Nexam Chemical Holding AB (publ)

Hello and welcome to this report presentation. Cleantech company Nexam Chemical Holding have reported this morning for the first quarter of 2024. And I want to remind the viewers that you can ask your questions in the live chat. And with that, I'm honored to present today's speakers, CEO Ronny Törnqvist and CFO Markus Nyberg to the studio. Hello, Ronny.

Hello Mathias.

How do you do?

Very good, very good.

Good to see you in the studio again. Could you please describe the quarter in brief?

Very briefly, it is a solid quarter. We have continued our sequential growth and we continue to implement the strategy that we're working on. And it's going in the right direction and we're doing the right things.

Okay, thank you very much. And with that, I'll hand over to you to do your presentation and then I will be back for a Q&A. Please go ahead.

Thank you, Mattias. Okay, so welcome to the presentation of the first quarter 24 for Nexam Chemical. I'm here together with my colleague Marcus Nyberg, our CFO, who will take a part of the presentation as well. Just to place ourselves in the world, it's hard to imagine a world without plastic materials. It is an important constituent for modern technology, modern healthcare, safety equipment, vehicles, telecommunication, etc. But plastics also have a very negative effect in terms of carbon dioxide emissions during production and in particular problems with waste handling and spreading of plastic waste into oceans for example. We want to make a difference here to our customers and to society by producing additives that are used both to improve technical advanced plastics to make them even better for their applications but also to provide part of the solution to the problems related to plastics. Nexam Chemical is a small clean tech company in Sweden, but we have a global reach. We have big plans and very high ambitions to make plastics better and more sustainable. Based on the same concept and ideas of using innovative reactive chemistry to affect the properties of plastics, our products land in a very wide range of applications. going from lightweighting, miniaturization, for example in the electronics industry and for vehicle industry, up to very advanced high temperature applications used in aircrafts and microelectronics. But we also have two application areas that are driven by really strong global megatrends, which are renewable energies and waste and recycling. Since I joined this company as CEO a bit less than a year ago, we have done a retake on the strategy of what we do and how we are aligned. A huge part of this is to sharpen the commercial strategy. Based on the customer value that we provide, we have split up our initiatives into four major pillars. They are lightweighting to promote or enable the production of lightweight and strong polymeric foams. The main area here is PET foams that are mainly used into wind energy. High temperature is the second pillar where we provide additives that increase the temperature resistance of the most temperature resistant plastics in the world and it's used in hot areas of jet engines and it's used to protect very small microprocessors that can become very hot. We also work in the area of aesthetics which is our traditional segment performance master batch where we have taken a new approach and to become much more market driven and oriented and by using our already strong foothold in the Nordic countries and in the big parts of Eastern Europe we're developing this into a broader and more interesting range for our customers. and also trying to link that activity with the chemical activity, so to say, in the other areas, in particular in the area of recycling. Recycling is our newest area of application, you could say, and a very important part for us for the future. It can sometimes be combined with the technologies that we have in the other areas and sometimes it's new technologies. But it's really axed at developing improved use of recycled materials through additives that can enable the use of recycled plastics into much more advanced applications. To go into the various areas, in PET foam we work with all the big global PET foam manufacturers in order to develop recipes and produce foam materials that have higher performance and the main application of PET foam is in the wind blades of windmills and therefore important for renewable energy. But and our contribution is here to bring this technology forward for example by the use of more recycled pet material as a source for the foam but also to make the foams more performant and enable applications in other areas such as transportation for example and marine applications etc There is a strong driving force to develop this PET foam market for wind energy. One is that the wind energy in itself has extremely low emission, about 10 carbon dioxide equivalents per kilowatt hour compared to 400, which is the EU average. and this pushes the whole industry of wind energy and on a 10-year period it's predicted to more or less double in the world, the installations. Inside the core technologies that are possible to use in the wind blades PET has a very future-looking application field compared to, for example, PVC foam and balsa wood. PVC foam has a very high carbon dioxide equivalent in its production, around eight kilograms of carbon dioxide for one kilogram of PVC foam. whereas PET can be down to 2.5 maybe kilograms if it's virgin and 0.5, 0.6 when it's based on recycled raw materials. It is also technical performance and economically good to use PET and therefore there's a strong drive to use it more and more in the wind blades. Balsa wood also causes deforestation where it's harvested. The second area, high temperature materials. The main application for this commercially today is to produce advanced components that are used in jet engines for mainly military aircraft today. When you use lightweight composite materials, you can reduce the consumption of the jet engine. However, composite, which are the lightest and best materials for this, are limited in the use of temperature to maybe 350 degrees. By the use of Nexam's additives, this can be increased to sometimes 400 degrees C, and therefore you can do more components in the engine from these materials. So this is something that is growing. We're also active in translating this from military to civil aviation, and we see a long-term big potential for us in this field. We'd like to deep dive a little bit in the area of recycling. It's our newest area. We have a concept called reactive recycling, which is really used to make better products from recycled materials. We work in areas such as technical fibers, sheet manufacturing, packaging materials, films for agriculture and so on. All areas where an increased use of recycled material would be beneficial. I will come back to the total market of this. But to start to explain what does our materials do? When plastic material is recycled, it is degraded by the environment and by the process, etc. There is a research team at the University of Torino in Italy that have investigated the effects of recycling on the materials. They have selected to measure viscosity, how easy the material flows when it's molten. because it's a strong indicator of how the material is degraded, so to say. And they have done multiple extrusion cycles or multiple manufacturing cycles to simulate the recycling process and the viscosity is going down as you increase the number of recycling cycles. This means that the polymer molecules inside the plastics are cut, so to say, and become shorter. Viscosity goes down, but the material also becomes more brittle and less friendly to use. And you cannot make very much with something that has been recycled nine times. However, if in the ninth cycle the next reactive recycling additive is added, you come back to the same viscosity, so the same molecular weight or the same polymer chain length that you had after only four recycling cycles. So from that perspective, you can say that the addition of our product enables the material to be recycled more times or to be used in an application with higher requirement. a couple of examples from the world of PET, where we work together with various customers globally to use our additives to upgrade the recycled materials. All in all, you could say that the first projects where we have started and where we are in production today, there are multiple benefits. It's economically advantageous to the customer. It is saving a lot of carbon dioxide emissions because the material is used instead of being incinerated or used in more advanced applications. And a couple of examples here, sheet manufacturing in the Middle East, staple fiber production in Southeast Asia, and they both have the same common so to say, the same common driving forces, lower total cost and improved environmental footprint. The lower costs can depend on things like this. We have done an estimation based on a customer case, what it means for the customer. They can use recycled PET of very high quality. It's very expensive, even more expensive than virgin material, and it works. However, by using our additive, they can also add a portion of much lower cost, more degraded PET material. which is cheaper, of course our additive adds cost to the system. In this case it adds more or less 6% material cost. But because of the higher value of the otherwise almost useless cheap material, the total value of the material goes up by 22% in that case. And this is very often the case when we work with recycling. You save money and you help the environment. If we take a step back and look at the recycling market, what is happening here, or the plastics market in total, 400 million tons of plastics are produced every year right now. It's predicted to increase quite a lot in the coming years too. Almost 10% is based on bio-based plastics or recycled materials and the rest of the 90% are virgin materials. And of course there is strong action now in all regions in the world to try to increase the use of bio-based material, chemically recycled materials and mechanically recycled materials. But to accelerate this process the recycled materials have to become better. And we work in polypropylene, low-density polyethylene, high-density polyethylene, and PET, where we have solutions with reactive recycling. And these consist more than 50% of the global production of plastics. So we think and see that mechanical recycling will increase all over the world. Chemical recycling, bio-based materials will also increase all over the world. And the source for what is going to be recycled are in the areas of the big plastic grades, PP, PE and PET. That's where we're in. And we're working all over the globe with this. To come back to our home base where we work with improving plastic materials and make them fit for applications, we tried to combine our decades of experience in color matching and tailoring plastic materials to suit applications with the reactive recycling in order to drive much more use of recycled material also in fairly advanced industries here at home so to say. At home I mean the Nordics and Eastern Europe where we have a very close collaboration with all the plastic manufacturers. It saves one to one and a half kilogram of carbon dioxide equivalents per kilo when you replace virgin with recycled materials. What we're doing here is quite unique and there are people already out there on the markets that do color recycled materials but they do not have the reactive recycling spices to it that we have in our solutions here. And we're working a lot here on the whole markets to develop these concepts. And for example, we're in an initiative, Polymer Teknis Institut, a Swedish initiative for more recycling into industrial applications, where we work, for example, with Chalmers and Scania. So that was about the technologies and what we do. Just give you a business update for the first quarter now, how it's going. Financially, we continue the sequential growth that we have had since second quarter last year. We're now back to the sales volume of the years that were better than 23. That means we're back to the levels of 21 and 22. We even are slightly a bit above quarter one last year. But you have to bear in mind that the markets out there are in general much slower, less demands for industrial production and so on. So this has been possible by a very, very active business development from the whole team. The gross margin has been up for a while. We have now five consecutive quarters where we have increased it and Marcus will come back to more details on that. And we see that we can continue to increase it in the future. The earnings bottom line are still slightly negative but the EBITDA was 2.2 million Swedish compared to 0.1 same quarter last year when we had almost the same sales number. This has been possible thanks to a savings program that we have implemented and worked on the whole year last year of a total yearly value of about 13 million SEK. The full effect of this saving program was reached now during this quarter. And we're happy to see that we were able to implement it fully and we did not start to leak somewhere else, which is often the case when you do ambitious saving programs. With this, we also have a much stabilized financial situation. A positive EBITDA means that we can live on our own cash. The cash flow that we generate also funds our operations that we do, in spite of the fact that we do actually do a lot of forward-leaning activities both in R&D and sales. We continue to refine the strategic orientation and continue to build on that. In innovation, we continue. We have announced a few patents last year, especially within recycling, and this has caused enormous global interest for what we do. So it is growing the pipeline let's say and also in the area of innovation we go more and more to finding complete solutions for our customers by complementing our product portfolio and this is also turning out quite well. So we have a very positive outlook for growth in the future. But with that I would like to hand over to Marcus so he can give you a little bit more details about the economical side of the first quarter.

Thanks Ronny. I will give you some more details of the outcome for the first quarter. And first of all, a little bit look into how the sales actually have changed a bit. We are at the moment reporting in master batch and in chemical. and as you can see the chemical that is the gray ones here they have actually increased quite a lot since during the last year and that's also where we really have invested in r d in business development and and such things and that's also where the reason why we also are improving our margins I will actually go into the margins straight away. This is the margin development for more or less the last two years. This is also a consequence of that we are selling more advanced chemicals or advanced master batch, but also that we have been doing insourcing of this production And also that we have really been working to cost optimize our recipes and so on. But I guess that the big question here is of course will it, can it continue to increase? And I will say that the answer is yes. At least a couple of more percentages. So and then we will move on to have some, we did the spreadsheets more or less and I think One of the most important things here is that we have been, our top line is very much the same as last year. We have improved our margin and we also have been running this cost saving program and that is now fully in place. And we are seeing from March and going further, we will see all the impact of this. And that means that we can expect improvements also on the EBITDA level on these sales volumes. Then when we come to the cash flow, I think we have been addressing this question the last year because there is of course a concern from our current investments if we need another capital raise. Our answer has been that we think that we are able to run our business with our own cash. And of course we have taken lots of actions for this. Besides the margin improvements and the cost saving program, we are really focusing on working capital. You will see it when we look at the inventory and the inventory levels. They are starting to decline. And if we go forward on these levels, we will not be a company that will generate lots and lots of cash. But we still see that we are able to finance our own operations and also the investments that we are doing. So that is still the message that we are able to survive on our own cash. We also got a question before this presentation. It's a lot of seasonal variations when it comes to cash. And I would say that we are really working a lot with different processes and so on to mitigate this. So I wouldn't say that they are huge variations when it comes to different seasons. It's much more important of what we are selling and to whom we are selling. due to different payment terms and so on. So that's not really a big issue. You can also see that when you look at the operating expenses, we are talking about this cost saving program, you see that you don't really see the all the money in the operating expenses but keep in mind we have a lot of inflation and more or less half of our employees they are employed in outside of Sweden and there you have both inflation and also the the currency impact okay that's more or less it for me yeah and over to you Ronny thank you Marcus so

In total we are stable on cash flow right now. What we need is more volume. So we are working very hard with that. Very big focus on business development and all the supporting functions around that. We are now returning into growth in 2024 and forward with an increase in profitability. Obviously, if you look at the EBITDA levels that we have right now and the cost structure that we have, we need more volume. So the highest focus is on business development and selling more and increase our value to our customers. But the cost saving programs really delivers the foundation for profitable growth and a balanced cash flow. We have this sharpened commercial strategy, which focuses all internal resources. It's not only sales, it's also how we do in operations, what we do in R&D and so on, so that we are very customer focused and growth oriented. In Lightweighting, have a substantial market recovery with much higher order intakes in the end of 2023, beginning of 2024 into the wind energy industry. That with six to 18 months delay should increase the need of foam materials. So we see by the end of this year, beginning of next year, we should see growth in that segment. In addition to all the efforts we're doing to be even more relevant and bring more solution into that industry. High temperature, we have communicated when we got a very large order from North America in the area of high temperature. We continue to deliver on those orders and it's looking well also for 2024 and 2025 in that area. In the aesthetics, we work a lot with product innovation and recycling focus. And obviously working on the hygiene factors, delivery times, quality, etc. where we are really strong. And this generates more business in that area too, but the markets are still slow, especially relating to building industry, agricultural industry. Recycling, we have our first breakthroughs that are realized, we're being tested in reality so to say and there's a huge global interest for this and there is a lot of projects ongoing to grow this. There are thousands of potential customers out there and we're working to support the first one in order to prove industrially also that this really works well and the indications are absolutely that they do. And then on the longer term scale, we see doubling of wind energy. We see enormous increases in recycling worldwide. So we have a really strong foundation on the megatrends that we are in the right segments where there will be a lot of growth. And on the longer term, the high temperature applications will also grow. So in sum, why invest in Nexum? First of all, because we have a very high ambition and concrete plans for this year, next year and going forward regarding all the financial KPIs based on growth. We have five consecutive quarters of improving gross margin and you can expect more to come from that. We have a broad portfolio of cleantech solutions in four market segments and they all have their own underlying growth. And to underline that growth potential, we have clear customer offerings, solid business casing and the ability to adapt and develop new customer offerings. patented cleantech solutions supported by the Megatrends. We have done the major investments, you could say with the current organization, at least the overhead organization and machine installations that we have, we could double our sales with no major capex. The organization in itself after this strategic retake has become stabilized, worked really well and we don't have any big glitches in it and we have a potential here to take on much bigger tasks without growing the team too much. However, right now because of the huge customer interest globally we need to reinforce sales team a little bit to handle all the opportunities. We also have a business model with the potential for targeted future investments, potential acquisition cases and so on in the future. So those are the main reasons why to invest in us. With this, I'd like to conclude this presentation of quarter one. And thank you so much for listening. And I would like also to extend a thank you to all employees who have done a great job also in this quarter to support our mission. Thank you.

Thank you, Ronny and Marcus, for your presentation. And let me just state that both me and Mother Earth are very thankful to all you cleantech companies that help reducing the human footprint. And with that, we start off the Q&A. And after the savings program that have reached full effect in Q1, you reached an EBITDA of 2.2 million Swedish kronors. Could you elaborate a bit on what stood out in the savings program during the quarter?

Maybe a question for you, Marcus?

Yeah, I guess I can start. First of all, personal expenses. They have been reduced. So I would say that is the main idea of things. And also, some when it comes to the margin, but it's more personal expenses. And also that we're not using consultants. But that's also a little bit linked to that. The people that we already have in... that we're paying salaries for and are employed, they're doing a little bit more and also working a little bit in a different way. So that's possible expenses.

Increased efficiency in the organization.

Yeah, I would say so. Okay, thank you. The margins amounted to 4.1%. Where do you see your EBITDA margin in the long term?

Well, with the narrower cost base where we are right now and with the product portfolio we have, that's where we land today. We are putting all our energy into growing the volume. It's quite clear from the presentation. And with the growing volume, there will be a strongly improved EBITDA also. And so that's why we focus very much on growth. And it's kind of not really rewarding when the market is very slow because we have virtually the same sales today as we had a year ago. But we have taken so many more projects and we have so much more customers and customer cases. But because there is also some kind of decline underlying that we don't get full paid. So if we continue to grow our business, take more projects, take more business, and at the same time some kind of relief on the market side, then it would be much better.

You achieved a coverage rate of 45% in the quarter, which means that it has now increased sequentially for five consecutive quarters. Will you be able to keep this trend?

Yes, we will keep it Marcus mentioned it in the presentation, we expect a few percentage points more on this. And the reason is that one one underlying reason is a lot of insourcing of production. And this has not been fully achieved yet. We still have residual material deliveries from external production, etc, in the quarter. So yes, we believe that we absolutely will be able to improve it a little bit. Yes.

Could you put some color to your cash flow and seasonal variations during the year?

Yeah, definitely. If you look at a year ago and before that, it went a little bit up and down. Now I think we understand our customers better and we have changed processes and so on. So I would say that it's not that really seasonal anymore. It's very much more dependent on what the customer is buying and when different customers are actually or paying. So that means actually, because the cash flow can be a little bit of a snapshot. I mean, like if they pay 5 million SEK on Friday or Monday, that could have some difference. So we look into the cash flow, we look at it for a year or so on. So it's not really seasonal anymore, at least.

Thank you. And if we move on to your PET part, which markets have done well and which have done less well?

The PET foam market is a little bit difficult because there is overcapacity on that market. But if you look into our reporting and so on, we have increased sales in Europe in that segment. But it doesn't necessarily mean that the material is used in Europe. It might be a central purchase organization placed somewhere in Europe and then that the material is used in, for example, Asia or North America. What we see is that also the pet foam producers also export their foam, so to say, further on. So even if we sell a product to a country in Europe and then it's sold to, for example, India internally at that company and then that material is then exported to another third country for installation, so to say.

Okay. And how much of your performance is the wind sector and how much is towards industry, transport and marine, for instance?

In the PET foam segment, I assume that you mean like the lightweighting, I don't know exactly the exact distribution, but the absolute majority goes to wind industry. But there is an increasing trend to use more and more PET foam in other areas, and that's in particular marine and transportation. It's an excellent material, for example, in transportation of cold materials, for example, insulation properties and doesn't take up water. So there's an increasing portion of that. But a rough guess, 70 to 80 percent in wind.

Okay. And if we move on to Masterbatch, which sector is doing well there, respectively less well?

Sectors doing good in Masterbatch are packaging and daily consumer goods. They're continuing to do well and difficult areas have been in building industry and agricultural film, more or less.

If we move back a bit, you received an order for airplane engines in the US. How is that business going along?

It's going quite well. We continue to deliver. We have quarterly deliveries according to the long purchase order that we got. Customers are very happy with the quality. Everything is running fine. We have tuned our own production to make it more efficient on it and it's going really well and we expect that to continue also in the coming year or even years.

And you expect these military deliveries to move over to civilian?

Yes, I think the whole application field of high temperature composite materials for aviation will probably increase within military jet engines, but it will also be translated into more efficient jet engines for civil applications. We are in this project that has been announced called the TAPE Extreme, We work with Innovate UK and there is a huge interest from the OEMs in that field, how to apply that technology into civil applications.

And if we move on to India, you have a bunch of projects going on there. What is status in those projects?

It's a big interest in India. It's a strong market for recycled materials. They're put in place and there is, because of the high volumes of recycled material in the market, there is a need to also upgrade and upscale these recycled materials. So the interest for our products has been very high in India and one of our colleagues just landed this morning from a one and a half week trip doing industrial trials in India with various customers with apparently good results looking at the visit reports.

Okay, and I'll have some questions from the viewers shortly. But first, what milestones can investors look out for during 2024 when it comes to Nexum?

follow that we continue with our developments that we are currently doing regarding cost levels we intend to we're very determined to keep them continue to see that we continue to improve our contribution margin and have a stable cash flow but also that we will talk about and communicate when it's appropriate about new initiatives that then hit the market so to say and follow our intensive struggle to increase our volumes.

And when it comes to volumes within aircrafts, when can we see larger volumes?

Yes, the lead time is very different. In performance master batch or aesthetic segment you can have projects that are fairly short from weeks to months or a year. So they can be fairly short. In PET foam for a new formulation to be approved and so on it takes a little bit longer than that. And in recycling it's also quite long and complex approval processes to get things into industrial speed. And for high temperature is the longest lead times because you need to validate the material component and the engine and the aircraft, so to say. So those are usually many years, those projects. So we don't count on high temperature into jet engines to be a fast mover. It is taking its time. But it's important to be there and therefore we are there and we have key technologies that are important there. But from our perspective, we need to to finance our activities in that. So that's why we are very grateful for the initiatives such as Innovate UK, where we get supported for the R&D resources that we put into this area.

And one of our viewers have read in the paper that you're moving into properties and housing. Is that correct? Not that I know of.

No, that wasn't used. Okay, that might be true.

Some sort of misunderstanding. Okay, but that was all my questions for you today. Thank you so much for your presentation and good luck going forward. Thank you, Mattias.

Thank you.