Polygiene Group AB

Good morning, everyone, and welcome to this presentation of the second quarter of PolyGene Group. I am Erika Bjork, and I'm the CEO of the company. And today I have Niklas Blomstedt, our CFO, joining from another location.

Good morning.

So first of all, I would like to just give a brief summary on the situation. It has been a very, very tough quarter, as you can see. It's a very disappointing report and I believe you have many questions for us. So I encourage you to write the questions in the chat that you can see here in the meeting. Yes, it has been a very challenging quarter and it's due to external factors only that has impacted the quarter very heavily. The tariffs that we mentioned in the last report, we didn't know how that would impact the group. We knew that we don't have any direct consequences because we don't ship any products to US, but we also highlighted that it could be an impact if our customers are affected. And we are an ingredient and we can't sell if we don't have customers that are producing. And with close dialogues with our customers, they have indicated that there has been a lot of disruption in the production chain. Many projects has put on hold. These tariffs have to be mitigated. So there's a lot of price negotiations going on. And during this time, a lot of projects was just delayed. And these discounts they're asking for, it's really hard for the fabric mills or the manufacturing partners to absorb these tariffs. which also led to that there's a lot of capacities that are empty now in China, and we can see that brands are trying to relocate to other countries. But I will come back on this topic when I go into the segments. We also had a negative impact on the currency effect of this quarter compared to last year, which also had a quite big impact. But it, of course, not only was negative this quarter, we also had some positive news. We announced in May the strategic partnership with a new customer in US in the healthcare sector, and they have an estimated annual volume of 30 million SEK. And then we also maintained cost control. I know that there were concerns about the cost increases in the last quarter, But that is only an effect of periodics, how we allocate costs during the year. So we believe that in the full year, we will be around the same levels as 2024. And then we had some breakthroughs in the Shedguard development. And I also would like to give you a little bit update on where we are in the launch of the Stay Cool technology.

But first, Niklas will go through the numbers.

Yes, if we start with the summary, sales was down with 12% from 36.4% to 31.9%. 7% of that was related to foreign exchange impact. We had the gross margin of 63% versus 65%. And on the top level, all of that was also related to currency. We will get into a little bit more details on the segments later on. Looking at the operating cost, as Ulrika said, it was in line with last year or even lower, 19.8 versus 20.1. EBITDA was negative with 1.2 versus 2.6 last year. And in the 1.2, there is a currency conversion difference impact of minus 1 million SEK. We have EBIT of minus 2.6 versus 1.2. The cash flow was negative with 12.6. And apart from that, The impact of ordinary business, we had some extraordinary items during the quarter. We had the dividend from 5 million, we had an inventory buildup of 4 million, and we had some payments of tax steps of 1 million. Cash end of the period was 47.4 versus 54.3 last year. If we then look a little bit more into the sales, as we said on the top line, it was down 12%, where 7% was due to FX. Admaster dropped 44% in the quarter versus last year, while Polygene increased 24%. The increase in Polygene was driven by the distribution sales. And with this increase in polygene, we can also then see that the polygene share of the total in the quarter was 66% versus 46% last year. Well, I must have dropped to 34% versus 54% last year. And the drop in Admaster also then impacted the different regions differently. We saw the biggest decrease in EMEA and Admasters have the lion part of their sales in EMEA. So that's why EMEA had the biggest drop. APAC dropped 33% and Americas with 19%.

Take some more details.

I think we talked about the sales already. The margin on the top level, as we said, driven by FX. We had the positive. If you go into more details, we had the positive segment mix as Polygine have higher margin than than Admaster and we saw big increase of the Polygine sales. However, in Polygine we had a negative customer mix as it was much higher distribution sales this year versus last year. And as we said, operating cost more or less in line or lower versus last year. And on the EBITDA of minus 1.2, we had the currency conversion impact of minus 1 million. And cash flow, the extraordinary items of the dividend, stock buildup, and the payment of the tax debt of 1 million SEC.

Okay, thank you.

Now moving into the segments. So I will start with the polygene side of the business, which is the textile part. And yes, as Niklas said, we had a growth and year to date, 33%. This quarter was 24%. And I also would like to say that all in all, with Q1 and Q2, year to date in the group, we are still having a growth. Just want to mention that. These numbers are actually higher if you consider the currency effect. I would say that the main part of all sales in PolyGene is in dollars. So of course we have an impact on almost 10% there. So the growth is actually higher. As Niklas said, these 66% that PolyGene has of the share of the sales would trigger a higher margin for the group. But the sales mix within PolyGene has now been to the negative side in terms of margin where the distributors have many orders and they have a lower margin initially. And then when the royalty arrives, the margin will stabilize. So this quarter has been a lot of focus to stay close with our customers. And also I've been talking to many other players in the industry. I've been talking to other distributors. I've been talking to mill partners. I also been talking to competitors. and all witnessed the same, that in this industry, it had taken a big hit on the tariffs, just because of the production is mainly in China. We also know that there is a lot of things going on with relocating business. we can already see that Vietnam is growing. So the distributor actually today placed other orders saying the business is coming. We need to have more goods that we have to fly in now because it was like a surprise that it will move so fast. So we have global distribution set up. So wherever our customers will move, we have all the registrations, we have stock, we have distributor agreements in all these areas. So we are quite confident that we can continue to serve our partners if they were going to move their business. And it's business as usual. I mean, all of this that happened is lying outside. We still have this positive momentum internal. All the planned activities, all the trade shows, everything is still ongoing. And we still onboard new customers that has been planned since before. So, for instance, Fila, a well-known brand, they launched collections in the second quarter. We also have other brands that are launching. So all this has happened before and continue. We can also see that markets that had a less impact of the trade war, for instance, Japan, they are signaling a very strong Q3. They also took a hit now in Q2. I think they were flat. Normally they are in a good position. situation now. I think they were growing 25% in the first quarter. Second quarter was flat because they also, of course, is impacted. We have global brands that are selling all over, so they are an impact. They indicated for us now that they see that they're going to claw back some of these volumes in the Q3. And I hope the other regions also will give me the same signals. And then we have positive news on the Shed Guard project and on the Stay Cooled. So if starting with the Stay Cool, it is a cooling technology that is moisture activated and give you a cooling sensation when you wear it. It has been very successful. We launched it late March, April. So it's quite new, but still we see a lot of interest. We have now introduced this technology to more than 80 brands. And when I say introduced, it's that we had sit down with a meeting. They have shown interest. And we can see that 50% of those already moved into a trial phase, which is a really, really big conversion rate. And they either do wear a trial where we send these treated T-shirts or they actually moved into production trials, meaning that we put our technology on their fabrics. And the wearer trials have come out very positive. We got a lot of positive feedback and we believe that this could really be a big hit next year. We do have some brands that already confirmed that they will start using Stay Cool. And that is for the spring summer collection, 2027. They have a long, long sales cycle here because they are now working on these collections and they are produced in 2026. So we don't believe there are going to be a lot of sales this year for Stay Cool, but definitely we will see something happening next year, I'm sure. So now we are working on fine-tuning recipes. We're trying to decide which test protocol we're going to use. We're also finalizing the certifications, the blue sign, the ecotex, everything we need to have this product on the market. So this is a very, very positive outcome so far, and it's just launched. It's just a couple of months. So we've been working really, really hard on getting this out in the market. And then on to the innovation project, Polygene Shed Guard. This is a textile finishing that can help us to keep the fibers to the fabrics, which means we can reduce microfiber loss when we wash clothes or wear clothes. And this technology has been developed since 2021. It took a long time to do research and to try to find the right technology or the right chemistries. And then in 2024, we launched this innovation project, which basically is where we get help from our partners, if it's mill or brands, to develop this project. Because if we're going to get a big hit, we already have customers in line for this. So the phase one, we got very inconsistent results. It was very hard for us to analyze. So we partnered up with Manchester University and they have experts on microfibers. So we actually got this project funded as well. And they had been a fantastic help for us to understand the data we would get from all these trials. And then we have the phase two, which basically was we took the success cases from phase one and we continue to develop with these fabrics into phase two. And that was finalized in May. And now we have identified some fabrics that we really can show there is a consistent positive results. And what we have been doing with these fabrics now, we've gone back to these partners and offer them a commercial agreement. And where we are now is actually to get their feedback on pricing, on other terms and conditions. And we have more than nine. I heard today there was another one interesting. So we're going to continue to do more tests, more trials, and parallel, we're going to develop commercial projects. And it's actually that we have one Swedish company interested in this as well. So I think this could be, if the commercial agreements and the feedback is good, I think this also could be interesting to see where it can go next year. And just to show you the performance, this is one of the partners. It's two different kind of fabrics. It's mainly fleece fabrics, which is very good for this kind of technologies because it's plastics and fleece, they shed a lot. And as you can see, the gray box here, it's untreated fabric, the control. And then we have the orange box, which shows when the shed guard is applied on the textile. And then we wash this five times and then the Manchester University analyze the data. They count the microfibers that are in reduced and they also way and look and do a lot of things to just get to these numbers. And as you can see, we have a 58% reduction on fabric A and 41% reduction in fabric B. And these are really, really good results. They are way over what the customer is asking for, which means we can see there is a consistency here that Shedguard could make a difference in the future. Very exciting. Moving into Admaster who had been struggling a little bit. As Niklas said, there was a big loss here or decrease in sales in the second quarter. And of course, it's also directed back to these tariffs because they create uncertainty and uncertainty is never, never good. It has disrupted across industries. Many of our customers are global, so they are impacted, even if sales are mainly in Europe and UK. they are still part of a global network. Many of those are producing in China as well. So what we have learned from talking to all our top customers is that orders are pushed further to Q3, Q4. They witnessed that they have stock levels. They also said that projects has been delayed or even lost in some cases. And it's not a lost customer, it's more lost production of a specific product. They don't going to change any strategies until they know what is the true impact. And you know, it's still ongoing. We don't really, really know where it's going to end. We are talking, there's discussions about Europe now and the UK. So until everything is stabilized, they just put a lot of projects on hold. And of course there is also price pressures like we see in the textile side that everybody's negotiating. We also attended industry meetings like the British Plastic Federation to get insights and to get knowledge from other partners, other players about the current business climate. And we can see that the output is exactly the same as when we talk to our customers. So this is the main business climate that we are facing right now. But we continue doing what we do. We have an upcoming agent and distributor meeting here in September because we want to strengthen our sales force and really educate all the distributors about the Admaster offering to really, really get them on board to be strong. And we also have some interesting product development going on in Admaster. It's a new field. It's a new, interesting development. And I hope I can talk more about this in the next quarter when we have more results. And just to finalize, to give you a little bit outlook of how we see the rest of the 2025, I would like to again emphasize that this is a temporary setback. It's caused 100% by external factors. There's nothing changed within the company or in our long-term plan. We know that it will be stabilized, but it will take some time. We don't really know exactly when we're going to recover. But for sure, we know that when we recover, the financial position will be back again at these positive key figures that we have been used to see in the company. And the positive momentum we had for the last six, seven quarters in the business haven't changed. We have our business pipeline, we have new tech launch, and that's really, really interesting. And we also continue to work with our R&D on more projects coming for the future. And then also just to highlight and heads up, because we know that these tariffs have to be mitigated somewhere. Either the brands will absorb them and hit their margin, but I don't think that is the case. So I think some of these tariffs will hit the consumer. And when consumer prices go up, that could affect volumes. And then, of course, hit the volumes where we are an ingredient. We don't know yet, but I'm sure they're going to be a lot of. price discussions moving forward, and we are also part of that. So we are working very hard now on our own supply chain to optimize, to try to squeeze out, do more efficiently, looking at rates, looking at how we ship things, just to be prepared when it turns and be able to support our customers as well. And I think more than ever, There is a big chance now for Polygene Group as an ingredient that adds a value, who can strengthen your competitive advantage. We know that you can even charge more to the end consumer if you communicate the value. And this is exactly what Polygene Group is very, very strong at. So I think more than ever, we have to prove our value out there so we are not just being seen as a cost that you can cut off. So that is very important for us to work hard on. I think that will all slide, so I think we can go to the Q&A now, Niklas. Do we have any questions coming in?

Yes, we had some questions prior to the meeting about some new products on Stay Cool and Shedguard, the status and also how the revenue stream was. I think you talked about it already and gave us an update. But can you talk a little bit, has there been any kind of impact on the revenue from those products yet?

No, not yet. We are still in... trial phase. There could be, I asked the Salesforce, could there be anything in 2025? And there could be minor. I think we will see the big impact next year. And since it's spring, summer, mainly 27, that is production, the second half of next year.

And then there were some questions about... The cash flow, I think we touched upon that as well with external items or the dividend, the stock build up and the payment of the tax steps. I think we covered that one. Then it was a quite interesting question about the geotextile. So last year we had a quite big order in Q2 in Edmaster. It was almost 5 million set. How has that been this year and what do we see for the full year?

Yeah, that's true. It's positive. We have an agreement with our exclusive partner. They have committed to volumes and as year to date, they haven't took anything yet because the other stock they took was end of last year. So I believe we will see this coming in the coming quarters.

And that is a significant increase from last year. That's coming.

And then I think.

I think that actually covered the questions we got before and during the meeting.

Yes, OK, I think then I interpreted that we covered and answered most of the questions, and I just also would like to say again to everyone that this is a temporary setback caused by external factors. It will come back. It will bounce back. I can't say and promise now when, but I really hope it will be in this year. And as I said, we see positive signals already from some regions that they're going to beat their Q3 and have very good numbers. So I really hope that's going to be a trend for the rest of the regions. And yeah, I think that was all for us. And then I wish you a happy summer.

Thank you.