilities, what specific cost efficiencies or productivity gains do you expect to realize and how will this affect the bottom line?

Yeah, I can give one. There are many different sort of small parts to answer here, but I can give one sort of concrete example. In our old facility, we had to assemble one machine at a time. which is of course not the most efficient way of assembling a machine in our new facility we can assemble two or more machines simultaneously so you can you can save a lot of setup time when doing machine assembly this is just one example there are many other examples but but that's sort of

Okay, and we'll take one final question here. Can you provide more details about any potential new developments with Hyundai? And will there be opportunities through their collaboration with Toyota?

I was visiting Asia like a month ago. And of course, I also visited Hyundai. I cannot sort of disclose any details about the collaboration and exactly what we do on the technical side. But we still have a collaboration with Hyundai.

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