I-Tech AB

Hello and welcome to today's presentation with iTech. With us presenting today, we have Magnus Hanell, Acting CEO, and Cecilia Olausson, Director of Regulatory Affairs. If you'd like to ask any questions, you can use the form that is located to the right, and we'll take that up after the presentation during the Q&A. And with that said, please go ahead with your presentation.

Hello, everyone. A very warm welcome. this August morning with a little bit bad weather outside, but hopefully a nice warm message from ourselves here. Today I'm here, Magnus Enel. I'm in the role as Acting CEO and also Cecilia Olausson besides me. So I'm going to lead you through this webcast and the Q1 future report of iTech. I would like to start by just giving, for those who haven't listened in to us earlier that much, give you a short background on what iTech is, what we do and why we do it. And I think most of you know that we are a listed company. We've been on the Nasdaq Stock Exchange since 2018. We're basing the company on a unique and protected technology, i.e. the Select Hope. And what does this product do? We have, so to speak, a proven ingredient biotechnology in Selecto that we add to the mixture of paints. And when added that and when the Selecto is attached to the surf or on the surface of a ship, it repels all the barnacles that try to settle. which is a very unique most of the biocides out there today usually kill the organisms but we repel them instead so after a few hours they go back to the normal state and the purpose of this is of course to improve shipping and improve by enhancing the power of coatings uh i make sure that we have the best coatings available. And the result of this is that we produce lower emissions to air and sea by reducing the carbon footprint from the fuel burned in the ships. And I take as company has a strong growth behind us and we have hopefully a strong growth ahead of us. Today we have more than 30 available products on the global paint market, so to speak. And six of the nine largest paint companies actually produce commercial paints sold to the shipping industry. This has led to that we have produced and delivered more than 20 metric tons of Select Hope. And you should remember, I haven't said it today, but earlier, that we only use as low as 0.1% of the total volume in the paint bucket is Select Hope. So 20 metric tons goes to a lot of paint. And in fact, there are more than 2,500 ships out there using the technology today. And with such a good product, we also would like to have a good market opportunity, and we do have. We estimate that the total market opportunity for Selecto is somewhere between 350 and 500 million US dollars, which is far from where we are today, but hopefully we can gain it over the years to come. And just a glimpse of the quarter, we are continuing growing, both in turnover and profit. And in fact, it is our best quarter ever again. On the sales side, it's driven a lot by Japan and Korea, which are our most significant markets today, contributing with 35% respective, 50% of the sales. And for the quarter, we amount to almost $43 million in sales. compared to the 33 million SEK last year, resulting in an EBIT margin of 24%, slightly above last year. We're coming back to the reason why it's not more later on, but it gives us a solid or a very good net result of almost 9 million Swedish kronor compared to 7 million last year. So looking into why we are on the market today, because we know that there is a huge demand for reduction of emissions. Today, the seabourn trade stands for almost 3% of the global carbon footprint. And we know that there is over 100 million tons of CO2 in potential savings only on the coatings. Coming from the base today of 800 metric tons rough clearing carbon dioxide emissions from the shipping, that is a significant part. And the role of selector can really make a difference in the savings for coatings. The second part of why we exist is actually to protect the marine ecosystem. Today, we know that alien invasive species are regarded as the second biggest cause of extinction of species. That means if we are having fouled hulls in Asia or in other places in the world that are bringing organisms into the oceans close by in another place, that is a significant risk of actually introducing new invasive species and also extinction of other species. So that is a really focused area of this. And the third part is the material optimization. All the trends are moving into more optimized biocidal composition. And what do we mean by that? It means that we're trying to reduce the biocides that are in the paint. As I said before, we only use 0.1% of Selecto, gaining for barnacles the same effect that 30, 40 or 50% of copper do. By reducing a lot of other biocides in the paint bucket, we can also increase or utilize a much better material optimization. Then looking into the general trends. As I talked before, there is a huge need of reducing carbon dioxide, not only in the shipping industry, but the shipping industry as such, through IMO, which is the International Maritime Organization, it's a UN body, they have set the target that we should get to zero, net zero, or close to net zero greenhouse gases by 2050. I said also earlier that we are today producing 800 million tons of carbon dioxide. That should be reduced by 40% until 2030. And the base for this reduction, the 40% reduction, is actually 2008. So we should reduce it from the more than 1 billion metric tons that we have to 28. Jone Peter Reistadler, and down to just about 600 in 2030 that's the difference of. Jone Peter Reistadler, Almost 200 metric tons that are to produce on into 2030 and then we have another indicative checkpoint that we should be on a 70% reduction until 2040 and then finally the net zero by 2050, of course, we can't do this alone, but. Selector is an important part of making sure that we are utilizing the best systems for the hull and giving the best results with the lowest emissions. To make sure that this happens, there are a few initiatives introduced. One is that they have introduced a carbon intensity index, which is an operational measurement where you have a classification of each ship and how well they operate and how energy efficient they are operating the ship. So that is ongoing and it's an ongoing reduction in order to keep the high grades. Then we have the energy efficiency index, which means that you're looking into how well you have designed the ship. So that is what the shipyards are looking into when they're designing and producing the new ships. And then we also have the upcoming EU emission trade system where it also will start to cost a lot of money to have the carbon dioxide emissions. And so now we're giving you a slightly good view, I hope, why we're doing this, what we're doing and how we're doing it. But also, I will come back to the customer development and the Porter as such. But as most of you also are aware of, we are in a position right now with the renewal of our certification in EU. So Cecilia will give you a good overview on what we have ahead of us in that sense.

Yes, thank you. Yes, so... This is where we're at at the moment. We're in the middle of the picture at the socio-economic analysis process. So... We have gone through working group meetings and we have received a BPC opinion where ECHA and the member states agreed to the initial proposal made by Norway. Which means that for Selecto to remain on the European market, we need to demonstrate that Selecto is needed for the maritime industry. And as you can see, we also include medetomidine here, because that is the name that is used during the assessment. So this is the active substance name for Celectope. We, or you as stakeholders, can provide input to this process, and I will talk a bit more about that later. Once the socio-economic process is done, to demonstrate the need of Solecto, that will be discussed by the Standing Committee on Biosilo Product, which is organized by the European Commission, and is consistent of the member states. And they will look at what has been submitted, both from us, and from other stakeholders. And then basically they will consider, is there enough input or has a need for select hope been demonstrated that could override the recommendation from the BPC recommending then that select hope should not be approved in Europe. Following that discussion, it could be one discussion, it could be more discussions. So therefore, the timelines are a bit, they're not exact. This will then move into a voting procedure where the member states then vote on if select hope should remain on the European market or not. So the socioeconomic analysis and the process. So, as I mentioned, ECHA has concluded that medetomidine, the active substance in Celecto, should not be renewed on the basis of endocrine disruption. And as we previously communicated, we still believe that this conclusion is flawed and that the scientific assessment has not been thorough enough. However, independent on this recommendation, SelectO can still be approved if certain conditions are met. And there, you need to show that a non-renewal will have a negative impact on the EU. It could be negative impact on society. It could be financial negative impact. It could be environmental negative impact. And all this information is then collected in a public consultation where interested stakeholders, such as paint makers, ship owners, shipyards, et cetera, can contribute. This is a standard process. There has been numerous consultations previously, and there are consultations ongoing as we speak. Looking historically, a majority of those substances has been renewed. So we are positive. Looking at why Celecto should remain on the market, it brings socioeconomic benefits, which we have also shown in an extensive report that will be submitted from ITEC. And what we can see is Celecto helps reduce fuel consumption in ship. It limits the greenhouse gas emission. It helps prevent spreading of invasive species, as Magnus talked about. But we can also see an overall benefit for the environment if Celecto remains on the market, since it will help reduce the use of biocides, for example, to a lower amount released into the environment. So the public consultation will open soon. Exactly when is something we're not informed about, unfortunately. What we know from the moment is that commission expects it to start end of August, beginning of September. Of course, we will inform all our stakeholders when this happens. It will be launched at the ECHA website. And Any information that you would like to submit can be done so confidentially, if you would like. So what type of information are we looking for? Well, details on Meditomedine and Salictope's economic and environmental benefits for the world's shipping industry. Of course, European Commission and ECHA are most interested in information around EU. But of course, shipping is a global business. So we are interested in any information highlighting the need of Celecto. Other information that could be submitted is proof that Mediterranean does not have endocrine disrupting properties when used as an anti-fouling substance. That this has no relevance in this use. information about or concerns about the lack of rigor in the process could also be submitted. So generally, any kind of support is appreciated at this stage.

Thank you, Cecilia, for that very good run-through of the current challenge we are in and the process with the EU renewal. As you say, we're looking positively into this entire process, and hopefully we can gain so much support from our stakeholders in order to continue having an improved substance in the EU as well. Having said that, let's start to look into the more forward-looking commercial stuff in the company. And this is a slide that I think most of you have seen earlier. There are really not any major changes today. We have in the middle of the screen, we have nine major paint manufacturers named as A to I. in the world, I would say that they are representing more than 90% of the global anti-fouling market. And as you can see, we have ongoing R&D with all of them. They have projects in order to put products on the market. If they haven't, they also have projects in order to put new products on the market. And of those nine, we have six of them with commercial, as we said before, commercial paints on the market. All six of them have products for the new building market. But I haven't described it today, but generally the new building market is roughly one tenth of the dry docking market. So it is very important to also get into the dry docking market. And as you can see, four of them have products on the dry docking market today. And I think one other important matter is that another two are looking into launching new products within the coming period. And we are really looking forward to them when they are introducing them to the market. So, overall, we have the global framework that are driving the increased share of wallet for these premium amplifiers The selective containing products are. We have also another driving force which we haven't talked about earlier, or we have talked about it, but not today, the implementation of the Korean legislation where. They are demanding that not more than 1% of respective biocides can be introduced in paint. This is legislation coming into force next year, I believe. And that will drive the need for selective-like ingredients to put in the paint bottle, because you can't have more than 1% per biocide. The reference is, of course, that you have copper today is 30 to 50% of the major copper-based paints. Other biocides are introduced by 7 to 8% levels in order to reduce the full effects of them. So there will be a challenge without the selector reaching all these targets in the legislation. And we also have a strong sales development. As you can see on the left hand side, we have a sort of a pie chart of the portions of our sales for respective customer for the first half year of 2023 and the first half year of 2024. And as you can see in 2023, it's almost only two customers show. In 24, we have at least five customers show in the pie. And what has happened compared to last year? Well, CMP has increased once again, very well, up 35% between the years. One of the major thing we believe that is behind this growth is the products they introduced during 2021 and 2022, which really are gaining footprint today. Our second largest, which sometimes we reveal the name, we're talking about it then, is KCC, which they are relatively flat, although on very good levels, when we compare between the half-year 24 and the half-year 23. But they're showing indication for increasing volumes over the coming periods as well. And then, as we have disclosed earlier, PPG have launched a new product and they continue to grow their sales. They are our third largest customer, the great part down to the left. And we're really looking forward for them also to gain footprint. And the fourth customer that we can talk about is Kansai that more than doubled its sales between the years here. although from quite low levels, but we also know that they recently registered additional three premium products in Japan, which contains SelectUp. So we're also looking forward for them to start growing even further. Then coming into the quarter, and actually I borrowed the headline for this slide from a previous webcast where we actually stated it was our best quarter ever. Now it is our best quarter ever again, which is really nice to standing here in front of you and discussing. As you can see on the rolling 12 months revenue part, we had a small dip in Q4 last year, but we're now on the growth track again. The EBITDA is on a solid level. We are growing it a little bit compared to Q1 and not compared to previous year, but that is also one of the reason, well, one of the reason is of course the EU process that we're into. I'm coming back to that later on. And then it's also good to see that the operating, the part of sales that are going to operating costs doesn't increase at least. We keep it on the same level as previous quarters. But we have the possibility of reducing them even further moving forward. And in numbers, we have, as I said before, the continuous strong growth in turnover and profit. And we have a growth from 33 million last year to 43 million this year with the maintained gross margin. We have a strong EBITDA. We have a slightly weaker operating cash flow. And that is very much dependent on that we had a lot of sales late in the quarter, which means that all the accounts receivables were actually almost double the accounts receivable compared to Q1 this year. We'll, of course, have an effect in Q3 where they will be reduced again. We have a strong cash balance in the company, although we actually did send out a dividend of almost 80 million earlier during the quarter, so. Other comments is, of course, I've been into before, C&P continues, very strong growth. They're there for this specific quarter, up 30%. And as I said before, also, we have this significant growth in Japanese sales, where we are up 96% between the, for the first half year in 24 compared to 23. Coming back to the EU, I just need to mention that in this EBITDA result, we have more than 3 million extra costs for the first half year, which gives that we should have had around 50 million in EBITDA instead of the 12 million we have today. And it will continue for the coming periods as well. roughly the same pace i would say but we we are not since we have a lot of cash we have a strong result in the company we are using all the efforts we can in order to support the eu renewal process and don't save where it shouldn't be saved so to speak And to finalize this presentation, just a very short review of the business outlook. As I said, we have the general trends towards carbon reduction, continues to drive the demand up. We have the EU ED process. We're entering in a very intensive phase with the upcoming public consultation. As we discussed in the previous course, we have operational improvement projects, They will continue to fall and we anticipate that we should show some impact on the crossbonding, actually increasing it a bit towards the end of the year. We also communicated that we have started up work on strategic search for new business opportunities. And we have now also initiated this work more intensively and also have a dedicated resource in place where we have hired a business developer in Peter Farnaken who was joining us earlier during Q2. And finally, I would like to also here take the opportunity to welcome our new CEO that is going to replace my temporary role by mid-September. So then we are in full speed in all areas of the company and should continue the nice work that everyone's doing. With those words, I think we conclude the presentation for today. I'm ready for questions.

Thank you very much for that presentation. And like I said, now I'll jump into the Q&A section here. And we'll start with the first question here. Can you elaborate on the new anti-fouling product introduced by PPG in Korea and its market reception so far?

We don't have a lot of information from PPG, I must admit that. We can actually, as of now, only see what kind of impact it has on the sales for us. Of course, we will try to have follow-up discussions during the fall with the customers, but We know that they have made very positive tests with the product before launch, and I don't anticipate any other results from the ongoing commercial applications.

And how long is the next step in the EU regulatory process expected to take?

Yes, sorry, I forgot to say that. This public consultation around socio-economic benefits is a 60-day process from launch until end. So basically during 60 days, stakeholders have the possibility to engage and submit information. The review phase is not fixed in the legislation. So it's not really controlled how long it could be. We expect it to take two meetings and then we can look at the commission schedule for that committee and give some estimates. If everything doesn't get stopped anywhere or something unexpected happens, there should be a recommendation for decision in June next year at the latest. But as we've learned in the past, the timelines and European community can be very unpredictable. But the first process is 60 days.

Okay, thanks for that answer. We'll take the next question here. What are the key factors driving this strong growth in turnover and also profit? And how sustainable would you say that these rates are in the coming quarters?

Well, I think I explained quite a bit about the drivers but but but of course it is an acceptance on the market for the products that have been put to the market and i was going to see simply who was the first company out there is also gaining the largest traction on the market and it's only also how they combine the products in their offering i would say it's both an acceptance from the market as well as the the the how the paint companies put forward the products. And I would say that, well, of course, we can't anticipate 30% growth in eternity, but of course, we anticipate, we are coming from a very low level or from a low market share, somewhere between 1% to 2% of the market. And of course, we are looking forward to gaining a larger portion of that moving forward. exactly on which levels it's very hard to predict and what would you say are the key drivers for the strong growth in japan i think it is the products that that cmp launched in 21 and 22 where they have introduced the the japanese shipyards they are almost going standard with one of the products, the AMH product, where they combine that with a more sophisticated CF premium paint on the sides, when they have a little bit less sophisticated paint on the bottom of the ships. So that combination has been a real market penetrator for CNP on the Japanese market.

And could you also elaborate on your strategic search for new business opportunities?

Of course, I would like to stand here and say that we have this, this, this and this project ongoing, but I can't because it is too early to say, but we are looking into partnerships and or investments with the potential new substances. to bring to the market or with combination of substances, et cetera. So hopefully we can start to elaborate a little bit more on it during the fall, but we have a number of sort of opportunities that we are looking into right now, but I don't have any more solid and I don't want to stand here promising anything that we can't keep later on.

Given the ongoing re-registration process in the EU and ECHA's recommendation to classify Selecto as an endocrine-disrupting substance, how do your legal and regulatory advisers assess the chances of reversing this decision in the upcoming phase?

We and they are optimistic. Of course, it's difficult to assess exactly how big the chances are. Since looking at the endocrine disruption, it is quite a new criteria included in the legislation. So we can't really compare to other substances facing the same classification. We can look broader towards other classifications that would result in the same outcome. And there we can see that there have been cases that have been revised, which is one of the reasons for our optimism.

I just want to add that in the ongoing process with the socio-economic analysis and the public consultation and until they come to a decision, there we can't revise it. That are actions that need to be taken after the final decision in such case. Yes.

And considering that SelectUp is described as important to meet new legal requirements of a maximum of 1% mixing of each individual biocide, how do you see your competitive position going forward?

I think you're referring to the Korean legislation. And in Korea, we are very competitive, I would say. We know that there are tests ongoing with several products, with Selecto in them, because we are really the only one that actually fulfills the 1% criteria today. As I said before, all other biocides on the market, and I say all biocides, need more than 1% to gain their full effect. We are the only one that actually gain our full effect on a much lower level than 1%, i.e. 0.1% level. So we're really looking forward for it as well.

And you mentioned earlier strong growth in both Japan and also in Korea. Could you provide any more insights into what is driving this growth and how do you see the potential for continued expansion in this market? And specifically, how do you see the opportunities to further increase market shares?

I think I answered the question already for Japan. But looking into Korea, we believe that the upcoming legislation is one part that is actually driving our sales because they are already now looking into the products that are coming to the market next year but of course they want to put the products they apply on the ship should be there for the future as well so we believe and also it's strongly driven by the proof we have that the selective container products really work with the hassles during new building as they have in Korea. We should not really remember that that was actually the starting point for selective to come to the market. That was the enormous barnacle growth they have on the ship house when laying or anchored during the outfitting period, which could be six to 12 months. And they had huge problems before where they almost didn't make the speed trials, et cetera. now selectively in the market and continue to grow. We are getting quite a large share of the new building products in Korea. It's still a potential to grow, but of course we can't grow in the same magnitude year over year.

And do you expect that the regulatory costs will accelerate from this point for the remainder of the year?

No, we don't really foresee it to accelerate. Of course, it could be a slightly higher pace, but we also don't foresee that we can reduce it very much. So I would say that we anticipate around the same level as we are for the first half year, this year.

And how do you see the development of the EU re-registration process for Selecto? And could you provide any more details for Karl or about the upcoming public consolation phase, and what measures do you plan to ensure continued approval despite the classification as an endocrine disruptor?

Yes, so what we're doing at the moment is we have prepared a socio-economic analysis of Celadoc, or not we, we have commissioned a large consultative firm, Ricardo, to do a more or less independent analysis of cell lactose. What would be the consequences for Europe on two cases? One, that cell lactose remains on the market as is, and one that it's no longer available in Europe. And then looking at environmental consequences, consequences for human health and society, and consequences financially. So that report will be submitted from iTech in the public consultation. We are, of course, also working on engaging stakeholders, especially our customers, which are the ones that can, on a sort of firsthand basis, describe why Cellictope is needed in Europe, but also on a wider scale, such as chip owners, shipyards or similar also engaging trade organizations which gather the industry and we can really defend antifouling biocides and why you shouldn't diminish the already small toolbox because there aren't that many substances around that can protect against hard fouling. So all of these activities will be ongoing. Of course, we will also try and engage the member states in Europe, explaining why Cellictop is relevant.

I think we also maybe should add to this that Cellictop is not the only biocide that are under investigation in EU. In fact, all of them are either under sort of renewal or will come up very soon. So it is a clear risk if If EU continues as they do, that there are no toolbox left and that will have significant environmental impacts for Europe.

Yeah. Okay, we'll take one final question here. What does the competitive landscape look like for Zagtop? And are there any new technologies or products that you see as potential threats?

I think the competitive landscape, as we know, haven't changed that much over the years that we see. Of course, there are initiatives such as UV lights, such as hull skaters. cleaning robots, et cetera. But we really don't see them as real competitors today, because there most likely will be a niche market for them. But otherwise, it is the ordinary and premium antifouling paints, such as copper-based paints, such as maybe Equinia-based paints. Equinia and copper are both complementary to us, but of course, also competitors about the market. In regards to new biocides coming into the market, that has an effect we really can't see anything arising that is worth mentioning here.

okay thank you very much magnus and cecilia for presenting today and also answering all our questions and also a big thanks to everyone who followed this presentation with itech and i wish you all a great rest of the day and we'll see you in q3 thank you very much thank you very much have a good day thank you