I-Tech AB

And welcome to today's webcast with IoTeX, where CEO Marcus Jönsson and CFO Magnus Nell will present a report for the third quarter of 2024. After the presentation, there will be a Q&A. So if you have any questions, you can send them in using the form to the right. And with that said, I hand over the word to you guys.

Thank you very much. A warm welcome to this presentation of the quarterly results for IoTeX. The new face and the new voice in the room here is Marcus Jönsson, a new CEO since September 16th. And with me is... Magnus and Erl, CFO and an old voice, so to speak.

So let's get going.

Let's get going to the presentation. So to introduce myself then to the audience here, very briefly, you could say education wise, I'm a chemical engineer. I've had about 20 years of a career so far, mainly in the specialty chemicals and industrial biotechnology sectors and working mainly, you could say, with business development and marketing besides general management. So what I bring with me into iTech is of course the experience I have of business development within these sectors that could be relevant going forward, but also then skills I would say within marketing and general commercial excellence that could benefit the organization. I'm really thrilled to be here with iTech and I want to thank Magnus especially for the very good leadership during the transition period and for the onboarding from him and the rest of the team. So it's really great to be on board and sort of being three weeks into the job. And we start a little bit then by a recap of the market that iTech is operating in. And I would also here recommend if you want some deeper insights to look at the Q2 report that Magnus and Cissi was presenting last time. But essentially, we are looking into today, the scope of the market is the shipbuilding and the maintenance industry. So there are around 1600 ships built every year and around 20,000 dry dockings, which means then the ship is going in for repairs and repainting, etc. And you can see here in the bottom that Asia is really dominating this business today. So in terms of new ships, you have China, Japan, Korea as the three most important regions, and then Europe sort of on the fourth place. When it comes to dry docking, you actually have a very big dominance of China today. And dry dockings in the rest of Asia is to a smaller degree and more in the line with Turkey and Europe, as you see in the markets here. And the products that the iTech solutions are going into them are the anti-fouling coatings. And that's essentially represented by the orange coating you see on the ship here, which is the below the water surface. And the assessment is that for iTech, this is a three to five hundred million dollar opportunity, essentially. And the technology that we are providing them with Selictop today is a key technology then to address the problem of fouling. So essentially, when a ship's surface is underwater, it's attracting a lot of biological organisms. So you have soft fouling in terms of algae and seaweed, et cetera, but also hard fouling in terms of crustaceans. And Selecto, then, itech's star product, is very efficient against barnacles. It's not a biocide by itself that it harms or kills the animal, but it actually repels them. So it has a nice functionality, and it's added in very tiny amounts compared to traditional anti-fouling technologies, around 0.1%, which means that every shipment of Selecto gets you a long way in terms of creating a very efficacious anti-fouling coating. And why is anti-fouling of ships so important? I would say it is linked now to the energy transition. So as Magnus alluded to in the last quarter reports, the global shipping industry is representing about three percent of our total emissions of co2 as humanity and one thing that very significantly impacts the the you could say the power needed to go through the water is fouling on the hull so you really need a clean and smooth health surface to optimize the fuel efficiency so only as little as 10 percent of fouling can actually increase the fuel consumption and thereby the CO2 emissions by 30 to 40 percent. So it is a matter of for the environment and of course of the operating costs for the shipping companies as you know bunkering fuel represents somewhere between 30 and 40 percent of the total cost. And also when we are seeing this energy transition then of course the shipping industry will have to transition into new sustainable fuels that you could say are even more high value. So the potential savings are becoming even larger in the future. And sort of a clean hull is a very, very cost efficient way to optimize your ship. Of course, there are other things like ship design and other efficiencies, propellers, et cetera, propulsion, but a clean hull is really essential. And the anti-fouling coating market then has the sort of the interesting outlook that it's actually quite a consolidated market. So it's dominated by six to nine major coating suppliers today. And I would say I think it is, you know, in commercial relations or very tight dialogue with the majority of the major players today. So the SELICTOPE technology is quite unique and there is IP around the products and processes and the formulation, et cetera. And then during the last couple of years, then I think has built up a formulation know-how that is now serving us really well when we talk more to customers and sort of further developing the efficacy of their products and the applicability of the SELICTOPE solution. So the production is outsourced as such, and Magnus will talk a little bit more about that today later. And if we look at the market penetration today, we are estimating that we have treated a little bit more than 2,500 ships. And this is out of a total global fleet of 110,000 ships. And so, of course, the market potential is still very, very huge for high tech. And we should say that then, as you can see to the data on the left here, a lot of the market potential is still in Asia. And that's also where we intend to go for. So if we come in to look at the highlights then for the quarter, we would say it's another solid quarter than delivering according to our internal plans really. So we see a robust sales growth of 27% versus Q3 last year. The operating margin is 23% versus 25% last year. Magnus will talk a little bit more about that. And I think it's also very glad to see that the diversification of the customer base is continuing. So this quarter, actually 33% of sales was from a broadening and more diverse customer base. And also noteworthy, we can say that, or we can just release that the IPEC has been appointed and the DIGSL company. So being recognized really for the growth and the profitability and for, you know, creating new jobs for people in Sweden, which is great. And it's really a testament to the great work done by the predecessor of me and the whole team here at italks. So it's fantastic. All right. I think we're coming then to a more deeper look on the financials, so I will hand over to you, Magnus.

Yeah, I think you all recognize this slide, and I think it's really nice standing here once again presenting a growth on our road in 12 months turnover. We had a slight bump in the curve in Q4-23. But after that, it's been not a straight line upwards, but of course, we're growing and we're growing significantly with our customers. And it's also nice to see that the profitability also comes along with it. Of course, we have a little slight higher operating cost, which I will come back to a little bit later than we want to have, because as we have presented to you guys and girls along the way, we are looking at a very scalable business model where we should not be forced to take on major cost increases. But there are steps that we need to take. For example, now the ED process, where we need to spend a little bit more money. We are coming into the business development work, where we will need to spend a little more money to make the company grow in a significant way. So really nice to continue the growth path on the top line. This also comes with, if we look into the quarterly and the year-to-date number, it is really hard fact. We are in the second best quarter on the turnover side. We are already now, year-to-date September, exceeding the turnover from last year. which is really nice. So this 27% growth on the Q3 comes along with a very nice growth in the early months of this year. And then, as we said, we are exceeding last year already. The gross margin we have talked about quite a lot on the On the previous calls, we will actually end this call with a little discussion about it. But it is stable as it is now. We have a stable pricing towards our customers. We have a stable costing towards our suppliers, which I will come back to a little bit later on. Then, of course, we would like to see if turnover goes up 27%, we should have at least operating margin up 27% in a perfect world. We're not always living in the perfect world, so we need to spend a little money on extra stuff. What you see here is that we have an increase at least of 16% of the operating margin, up from 8 million previous year to 9.4 this year. But there are some effects of the ED consultants that we need to take on, and we also had The final sort of wrap up of our R&D department, which affects the personnel costs. We have some normal salary adjustment and some small extra costs along with the recruitment of the new CEO. So that are things that affected the quarter as well. And then I think I've informed you quite many times now that we are going into taking a little bit more responsibility over the networking capital. taking up some of the responsibility from our suppliers. And here we also see an effect now that the net working capital has increased or almost doubled actually since the year end of 23. And that is an effect of these prepayments mainly and also some increased accounts receivables. But on the other hand, we have a very good cash conversion still. Not the full 35 million we have in profit before depreciation, but it's a very good conversion and we have a very strong cash balance that we hopefully can make it to use to some great activities coming forward.

Thanks, Magnus. And then we should comment a little bit on the re-registration process that is ongoing in the EU. And here again, I want to have a shout out to your previous quarterly presentation, where we also were joined by Cecilia Olsson, our Director for Regulatory Affairs, who gave a more in-depth view of this process. Essentially, we are at this stage where the approval for SelectOp is supposed to be renewed. and where it's actually being challenged by the biocidal regulation or standing committee on biocidal products, etc. So in the face that we are in now, we actually, we and you could say the general public, our stakeholders, need to prove the use of SelectO and the value of SelectO for them to consider an exemption where then SelectO can continue to be allowed in the EU. And I mean, I want to say that I think we are really standing for, you know, a progressive chemical legislation. We definitely stand by that. And I mean, the company as such is funded, founded on really a passion and a drive to make more sustainable anti-fouling solutions for the shipping industry to make more, you could say, environmental friendly products, right? So it is a little bit, you could say, a twist of faith, really, that we are in this process. But we have actually created a little information video that we thought we would share with you today that sort of outlines how we view the data and the fact that comes on the table in this process. So we will run it now, and we can probably come back to this in the Q&A session afterwards as well.

Celectope is a unique anti-fouling agent for use in marine coating systems. It protects ship hulls from barnacles. Celectope is the commercial name for the active substance metatomidine, which also has pharmaceutical uses. The team at iTech is confident that Celectope is safe to use. In the European Union, all biocides must undergo an extensive approval process under the EU Biocidal Products Regulation. And right now, the European Commission with Member States is considering the renewal of metatomidine as an active substance in the EU. The Biocidal Products Committee of the EU Chemical Agency recently concluded that metatomidine has endocrine-disrupting properties that could threaten its approval in the EU market. This was based on their assessment of the properties of medetomidine. Unfortunately, the assessment did not consider how medetomidine is used and the extremely small amount that is included in anti-fouling products. We do not agree with the conclusions and are confident that use of medetomidine in the anti-fouling applications is safe for both human health and the environment. In mammals, the endocrine system is a network of glands and organs that produce, store and secrete hormones. These hormones travel throughout the bloodstream to regulate various bodily functions, including growth and development, metabolism, reproduction, mood and behaviour and sleep. Endocrine disruption occurs when substances cause adverse effects on the function of the endocrine system. An adverse effect could be changes to organs, growth, development, reproduction or lifespan. Some substances, which many of us use every day, such as sugar, caffeine and soy protein, affect the endocrine system. However, they do not cause adverse effects at commonly consumed doses and would only be considered endocrine disruptors if people consume them at unusually high levels. Under normal use conditions, substances which authorities have classified as endocrine disruptors may actually be endocrine-active substances without adverse effects. Medetomidine is a well-researched substance that has been safely used in both human and veterinary medicine as a sedative for many years. The endocrine disruptor classification is based on properties of medetomidine at high pharmaceutical concentrations, where reversible effects such as sedation, reduced blood sugar control and reduced stress response are seen. At concentrations outside the pharmaceutical use, none of these effects are observed, either in humans nor in the other mammals that were studied. Extensive risk assessments have shown that the exposure levels from metatomidine in anti-fouling products are far below those necessary to cause any of the effects considered as endocrine disruptive. Celectope has passed a risk assessment for humans and the environment. Even though it does have a temporary effect on the endocrine system when used in medicine, metatomidine does not pose a risk to human health or the environment when used as an anti-fouling biocide. Selictope represents a significant step forward in the development of sustainable and effective anti-fouling solutions. This is because of its critical role in reducing the marine industry's carbon emissions and contribution in reducing the dangers of invasive alien species. Because Selictope protects our waters, we must protect Selictope.

All right, so essentially the process that we are in now is called the public consultation phase. And of course, the team is very engaged, you could say, to speak to various stakeholders, whether that would be ship owners or paint producers, etc. To, of course, then inspire them to submit sort of their views on Selecto and the use of it. And coming back to that ironic twist of faith, it is a little bit strange, you could say, how you at one hand then can approved melatonin for pharmaceutical use, and it's being injected into humans and animals on a sort of a daily basis as a very popular sedative. But at the same time, you would like to ban it in a different legislation for concerns of the human health, right, when you're using it as an anti-fouling solution in pets. So that's what we mean with an ironic twist of faith, really. So then we shift gear a little bit, and we will talk a little bit about the business development initiatives then. So they were already started, you could say, before I joined, but definitely we will accelerate them now going forward. So we will essentially be looking for new and additional growth vectors for iTech going forward. And that could be then complementing technologies in the applications that we are today, or adjacent markets. I mean, besides anti-fouling paints, there are many marine applications that could actually benefit from anti-fouling, whether that would be floating structures, you know, water inlets, outlets, sensors, etc., that are sort of more part of industrial installations, etc., So there is more in adjacent markets as well. And we will also consider, you could say, more, you could say, step out businesses, but something where we can really leverage the synergies that are available in the IT team today. So these are sort of the areas that we are starting for now. really the short-term goal is to create a balanced pipeline. So things that we can realize fairly quickly, but also then things that we can work on, you could say from an innovation business development standpoint for a little bit longer. And of course, with a significant business potential. All right, so we come to the last part, which is the business outlook plan before the Q&A session. So what we are seeing then is continuous market or favorable market conditions. So essentially, as we were saying in the introduction, the shipping industry is in this energy transition period now. Also, I mean, the need for shipping is growing. So the wards and the dry docks around the world are pretty much full. New ships are coming or being built with new sustainable fuels, etc. So there is really a good momentum in the business in general. But of course, more importantly for ITEC is to get into additional customers and into their different products that they're using for unfouling. And that is also ongoing and we see that that will continue going forward. We also see that, of course, the EU process now, as we said, the public consultation will end in November, but then the committee will consider the input, etc. So we are really seeing that it will continue to absorb attention and resources, at least for the first half of 2025 as well. And then coming back to operational improvements.

Yeah, we've been discussing these operational improvements for quite some time. And for the ones of you who have been with us more historically, you know that we have one main supplier of the Selecto product today. We have had suppliers in there for more ad hoc production. But as you also know, we have continuously since last year, I would say, working to increase both that we have redundancy in the normal production where we don't want to go with only one producer, but also of course to make sure that we can get the most beneficial pricing. And you need to have several producers in line, so to speak, to actually have the best pricing. And what the status is right now is that we have production up and going or on the way to up and going within weeks with actually three suppliers. So our main ambition is from next year and onwards, we should have at least two of them should be our standard suppliers continuously supplying material to us. And maybe with a third as a backup, or we actually used all three of them. It depends on also the continued market penetration of Selecto, of course. And that we should start to see effects maybe already late this year, i.e. Q4, but at least during the first half of next year, we should start to see an effect of these that we introduced new supply with, with a lower costing, but also Hopefully there are some negotiations with the existing suppliers. So, all right, then I leave it to you to wrap it up.

Yes, so this was actually the presentation and we look forward now to a good dialogue, if you say, in the Q&A session. But as we said then, another solid quarter. And then for me then personally coming in, it is fantastic to start working with iTech and the team here, right? I mean, there is momentum in the current business. There's plenty of growth opportunities, et cetera, and also the drive and the will to look for new opportunities, et cetera. So we're really looking forward to, of course, on one hand, then take on the challenges that we see in the registration process, but also continue working with developing the business. So now we open the Q&A session.

Thank you so much for the presentation here. And we have received a number of questions, so I think we should go straight ahead. What do you see as the main challenges and opportunities when it comes to broadening your company's portfolio to more application areas?

Yeah, these are classical business development challenges, right? So of course, there is investment upfront and Magnus touched upon that in cost, right? It will put sort of a little bit of a burden on the results. And of course, as with any business development initiative, there is risk involved, right? So we really need to carefully consider and evaluate before making major moves. And as I said, then we need to have a balanced pipeline of, you could say, smaller bolt-ons and things that we could commercialize fairly quickly, but also then a little bit bigger initiatives that we're working on. And it could be both organic or sort of acquisition-based growth going forward. So it's important.

Thank you. With your extensive experience in the international market, especially in Asia, how do you see the opportunities for growth in these regions for SelectOp and other potential products?

Yeah, I think as we outlined a little bit in the beginning of the presentation, the opportunities are still vast, right? The global fleet of ships today is around 110, and now 110,000. And then we're talking really about the big ships, right? We're not talking about the private yacht market or smaller fishing boats, etc. So that is, you could say, on top opportunities as well here. And as we said also, the majority of this opportunity is in Asia. And also, high-tech historically have been very strong in the Midwest, very strong, but sort of... found its first in-routes into the new build market and sort of the outfitting market for new building of ships. And the penetration in the dry docking segment is still fairly low. So that's actually where we're going to focus and we are focusing and also where we are seeing the results now as the goals continue. So, yeah.

Thank you. In the report, you state that the dry docking segment is becoming increasingly accessible thanks to the excellent formulation development work in R&D. Could you elaborate on what you mean by that?

Yeah, I can say that the anti-fouling products, although you could say generally, you could say there are some some broad technology paths, right? But formulations are unique in a sense, right? So different customers' formulations look differently. And sort of the compatibility and the behavior of the different ingredients are always impacted if you make changes. That's also why the new product development cycles for our customers are so long, right? And also when it comes into coating of shipping chips, etc., you could say the potential consequences of a failed product can be quite severe in terms of fines and additional costing, right? So there is a risk-adverseness, and you want to be really sure when you develop products that the system is working. And the capability that IPEC has built up in the recent past here is really to strengthen, you could say, the innovation and product development skills and assets in the organization. And now you can see, you can meet the customers more eye to eye and discuss formulation developments. And there has been technical challenges and more specifically in the dry looking segments that we now see quite positive signals that we can be overcoming then going forward.

Thank you. You see steady progress for approvals in the US, Malaysia and New Zealand. Can you elaborate a little on the significance of these markets?

Yeah, I think we can start with the US market. Maybe you saw it was not as a really big country when it comes to new shipbuilding or maintenance of the commercial shipping fleets, right? It's still, however, quite big market when it comes to leisure crafts and private boats, et cetera. So there is of course that market opportunity that we can see in the US market. And also Southeast Asia is becoming sort of increasingly relevant also from a dry docking perspective. So these are interesting markets that we would like to access going forward. So although not the biggest, but still quite interesting opportunities.

Thanks. Marcus, as you enter iTech with new eyes, what is your take on the EU registration process?

Yeah, I alluded a little bit to it here in the presentation as well, right? This ironic twist of fate, sort of, that in one regulation you can inject it into the human body and in the other you want to ban it for health reasons, right? Because you're using it into paints under ships. So, but I think, you know, we are in general positive and sort of we do feel the support from the industry and from the stakeholders here. We know in ITEC, of course, that the SelectTalk technology is very relevant and really it could be one of the enabler to solve, you could say, the energy transformation challenge that shipping industry is facing, right? And I think what we believe here that the BioCyber Committee has not considered is, again, you could say the application of SelectTalk, where it is used and sort of the implications of that. But also what is the implication if you actually ban SelectTalk? How much more CO2 would be emitted if you don't have effective anti-fouling? And you have to, of course, compare Select Hope to the other solutions that would be available in the EU going forward, right? And see, you know, can we live without or live with Select Hope? So, you know, we remain hopeful. And I mean, the way that legislation works when it comes to chemical safety is that the burden of proof is on the industry, right? So we are guilty by suspicion. And of course, we can generate additional data that can actually prove that there is no concern when it comes to endocrine destruction. So there is also a development of the technical side of testing on board.

Thank you. You're working to establish a project pipeline. Could you give us some indication of what you're looking for in terms of niche, maturity, size, etc.?

I'm happy to elaborate a little bit more. But it is really, you could say, either complementing technologies that you could say would fit very nicely into the value that Select Open, I think, is bringing to customers today. Or then first-hand adjacent markets where the knowledge and the capabilities that we have would fit really well with new customer segments going forward. These are the prime things. But we will consider also, you could say, broader opportunities going forward.

Thank you. Here's another one. Congratulations to the good result. I noticed that the cash position is very healthy. How do you intend to use this cash?

You want to start? Of course, our class is and have been for quite some time to actually reinvest a certain amount of this cash into the company, into the business development activities, etc. But then you also know that we launched dividend plan last year, and although no firm decision is taken yet, I think we strongly will consider also another dividend when it comes to the May annual meeting.

Yeah, so definitely we will find good use.

Thank you. When can we expect to see a visible result on the gross margin from your new supplier?

Well, as I said, there is a possibility to start seeing some visible results already in Q4, but the firm ones should come first half next year, I would say, and then move forward, of course.

Thank you. Do you expect your elevated costs due to the regulatory process to be in line with your previous quarters going forward, or can we expect costs to increase or decrease?

That's a very good question, and you can also ask how long is the line, but we spend what we need to spend. And if that is in line with the previous quarters, as it actually seems, because we have had quite a stable, if you have a medium spending of 1.6 million per quarter the last three quarters, but of course, if we... deem it necessary to spend additional money in order to sort of take the last part of the balance to gain in our favor, then of course we will spend it. I don't foresee in the upcoming quarters that it will go down, but there is a possibility that we need to spend more, but nothing that I have on top of my mind right now.

Thank you. Your customer base is diversifying, which is promising to see. Do you expect CMP to remain your largest customer in the long term, or do you see a potential in the other customers to overtake CMP in terms of sales?

Yeah, there is always this potential. You could say that CMP has a good head start since they were really an early adopter of the Select Oak technology. So they have worked with this technology for a number of years now. They know it quite well. They know what the value is, etc. Not to say that we still have growth potentials. We have significant growth potentials with CMP. So it's really hard to say then how this will shift. But for sure, the target is to continue the diversification. And there is growth potentials, but a lot outside CMP.

Thank you. You mentioned in your report that the team is gearing up for business development activities and new opportunities. Could you please elaborate on this?

Yeah, I mean, as I said, the work had already started when I joined and now we will sort of accelerate that as well. I mean, we will look at bringing in selected, you know, additional capabilities within the business development field. And we would start, you could say, to look also a little bit broad on opportunities, right? But there are already very interesting initiatives ongoing here within, I think, in the business development area. So we also want to nurture and continue to qualify these ideas.

Thank you. You also mentioned in the report that the regulatory processes are ongoing in the US, New Zealand and Malaysia. Could you give us more detail on this?

The issue with the regulatory processes is that they are really notoriously intransparent in terms of timelines. We of course know what is expected of us, but it's really hard to say how long the authorities need to process and come back on specific submissions. So I think we are stating now in the report, we are quite confident that we would move ahead in Malaysia in the first half of 2025, sort of how this is developing. But for the other countries and regions, it's really too soon to say sort of at a more firm time.

Thank you. A question for Magnus. Apart from the EU registration expenses, can you give more information as to which costs go through the specific line item called other external costs? It would be useful to know in order to see potential operational leverage in this line item as the company grows.

Well, as we have three main line items with the product cost, the other external cost and the personnel cost, it's quite easy actually to elaborate on what it is. But of course, we have all the general overhead costs with our premises, our laboratories. We have all the travel expenses that we are, and we are increasing a little bit on travel expenses as well. All external consultants that we bring into the table. We are today, I think we are 10 headcounts employed in the company, but we are 15 headcounts, not full-time 15 headcounts, But even though 15 headcounts that are working with the company and also some of these costs come into the other external costs. So actually, you should see it's everything that is not personnel or production costs.

Thank you.

And depreciations, of course, which are outside.

Yeah. How do you plan to finance future business development and acquisitions?

Yeah, that's a very good question. And it really depends on if we're having sort of organic business development that we will fund within the ongoing results, so to speak, then maybe focusing on select or select adjacent things. But then, of course, if we are looking into more acquisition-related growth, then, of course, depending on the size, we could have some quite nice acquisitions already with the cash balance, but then, of course, we will go out and look to the most favorable terms of finance either through banks and or equity.

Thanks. Will Selecto be allowed for sale in EU during appeal process post a potential negative outcome from EECHA spring 2025? No. All right. Are there any examples of EECHA pursuing other regulatory bodies like Korea or Japan to influence them to take similar position on biocides that have been permitted by EECHA?

No, we have not seen cases where ECHA then is trying to influence other regulatory bodies. ITEC will of course work with all the regulatory bodies in the countries of interest going forward and mitigate whatever we see upcoming that could be similar to the EU process. So, for sure.

Thank you. Moving on to the last question here. Regarding the outsourced production, do you have a redundancy in case you would have problems in production?

I assume that the redundancy we're having with multiple producers, of course, but then if you talk about redundancy, we have some buffer inventories in Sweden that we can use for a limited time period. But the redundancy is really built up by having different suppliers, I would say.

And definitely will be strengthened, I think, with the initiatives that are ongoing. So there will be much more robustness in the supply.

Thank you. That was all the questions we had. So thank you so much for presenting here today. And thank you all for tuning in and sending questions. And I wish you all a pleasant week.

Thank you very much. Thank you very much.